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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ..................... to ...................
Commission file number 000-21627
Safe Alternatives Corporation of America, Inc.
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(Name of small business issuer in its charter)
Florida 06-1413994
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
27 Governor Street, Ridgefield, Connecticut 06877
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (203) 438-8144
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which
registered
None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.0001 par value per share
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(Title of Class)
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(Title of Class)
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. Yes X No
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Check if there is no disclosure of delinquent filers in response 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]
The issuer's revenues for the fiscal year ending December 31, 1996 were $63,854.
Prior to March 6, 1997, the Company's Common Stock has been an over the counter
"pink sheet" security. On March 6, 1997, NASDAQ accepted the Company's Common
Stock for trading. However, to the best of the Company's knowledge, there has
been no public market for its Common Stock, and the Company is not aware of any
trading activity in the Common Stock, and therefore, there is no market
capitalization available.
As of February 28, 1997, there were issued and outstanding 10,444,120 shares of
the issuer's Common Stock.
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I
ITEM 1. BUSINESS
THE COMPANY
Safe Alternatives Corporation of America, Inc. (the "Company") was
organized in 1976, under the name Knight Airlines, Inc., to engage in the
commuter airline business. In October, 1978 the Company engaged in an initial
public offering of its Common Stock in Florida, pursuant to an exemption from
registration under Regulation A promulgated under the Securities Act of 1933, as
amended (the "Act"). No market for trading of the Common Stock has ever
developed. The Company operated as a commuter airline from its inception through
April, 1983, when it ceased operations and all of the assets of the Company were
sold to satisfy all outstanding indebtedness. From April 1983 through September
1995 the Company was dormant. In May, 1994, the name of the Company was changed
to Portsmouth Corporation. In September, 1995, pursuant to a plan of
reorganization (the "Reorganization") the Company acquired all of the assets of
SAC-Delaware and commenced operations. On March 4, 1996 the Company changed its
name to Safe Alternatives Corporation of America, Inc. (a Florida corporation).
Since the Reorganization, the Company has changed its focus from being a
"public shell", without assets or a business, to a company concentrating its
resources on the research, development and commercial exploitation of certain
technologies (the "Technologies") which it either owns, exclusively licenses, or
in which it has exclusive marketing rights. See "Technologies". The products
which the Company has developed and/or intends to develop, as the case may be,
from the Technologies are primarily in the following areas:
1. Paint stripping chemicals (world-wide license.) This product is
currently being marketed and sold in limited sample quantities. The Company's
paint stripping product is used to remove lead-based paints, latex, alkyd,
varnish, polyurethane, and epoxy resin coatings from structural metal, cement,
fiberglass, wood, mica and plaster. The Company's paint stripping product is
applied using an airless spray gun, paint brush or spatula. For most
applications, the Company believes, based on its research and in-house testing,
that the stripper will remove substantially all of the paint, exposing the bare
surface within a 24-hour period. The Company's line of paint strippers is
biodegradable, water washable, non-caustic, and methylene chloride free.
2. Water-based foams for insulation material (continental United States
license). This product is in the final stages of development and the Company is
currently evaluating the appropriate mechanism for application of the product
onto its intended surface. Subject to the successful completion of its research
and the ability of the Company to obtain additional financing, the Company
expects, although there can be no assurances, that it will market this product
in 1997.
3. Radon barrier and flame retardant coatings (continental United States
license). These products are substantially developed and exist in working
prototype form. It is unlikely that the Company will market and sell such
products by the end of 1997, as they are subject to further testing and
development, as well as limitations with respect to the Company's ability to
finance such additional product introductions in 1997.
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4. Recycling solvents (continental United States license). Possible
products from this technology continue to be subject to further research and
development, and consequently, no products derived therefrom are expected to be
marketed in 1997. The Company anticipates that research and development with
respect to such products will continue, subject to the Company's ability to
finance such research.
5. Sealants (continental United States license). Possible products from
this technology are not as far along in the research and development process as
the Company's other technologies, products and prototypes. The Company
anticipates that, subject to sufficient financing, research with respect to the
sealants will continue in 1997. The Company does not anticipate marketing its
sealant products, if any, derived from this technology in 1997.
Although the Company is currently actively marketing its paint stripping
product, only nominal revenues have been generated from the sale of samples to
date. The Company is not presently marketing any of its other products. The
Company's timetable for research and development of new products and other
forward looking statements contained herein include a number of risks and
uncertainties, and consequently, the Company can not provide any assurances with
respect thereto. These statements are only predictions and actual events or
results may differ materially as a result of factors beyond the Company's
control. The time frames which the Company has indicated above with respect to
the dates when such products, if any, may be brought to market are based upon
managements' best reasonable estimates given the information available to them.
In part, the time estimates are based upon the review and analysis of the
products (i.e. the foam) by certain customers which have sampled such product
and provided the Company with their analyses. Based upon the experience of SSC
Marketing, Inc., ("SSC") a California-based marketing firm with experience in
sales and marketing of similar products, the Company has entered into a series
of agreements with SSC and believes that any products which the Company may
develop from the Technologies can be brought to market in a relatively short
time frame by SSC. See "Marketing Agreement". Certain of the Technologies are
unpatented proprietary technologies and in certain cases, because (i) the
Company's financial resources are insufficient to adequately protect and/or
prosecute such patents, and (ii) the Company believes that information which may
become available to competitors during the patent process could put the
Company's products at competitive risk, neither the inventor nor the Company
believes that seeking patent protection is prudent. The Company does not
currently manufacture its paint stripping product, but contracts with the
licensor of the paint stripping Technology to manufacture it. The Company
currently does not possess the capacity to manufacture any of its products in
anything more than sample quantities in a laboratory facility. The Company
therefore intends to contract with outside manufacturers to manufacture any
products derived from the Technologies, as they are brought to market. Although
the Company has identified certain of the companies which it would consider
engaging for the purpose of manufacturing some of the Company's intended
products, no such agreements have been entered into.
The Company does not presently have the financial resources to operate its
business, continue research and development or market its products. The Company
continues to seek additional capital from an array of potential sources. The
Company has provided information regarding its Technologies to venture capital
firms and is in discussions with some of them, although there can be no
assurances that any such discussions will result in the Company obtaining any
additional capital. Even if the Company is able to obtain additional capital
there can be no assurances that the structure or terms of such proposed
financing will be on acceptable terms. See Item 6 "Management's Discussion and
Analysis or Plan of Operation."
BACKGROUND
On September 15, 1995 (the "Closing Date"), pursuant to the terms of an
Asset Purchase Agreement and Plan of Reorganization dated as of August 21, 1995
(the "Agreement") between Safe Alternatives Corporation of America, Inc., a
Delaware corporation ("SAC-Delaware") and Safe Alternatives Corporation of
America, Inc., a Florida corporation, then operating under the name Portsmouth
Corporation (the "Company"), the Company purchased the business (the
"Business"), including, without limitation, all of the assets of SAC-Delaware,
and assumed all of the liabilities of SAC-Delaware (the "Reorganization"). Prior
to the Reorganization, the Company had no meaningful operations.
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Immediately prior to the closing of the Reorganization (the "Closing"), the
Company undertook a 28 for 1 reverse stock split; consequently, all of the
calculations included herein reflect this split. The Agreement provided for the
Company's purchase of all of SAC-Delaware's assets in consideration for, among
other things, (i) the assumption of all of SAC-Delaware's liabilities, (ii) the
issuance and delivery to SAC-Delaware of 8,000,000 shares of the Common Stock,
representing approximately 94% of the then issued and outstanding shares of
Common Stock as of the date of the Closing; and (iii) a six percent royalty (the
"Royalty") on the gross revenues of the Company attributable to the assets
acquired by the Company pursuant to the terms of the Agreement, payable on a pro
rata basis to the stockholders of SAC-Delaware. The Royalty is payable on a
quarterly basis during the sixty months immediately following the Closing Date,
and the cumulative total of all Royalty payments is limited to a maximum of
$8,500,000. The Royalty does not apply to the revenues generated by the sale of
the Company's paint stripping product, which technology was acquired after the
Reorganization.
RESEARCH AND DEVELOPMENT
During the three years ended December 31, 1996, 1995 and 1994,
respectively, the Company spent approximately $275,000, $273,000 and $370,000 in
connection with its research and development efforts. The Company has not
completed its research and development on any potential products, other than the
paint stripping product, derived from the Technologies, and therefore, there can
be no assurances that such potential products will be developed or that they
will perform as intended. Management believes that the next marketable product
to follow the Company's paint stripping product will be a fire retardant foam
insulation product. During the three years ended December 31, 1996,
approximately $350,000, in the aggregate, has been devoted to research and
development with respect to the foam technology. The Company is in the final
stages of its research and development with respect to the foam product, and is
currently evaluating the appropriate mechanism for delivery of the product onto
its intended surface. Subject to the successful completion of its research and
the ability of the Company to obtain additional financing, management believes,
although there can be no assurances, that sometime in 1997 the Company will be
in a position to bring the Company's foam product to market. The Company
believes that this product will be ready for market in this time frame, based in
part upon the test results which it has been achieving in its laboratory but
also from the positive response it has been receiving from certain customers
which have been requested to analyze it for themselves. The Company continues to
conduct research with respect to the Technologies in order to develop marketable
products. There can be no assurances however, that the Company's research and
development efforts will result in any commercially viable products.
All of the Company's research and development efforts are conducted at the
Company's laboratory facility in Brookfield, Connecticut. See "Properties"
TECHNOLOGIES
PAINT STRIPPING CHEMICALS
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The Company has obtained worldwide marketing rights to a proprietary
paint stripping compound. The proprietary compound is not patented but is
protected by trade secrets. Based upon the Company's research, in-house testing,
and customer feed-back, the Company believes its
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paint stripping product is effective in removing lead-based paints, latex,
alkyd, varnish, polyurethane, and epoxy resin coatings from structural metal,
cement, fiberglass, wood, mica and plaster. The Company's paint stripping
product is applied using an airless spray gun, paint brush or spatula. For most
applications, the Company believes, based on its research, in-house testing and
customer feed-back, that the stripper will remove substantially all of the
paint, exposing the bare surface within a 24-hour period. The Company's paint
stripping product line is biodegradable, water washable, non-caustic, and
methylene chloride free. The product has been sold, primarily in sample
quantities, to a contractor for the New York City Housing Authority, to the New
York Port Authority, to Sherwin Williams retail stores, and to other customers.
The Company's sales efforts to place its paint stripping product in Sherwin
Williams retail stores accounts for more than fifty percent (50%) of the
Company's 1996 revenues. While the Company experienced limited success in its
initial efforts to sell its paint stripping product through Sherwin Williams
retail stores, the Company has been unable to expand on such efforts, and sales
to Sherwin Williams have been minimal since April 1996. The Company believes
that the sales effort of the Company has been severely curtailed by the
insufficient working capital position of the Company.
FOAM
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The Company has a license from Mrs. Kathleen Kennedy, Mr. Richard J.
Fricke, a director and secretary of the Company, and Mr. Patrick J. Crehan, to
commercially exploit the foam Technologies in the continental United States.
The foam Technologies are protected by a patent, which patent is valid through
December 4, 1999. The Company believes that with its foam Technology it will be
able to manufacture foam insulation product for the construction industry
containing no chlorofluorocarbons ("CFCs"). Additionally, the foam Technology is
water-based, unlike most foam products currently on the market. As of January 1,
1996, federal law prohibits the sale of products containing CFCs due to their
damaging effect on the earth's ozone layer. The Company is in the final stages
of its research and development with respect to the foam product. The Company's
only remaining research for the foam product, which is currently being
conducted, concerns testing and evaluating the appropriate mechanism for
delivery of the product onto its intended surface. The Company believes that
this product will be ready for market in the second quarter of 1997, in part,
upon the test results which the Company has been achieving in its laboratory but
also from the positive response it has been receiving from certain customers
which have been requested to analyze it for themselves. The foam products will
be water-based, and therefore, management believes, comply with the government's
mandate. Management also expects these products to be less expensive to produce
than comparable products containing CFCs . The Company bases this belief on the
fact that the major ingredient in its foam product is corn syrup rather than
petroleum products, which are the major ingredients for many of its competitors'
products. Because corn syrup is substantially less expensive than petroleum
products, the Company's foam product should, upon achieving economies of scale
in the manufacturing process, be cheaper to produce than many comparable
products. The Company believes that its foam products will conform to
substantially the same performance standards as other foam products. In addition
to its application as an insulation product, the Company believes, based on its
preliminary research, that combining the foam Technology with the proprietary
coating described below, the foam may be fire retardant. The Company's foam
product is in the final stages of development. Assuming that the Company
successfully completes its research with respect to the foam Technology, and
subject to the Company's ability to obtain additional financing, the Company
expects, although there can be no assurances, that it will market this product
in 1997. See "Marketing Agreement."
COATINGS AND SEALANTS
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The Company has an exclusive license from Mrs. Kathleen Kennedy to
commercially exploit certain
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chemical compounds which management believes can be used to manufacture the
following products: (i) a fire retardant coating, (ii) a vapor barrier and (iii)
a radon barrier. Based upon the Company's analysis and testing, it believes that
(i) the fire retardant coating should be able to be used with a regular paint
brush or paint gun and should be effective in preventing against fire with most
building surfaces, (ii) the vapor barrier viscous plastic coating should be an
effective water tight coating for use on cement foundations, and (iii) the radon
barrier should effectively encapsulate radon.
The Radon barrier and flame retardant coatings products are substantially
developed and exist in working prototype form. Final testing of the physical
properties and performance of this product, as well as optimization of the
formulation, remain to be done. It is unlikely that the Company will market
and sell such products by the end of 1997, as they are subject to some further
testing and development, as well as limitations with respect to the Company's
ability to finance such additional product introductions in 1997. The products
to be derived from the sealant technology are not as far along in the research
and development process as the Company's other products and prototypes. The
Company anticipates that, subject to sufficient financing, research with respect
to the potential sealant products will continue in 1997. The Company does not
anticipate marketing its sealant products in 1997.
RECYCLING SOLVENTS
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The Company has an exclusive license from Mrs. Kathleen Kennedy to
commercially exploit certain chemical compounds in the continental United States
which management believes can be used to recycle polyurethane, plastics,
polystyrene and possibly disposable diapers. The recycling solvents products
continue to be subject to further research and development. They will not be
marketed or sold in 1997, and the Company anticipates that research and
development with respect to such products will continue subject to the Company's
ability to finance such research.
PROPRIETARY RIGHTS
Many of the Technologies which the Company licenses are protected by a
patent or have a patent pending. Most of the Technologies involve trade secrets
which are considered proprietary to the respective licensors of the
Technologies. The Company takes all reasonable measures to protect the
Technologies, including the timely update of patent related innovations to the
respective processes, if applicable, compliance with the terms of each license
agreement and through the requirement that each employee or consultant execute a
confidentiality and nondisclosure agreement.
LICENSES
The following is a summary of certain of the Company's material licenses
with Mrs. Kathleen Kennedy, the successor-in-interest to the estate of Mr.
Richard B. Kennedy. Each such license has substantially the
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same terms and conditions and each is valid until April 17, 2050, unless the
Company fails to pay a royalty of four percent (4%) of the gross sales derived
from the exploitation of the respective Technology, with certain limitations for
sales derived from inter-company transfers or transactions with subsidiaries.
The Company has also agreed to pay all maintenance fees and fees for filing and
prosecuting patent applications pending at the time the licenses were executed.
All rights under the licenses are freely assignable by the Company. The licenses
were amended on August 23, 1993 to collectively provide for a required minimum
monthly payment of $5,000, in the aggregate, and a required weekly payment of
$1,200 to Mrs. Kathleen Kennedy during her lifetime in lieu of progressive sales
minimums due beginning in 1993. The royalty payments described above nonetheless
survive. Failure by the Company to pay the minimum weekly and/or monthly
payments when due may result in the loss of exclusivity of such licenses.
Failure to pay royalties due under any license may result in the termination of
such license.
PAINT STRIPPING
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The Company's paint stripping products are proprietary in nature. The
Company has developed a paint stripping compound which it believes better serves
its purposes than the product which it had previously been supplied.
Consequently, the Company does not intend to avail itself of that certain supply
agreement with Samax Enterprises, Inc., due also to product inconsistencies. The
paint stripping products are not patented, but are covered by trade secrets. It
has been determined by the Company and the manufacturer that it is preferable
not to seek patent protection, but rather to protect this Technology through
trade secrets. The compound has been sold, primarily in sample quantities, to a
contractor for the New York City Housing Authority, to the New York Port
Authority, to Sherwin Williams retail stores, and to other customers. The
Company's sales efforts to place its paint stripping product in Sherwin Williams
retail stores accounts for more than fifty percent (50%) of the Company's 1996
revenues. While the Company experienced limited success in its initial efforts
to sell its paint stripping product through Sherwin Williams retail stores, the
Company has been unable to expand on such efforts and sales to Sherwin Williams,
which have been minimal since April 1996. The Company believes that the sales
effort of the Company has been severely curtailed by the insufficient working
capital position of the Company.
FOAMS
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The Company entered into a license agreement, dated December 9, 1992, by
and between Richard B. Kennedy, (Mr. Kennedy has since deceased and his wife has
succeeded in interest) Richard J. Fricke and Patrick J. Crehan (collectively
referred to therein as "Licensor") and the Company, as licensee, whereby the
Licensor granted the Company: (i) an exclusive right to exploit within the
continental United States certain inventions, technology, know-how and patent
rights relating to fire retardant urethane foam with reduced smoke toxicity, and
improvements thereto, excluding those applications which are utilized in the
packaging foam industry and (ii) the joint patent rights to manufacture, use,
sell and sublicense the Technology. For a more detailed description of the
financial terms of the license refer to the section "Licenses" above.
COATINGS AND SEALANTS
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The Company entered into a license agreement, dated December 9, 1992, by
and between Richard B. Kennedy, as licensor (Mr. Kennedy has since deceased and
his wife has succeeded in interest), and the
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Company, as licensee, whereby the licensor granted to the Company: (i) an
exclusive right to exploit within the continental United States, certain
inventions, technology, know-how and patent rights relating to a fire retardant
urethane coating which provides a vapor barrier, and improvements thereto, and
(ii) the joint patent rights to manufacture, use, sell and sublicense the
Technology. For a more detailed description of the financial terms of the
license refer to the section "Licenses" above.
RECYCLING SOLVENTS
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The Company entered into a license agreement, dated December 9, 1992, by
and between Richard B. Kennedy, as licensor (Mr. Kennedy has since deceased and
his wife has succeeded in interest), and the Company, as licensee, whereby the
licensor has granted the Company: (i) an exclusive right to exploit within the
continental United States certain inventions, technology, know-how and patent
rights relating to the disposal and reuse of plastic bags, polyurethane,
plastics, polystyrene, diapers and the like, and improvements thereto, and (ii)
the joint patent rights to manufacture, use, sell and sublicense the Technology.
For a more detailed description of the financial terms of the license refer to
the section "Licenses" above.
MARKETING AND SALES
MARKETING AGREEMENT
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The Company believes that its marketing resources are most effectively
deployed by contracting an outside vendor to market its products. Consequently,
the Company has replaced all of its in-house sales force, consisting of five (5)
salesmen and three (3) representatives with an outside vendor, SSC Marketing,
Inc., a California-based marketing firm ("SSC"), which vendor has experience
selling similar products on a national basis. SSC is seeking to develop sales
not only in governmental markets but also in the private sector. In connection
with such efforts, the Company and SSC are contacting major chains and providing
them with literature, samples and demonstrations. The Company has entered into
two agreements with SSC -- a consulting agreement (the "Consulting Agreement")
dated as of November 1, 1996 and a customer service agreement (the "Service
Agreement") dated as of December 15, 1996. Under the terms of the Consulting
Agreement, SSC will provide the Company with a comprehensive sales and marketing
program for the Company's products, including hiring sales representatives,
developing sales contacts, marketing plans, advertising campaigns, customer
service programs, and sales accounting and reporting systems. The Company will
pay SSC a flat fee of $8,000 per month, an additional fee of $4,000 for each
sales manager engaged by SSC to service the Company's account, with a minimum of
three such sales managers to be so engaged, plus approved expenses of SSC and
its sales managers. In addition, in the event SAC's annual revenues exceed
$2,600,000, the Company shall pay each sales manager a 2% commission on gross
revenues generated in their respective territories, and, in the event the
Company's annual revenues exceed $2,800,000, the Company shall pay SSC a 5.5%
commission on the Company's gross revenues, with the $8,000 monthly payments to
be credited against the payment of such commissions. Under the terms of the
Service Agreement, SSC will provide the Company with order entry, billing, order
tracking, sales forecasting and planning, and information processing services.
The Company will pay SSC an additional $5,000 per month for such services,
provided that, if at any time the volume of SAC's business exceeds SSC's ability
to adequately perform such services, the parties shall agree upon an increased
fee. A failure to so agree will result in termination of the Service Agreement.
Based upon the Company's experience with its in-house sales team, and based
further upon the contacts, reputation of and experience of SSC, management
believes that contracting for its marketing and sales needs will provide the
Company with a greater opportunity to market its products to more customers in
less time.
PAINT STRIPPING CHEMICALS.
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The Company, through SSC, is focusing its sales and marketing efforts on a
product-by-product basis, with its paint stripping product being the first
product to be offered in the marketplace. SSC is seeking to develop sales
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not only in governmental markets but also in the private sector. In
connection with such efforts, the Company and SSC are contacting major chains
and providing them with literature, samples and demonstrations. Based upon the
Company's experience with its in-house sales team, and based further upon the
contacts, reputation of and experience of SSC, management believes that
contracting for its marketing and sales needs will provide the Company with a
greater opportunity to market its products to more customers in less time. See
"Marketing Agreement".
The Company has placed advertisements in several magazines, including
magazines intended for commercial contractors as well as the do-it-yourself
market. The Company is in the process of establishing a direct sales unit where
orders will be taken by a telephone representative of the Company and shipped to
the end-user.
FOAMS.
-----
Since the Company is still experimenting with and conducting research on
the foam Technology, the Company does not actively market its foam product. The
Company intends to begin marketing the foams in 1997 through SSC to companies
involved in the construction industry. See "Marketing Agreement".
OTHER TECHNOLOGIES.
------------------
Until the other Technologies have been fully researched and
commercializable products have been developed the Company will not establish
marketing strategies for the sale of these possible products. Additionally,
management of the Company continues to seek to acquire other technologies for
commercial exploitation. The potential acquisitions may be structured as either
direct purchases or purchases of holding companies owning the technologies.
Although the Company is engaged in many discussions to acquire technologies,
there can be no assurances that the Company will be able to do so or to do so on
acceptable terms.
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SUPPLY ARRANGEMENTS
Paint stripping -- The Company uses its own formulation for its paint
stripper. The Company purchases the raw material used in the formulation from a
number of suppliers. The Company believes that there will be no shortage of raw
materials. The Company uses contract blenders to blend the formulation. The
Company believes that there exist sufficient contract blenders capable of
handling the Company's requirements.
Foam -- the foam products require large amounts of MDI, the base chemical
(polyisocyanate) of which is manufactured and distributed by several large
companies, including BASF and W.R. Grace & Co. The Company does not anticipate
any difficulties obtaining the necessary amounts of MDI or production equipment,
although there can be no assurances thereof.
Coatings and Sealants -- the Company does not anticipate any difficulties
obtaining the necessary chemicals and materials for the various potential
coating products. The Company believes that there are many suppliers of these
chemicals, available on reasonable terms.
COMPETITION
There are many other companies that offer similar or competitive products
to the products either developed or under development by the Company. The
industries in which the Company intends to market its products are characterized
by substantial and intense competition. Almost all of the companies offering
similar or competitive products, both domestic and foreign, are substantially
larger and have substantially greater resources, distribution capabilities and
experience than the Company. It is also likely that there will be other
competitors in the future. The following is a list of certain of the companies
with which the Company will be competing: Paint Stripping Chemicals- Peel-A-Way
-------------------------
Corp., Minnesota Mining and Manufacturing ("3M") and Thomas Back to Nature; and
Foams; Coatings and Sealants- Sealed Air Corporation, Carpenter Foam, Thompson's
- ----------------------------
Water Sealer and miscellaneous radon venting companies.
Under the terms of the Company's Supply Agreement, the manufacturer of the
Company's paint stripping product reserved for itself the right to engage in
direct sales of the paint stripping product. The Company's supplier,
therefore, may compete directly with the Company in sales of the paint stripping
product under different product labels. See "Licenses -- Paint
Stripping"
The Company's objective is to develop environmentally-friendly products
which will compete with the existing paint stripping, coatings, sealants,
recycling solvents, foams and sterilization technologies available that are
produced by competitors of the Company. The Company cannot provide any
assurances that the Company will develop competitive products, that a market for
such products (assuming that they are developed), will develop, that the Company
will be able to develop marketing or distribution channels, or that competitors
having greater financial and other resources will not, or have not, devoted
those resources to the research and development of new or existing products
which will compete with the Company's products. There can be no assurance that
the Company will effectively compete against any competitor.
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GOVERNMENT REGULATIONS
The manufacture and sale of paint stripping chemicals, coatings, sealants
and sterilization equipment are subject, to varying degrees, to federal, state
and local regulation. The predominance of the regulatory burden however is
imposed upon the manufacturer, such as the inventor/supplier, of the Company's
paint stripping product and not the Company. The Company must comply with
federal labeling requirements for the Company's paint stripping product, which
require a description of the various chemicals included in the product and the
hazards attendant to the use thereof. The foam, for construction purposes, is
regulated by state and local building codes. Failure to properly comply with
all regulations applicable to the Company's products could result in the Company
incurring substantial costs in order to comply or cessation of manufacture of
the offending products and the possible imposition of civil and criminal
penalties.
INTELLECTUAL PROPERTY
The Company's business is dependent upon its ability to commercially
exploit certain patented and unpatented proprietary technologies which it has
licensed from inventors. The ability of the Company to exploit the Technologies
depends on many circumstances beyond its control. No assurances can be given
that the Company will be able to commercially exploit such intellectual property
rights and develop marketable products. The inability of the Company to satisfy
the terms and conditions of the licenses with the holders of the proprietary
Technology rights would have a materially adverse effect on the Company. The
Company has an exclusive arrangement with respect to the paint stripping
chemical used in the Company's paint stripping products, except for the supplier
of the chemicals who also maintains the right to market such product. The
Company does not pay any license fees in connection with this license but agrees
to purchase the chemicals from the supplier thereof. Under the revised terms of
the various license agreements relating to the foams, coatings and solvents, the
Company is obligated to make minimum monthly payments of $5,000 and minimum
weekly payments of $1,200, in the aggregate, to Mrs. Kathleen Kennedy. The
failure by the Company to make such minimum weekly and monthly payments to Mrs.
Kennedy may result in the licenses becoming non-exclusive to the Company. The
failure of the Company to make royalty payments due under any license may result
in termination of such license. Certain of the Technologies are unpatented
proprietary technologies and in certain cases, because (i) the Company's
financial resources are insufficient to adequately protect and/or prosecute such
patents, and (ii) the Company believes that information which may become
available to competitors during the patent process could put the Company's
products at competitive risk, neither the inventor nor the Company believes that
seeking patent protection is prudent.
EMPLOYEES
As of December 31, 1996, the Company had ten (10) employees, including
three (3) officers. The Company has also engaged the services of four (4)
consultants, in addition to its marketing arrangements with SSC. See "Marketing
Agreement".
None of the Company's employees is represented by a labor organization and
the Company considers its relationship with employees to be satisfactory.
ITEM 2. PROPERTIES
The Company owns no real property. The Company has entered into two office
leases.
The Company leases 12,000 square feet in a building located at 91 Commerce
Drive in Brookfield, Connecticut (the "Brookfield Lease"). The Brookfield Lease
was executed by and between a trustee acting on behalf of Brookfield Commerce, a
Connecticut partnership, as lessor, and the Company, as lessee, on February 22,
1993. The Company uses this facility for research and development of products,
marketing meetings and shipment of chemicals. The term of the lease is for five
(5) years, commencing March 1, 1993 and ending February 28, 1998. The Company
has the option to renew the lease for an additional five (5) year period. The
base rent on an annual basis is $55,350 for the period through August 31, 1993,
$73,800 the next twelve months, $76,752 for the twelve months thereafter,
$79,822 for the next twelve months and $83,015 until the lease expires or is
renewed.
The Company's corporate headquarters are located in approximately 6,000
square feet of space leased by the Company in a building located at 27 Governor
Street, Ridgefield, Connecticut (the "Ridgefield Lease"). The Ridgefield Lease
was executed by and between a trustee acting on behalf of the Joseph H. and
Ellen Ann Donnelly Trust, as lessor, and the Company, as lessee, on September
30, 1992. The term of the Ridgefield Lease is for three years, commencing
October 1, 1995 and ending September 30, 1998. The base rent on an annual basis
is $40,517 for the first twelve months, $42,543 the next twelve months and
$44,500 for the twelve months thereafter until the lease expires or is renewed.
The Company believes its facilities are suitable and adequate for its
existing operations and those reasonably expected in the next twelve months.
The Company's facilities however are not suitable for manufacturing its products
in significant quantities, therefore, the Company intends to rely on outside
manufacturers to manufacture its products as they are developed and marketed.
The Company currently does not possess the capacity to manufacture any of its
products in anything more than sample quantities in a laboratory facility. The
Company therefore intends to contract with outside manufacturers to manufacture
any products derived from the Technologies, as they are brought to market.
Although the Company has identified certain of the companies which it would
11
<PAGE>
consider engaging for the purpose of manufacturing some of the Company's
intended products, no such agreements have been entered into as of this date.
ITEM 3. LEGAL PROCEEDINGS
There are no legal actions pending against the Company nor to the knowledge
of the Company are any such proceedings contemplated.
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 fiscal year ending December 31, 1996.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET
Prior to March 6, 1997, the Company's Common Stock has been an over the
counter "pink sheet" security and subsequently, on March 6, 1997, NASDAQ
accepted the Company's Common Stock for trading. However, to the best of the
Company's knowledge, there has been no public market for its Common Stock, and
the Company is not aware of any trading activity in the Common Stock.
HOLDERS
The Company has approximately 1,231 holders of record of its Common Stock.
DIVIDEND POLICY
It is the policy of the Board of Directors to retain earnings for use in the
maintenance and expansion of the Company's business. The Company has not
declared any cash dividends to the shareholders of its capital stock and does
not intend to declare such dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Since the Reorganization, the Company issued 923,726 shares of Common Stock
to approximately 202 individuals, for the aggregate consideration of
approximately $1,650,000. The Company believes, based upon representation
letters provided to it from such investors, that such issuances were made to
approximately 135 "accredited investors" as such term is defined under Rule 501
of Regulation D promulgated under the Securities Act and to approximately 67
non-accredited investors. The Company made such sales with the intention of
relying upon the exemption afforded by Rule 506 of Regulation D; however, the
Company has never filed a Form D with the Securities and Exchange Commission,
nor has the Company complied with filing requirements, if any, of the states in
which sales were made. In certain instances, the Company paid what it believed
to be finder's fees to individuals who introduced investors to the Company.
12
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Since the Reorganization, management of the Company has concentrated a
significant portion of its efforts on the marketing and sale of the Company's
paint stripping product. Additionally, subject to the Company's successful
completion of its research with regard to evaluating the appropriate mechanism
for delivery of the foam product onto its intended surface, and subject to the
Company's ability to obtain additional financing, management believes that the
Company's foam products could be ready for marketing during 1997, although no
assurances thereof can be given. Based upon the Company's current financial
status, the need to continue research and development and the Company's emphasis
on its paint stripping and foam products, management does not believe that it
will market any of its sealants, coatings or solvents in 1997.
The report of the Company's independent auditor, contains a paragraph as
to the Company's ability to continue as a going concern. Among the factors cited
by the auditors ( See note 1 to the financial statements) as raising substantial
doubt as to the Company's ability to continue as a going concern are (i) the
Company has incurred recurring operating losses and (ii) the Company has a
working capital deficiency.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Sales and Net Losses. For the year ended December 31, 1996, sales increased
--------------------
to $63,854 from $38,359 in the prior year, an increase of 66% due to the
continued growth of the Company's paint stripping product line. For the year
ended December 31, 1996, the Company reported net losses of $3,917,765 from
$2,441,613 in the prior year, an increased loss of 60%, due primarily to
increases in selling, general, and administrative expenses described below.
Selling, General and Administrative. For the year ended December 31, 1996,
-----------------------------------
the Company incurred selling, general and administrative expenses of $3,600,506
as compared to $2,131,560 in the prior year, an increase of 69%, due primarily
to a $1,144,000 increase in non-cash compensation and commission expenses,
related to the increased number and value of shares of common stock issued as
compensation. The balance of the increase is due to a $100,000 increase in
professional fees, a $241,000 increase in salaries related to the addition of
several salespersons, a $60,000 increase in travel expenses, offset by a
$120,000 decrease in royalties related to the mutually agreed upon termination
of a license agreement in 1995 relating to undeveloped technology, and other
fluctuations in various selling, general and administrative expenses.
Calculations with respect to the percentage of selling, general and
administrative expenses relative to sales are not meaningful.
13
<PAGE>
Research and Development. For the year ended December 31,
------------------------
1996, research and development expenses increased to $274,932 from $273,150 in
the prior year. As the Company's paint stripping product line has come to
market, and other product lines are further along in their development, research
and development expenses have tended to decrease. Calculations with respect to
the percentage of research and development expenses relative to sales are not
meaningful.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
Sales and Net Losses. For the year ended December 31, 1995, sales
--------------------
increased to $38,359, from $16,425 in the prior year, an increase of 134% due to
the continued growth of the Company's paint stripping product line. For the
year ended December 31, 1995, the Company reported net losses of $2,441,613
from $2,994,619 in the prior year, a decreased loss of 18%, due primarily to
decreases in selling, general and administrative expenses, and research and
development expenses described below.
Selling, General and Administrative. For the year ended December 31,
-----------------------------------
1995, the Company incurred selling, general and administrative expenses of
$2,131,560 as compared to $2,578,653 in the prior year, a decrease of $17%, due
primarily to a $517,000 decrease in non-cash compensation and commission
expenses, related to the fewer number and value of shares of Common Stock issued
as compensation. Calculations with respect to the percentage of selling, general
and administrative expenses relative to sales are not meaningful.
Research and Development. For the year ended December 31, 1995, research
------------------------
and development expenses decreased to $273,150 as compared to $369,791 in the
prior year, a decrease of 26%, due primarily to the following; a decrease of
$18,000 in laboratory fees, a decrease of $41,000 in research and development
consulting expenses, and a decrease of $36,000 in research and development
salaries. As the Company's paint stripping product line has come to market, and
other product lines are further along in their development, research and
development fees have continued to decrease. Calculations with respect to the
percentage of research and development expenses relative to sales are not
meaningful.
14
<PAGE>
LIQUIDITY
The Company has never generated sufficient revenues to finance its
operations and has been able to remain in business solely as a result of raising
capital. The Company's ability to continue as a going concern in the near term
is dependent upon obtaining additional financing. The Company does not have the
financial resources to operate its business, continue research and development
or market its products. The Company is currently financing its operations
through loans from shareholders, which aggregated approximately $465,000 as of
February 28, 1997. The Company continues to seek additional capital from an
array of potential sources. The Company has provided information regarding its
Technologies to venture capital firms and is in discussions with some of them,
although there can be no assurances that any such discussions will result in the
Company obtaining any additional capital. Even if the Company is able to obtain
additional capital there can be no assurances that the structure or terms of
such proposed financing will be on acceptable terms.
The Company has entered into agreements with SSC for sales and marketing
services and with the respective licensors under the licenses with respect to
the various Technologies under which the Company has undertaken substantial
ongoing financial commitments. Unless the Company is able to obtain additional
financing, the Company will be unable to meet its commitments under such
agreements. See "Marketing and Sales -- Marketing Agreement" and "Licenses."
The Company estimates that it will require approximately $1,800,000 in
additional financing in order to continue operations for fiscal 1997, and an
additional $1,900,000 in order to fund overhead, complete research with respect
to all of the Technologies, commercially exploit the products derived therefrom
and market each such product. The Company anticipates that, of the minimum of
$1,800,000 needed to continue operations, approximately $650,000 will be
allocated to salaries, $200,000 to rent, utilities and insurance expenses,
$250,000 to consulting fees, $250,000 to royalties, $350,000 to operating
expenses, and $100,000 to capital improvements. If the Company is able to obtain
an additional $1,900,000 and fully execute its business plan, the Company
estimates that approximately $300,000 will be allocated to sales commissions and
expenses, $450,000 to research, development and product testing, $200,000 to
marketing and advertising expenses, and $750,000 to working capital and
repayment of debt.
OFFERING
The Company intends to raise up to Ten Million Dollars ($10,000,000), at an
offering price per share to be determined by the Company, in a private offering
of shares of Common Stock.
15
<PAGE>
The securities to be offered in the Offering will not be registered under the
Securities Act of 1933, as amended (the "Securities Act") but rather shall be
issued pursuant to an exemption from such registration under Regulation D
promulgated thereunder or another available exemption from registration
thereunder. Such securities may not be offered or sold in the United States
absent registration under the Securities Act or an applicable exemption from
registration requirements under the Securities Act.
ITEM 7. FINANCIAL STATEMENTS
Response to this Item 7 is contained at the end of this 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
16
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position(s)
- ------------------------- --- -----------------------------
<S> <C> <C>
Stephen J. Thompson 42 President, Chief Executive
Officer and Director
Richard J. Fricke 51 Secretary and Director
Robert F. Thompson 66 Executive Vice President,
Chief Operating Officer
and Chief Financial
Officer
</TABLE>
Stephen J. Thompson began his career in the government in 1977 as the
Mayor's Aide for the Municipality of Ridgefield, Connecticut. Mr. Thompson
served in several positions having broad exposure to State and Federal
Government Regulatory Agencies, including the Department of Energy ("DOE"),
Housing and Urban Development ("HUD") and the Department of Environmental
Protection ("DEP"). In 1979, Mr. Thompson was elected to the position of
Municipal Treasurer of the Town of Ridgefield, Connecticut. As Treasurer, he
managed the disbursement of tax proceeds, payroll and accounts payable and was
responsible for audits. In 1981, Mr. Thompson was retained by Perkin Elmer
Corporation as a consultant on issues of inventory audit and control for their
Micro-lithography Division. In 1982, Mr. Thompson worked at the Northeastern
Division of BMW of America as an in-house new business consultant, handling
franchise relations, floor plan finance and supervising department managers. In
1986, Mr. Thompson and a partner formed Olympic Enterprises, Inc. to conduct
business in land development and commercial construction, including zoning and
DEP issues. In 1993, a property holding company, Olympic of Venice Place &
Evers, Inc., a Connecticut corporation in which Mr. Thompson had been involved
as president and treasurer, voluntarily petitioned for bankruptcy protection
under Chapter 11 of the Federal bankruptcy laws. Mr. Thompson graduated from
Ridgefield High School and attended the University of Miami from 1972-1973 and
Western Connecticut State College, Ancell School of Business from 1977-1979.
Mr. Thompson's wife is an employee of the Company.
Richard J. Fricke has been a practicing general practice attorney in
the State of Connecticut since 1970 and was admitted to the bar the same year.
From 1970-73, he worked with the law firm of Gregory & Adams, in Wilton,
Connecticut. From 1973 to 1990, he was a partner in the Law Firm of Crehan &
Fricke, in Ridgefield, Connecticut. Mr. Fricke filed for protection under
Chapter 7 of the federal bankruptcy laws in 1996. In addition to private
practice, Mr. Fricke was Town Counsel for the town of Ridgefield, Connecticut.
From 1973-81, he served as Director of Village Bank & Trust Company and for the
Ridgefield Community Center and the Ridgefield Montessori School. Mr. Fricke
received his undergraduate and law degrees from Cornell University in 1967 and
1970, respectively. Mr. Fricke's biographies can be found in Marquis Who's Who
-----------------
in America, Who's Who in the World, Who's Who in Business and Finance, and
- ---------- ---------------------- ---------------------------------
Who's Who in the East.
- ---------------------
Robert F. Thompson is Executive Vice President, Chief Financial
Officer and Chief Operating Officer of the Company. Mr. Thompson is a retired
Corporate Officer of American Can Co. He completed twenty-nine years with
American Can Co. and at retirement in 1988 was Assistant Treasurer and Chief
Credit Officer with functional responsibility for Credit, Payroll, Real Estate
and Claims within the Treasury Department. Mr. Thompson served as President of
the Credit Research Foundation, Columbia, Maryland, from 1989 to 1993. The
Foundation is an education and research organization affiliated with the
National Association of Credit Management. He directed the Foundation's formal
program activities at Dartmouth College and Stanford University and all research
projects in the area of credit and financial management. Mr. Thompson serves as
a director of Morgan Foods, Inc., Austin, Indiana, and the New York Credit and
Financial Management
17
<PAGE>
Association, New York, New York. He has served as a Trustee of the Credit
Research Foundation and as a Director of the National Association of Credit
Management. Mr. Thompson holds a B.A. degree in Economics from St. Francis
College, the Executive Award from the Graduate School of Credit and Financial
Management, Dartmouth College, and attended the Graduate School of Business at
New York University.
Currently all directors hold office until the next annual meeting of
shareholders and until their successors have been duly elected and qualified.
Officers are elected by and serve at the discretion of the Board of
Directors. Other than Stephen J. Thompson and Robert F. Thompson, who are father
and son, there are no family relationships among the directors or officers of
the Company.
BOARD COMMITTEES
Audit Committee. The Audit Committee of the Board of Directors was
formed in December 1995 to review the results and scope of the annual audit and
other services provided by the Company's independent accountants, to review and
evaluate the Company's control functions and to monitor transactions between the
Company and its employees, officers and directors. Stephen J. Thompson, Richard
J. Fricke and Robert F. Thompson are the members of the Audit Committee.
Compensation Committee. The Compensation Committee of the Board of
Directors reviews and approves the compensation and benefits for the Company's
executive officers. Stephen J. Thompson, Richard J. Fricke and Robert F.
Thompson are the members of the Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was formed in October, 1996, to
review and approve the compensation and benefits of the Company's executive
officers and make recommendations to the Board of Directors regarding such
matters. Stephen J. Thompson, Richard J. Fricke and Robert F. Thompson are the
members of the Compensation Committee. No interlocking relationship exists
between any member of the Company's Board of Directors or Compensation Committee
and any member of the board of directors or compensation committee of any other
company, nor has any such interlocking relationship existed in the past. In the
year ended December 31, 1996, the full Board of Directors participated in
deliberations concerning executive officer compensation.
DIRECTOR COMPENSATION
The Company's directors do not receive any fees for their services as Board
members and committee members, but are reimbursed for expenses incurred in
connection with attending Board and committee meetings.
18
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth aggregate annual remuneration of the
three directors and officers of the Company, as a group, during the Company's
last three fiscal years, and the remuneration for the year ended
December 31, 1996.
<TABLE>
<CAPTION>
Aggregate Aggregate Aggregate
remunera- remunera- remunera-
tion for tion for tion for
Capacities in fiscal fiscal fiscal
Name of which year year year
individual or identity of group remuneration ended ended ended
was received December December December
31, 1994 31, 1995 31, 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen J. Thompson President, $ 58,500 $ 50,000 $ 34,000
Chief (1)(2)(3) (1)(2)(3) (1)(2)(3)
Executive and (4)(5)
Director
Richard J. Fricke Secretary and $ 58,500 $ 50,000 $ 34,000
Director (1)(2)(3) (1)(2)(3) (1)(2)(3)
(6) (6) (4)(5)(6)
Robert F. Thompson Chief $ 85,960 $ 83,444 $ 80,000
Operating (1) (1) (1)
Officer and
Chief Financial
Officer
Samuel E. Bernstein Vice President $ 41,200 --- ---
All directors and officers as a Directors and $ 244,160 $ 183,444 $ 148,000
group (3 individuals) Officers (1)(2)(3) (1)(2)(3) (1)(2)(3)
(6) (6) (4)(5)(6)
- ---------------------------------------------------------------------------------------------------
</TABLE>
____________________
(1) Although the employment contracts for Stephen J. Thompson and Richard J.
Fricke each call for compensation of $300,000 plus incentive bonuses for the
year ended December 31, 1996, these amounts were not actually paid through
December 31, 1996. In 1995 Mr. Thompson and Mr. Fricke each received $50,000 in
compensation, and in 1996 Stephen J. Thompson and Richard F. Fricke have each
received $34,000 in compensation. Additionally, Robert F. Thompson received
$83,444 in compensation during 1995, and in 1996 Robert F. Thompson received
$80,000. Each of these executive officers have waived their rights with respect
to salary arrearages through 1996.
(2) In addition to their base salaries, the Company has established a Medical
and Dental Reimbursement Plan for each of Stephen J Thompson and Richard J.
Fricke providing for reimbursement of up to $10,000 of medical and dental
expenses annually incurred by such officers. As of the date of this Memorandum,
the Company has not received any requests for reimbursements under this plan.
(3) The Company in 1995 paid and currently pays $5,381 and $9,921 for the
health insurance premiums of each of Stephen J. Thompson, and Richard J. Fricke,
respectively. The respective figures for such payments in 1994 were $2,914 and
$4,974, respectively. In 1993 such payments were $2,415 and $4,175,
respectively. In addition, in 1994 the Company paid $2,382 in legal malpractice
insurance premiums on behalf of Richard J. Fricke.
(4) Does not include 85,000 shares valued at $1.99 per share of Common Stock
issued as additional compensation to each of Mr. Richard J. Fricke and Mr.
Stephen J. Thompson for the year ended December 31, 1996.
19
<PAGE>
(5) Under the terms of their respective employment agreements, each of Stephen
J. Thompson and Richard J. Fricke are granted (i) an annual bonus equal to ten
percent (10%) of the Company's net income, and (ii) an annual Common Stock
option bonus of stock options exercisable for ten years at an exercise price of
$.01 per share for one percent (1%) of the number of shares of Common Stock.
issued and outstanding as of the end of the fiscal year for which such options
are granted.
(6) Mr. Fricke receives office space and secretarial services from the Company
for the operation of his independent law practice. The value of such services
are estimated to be approximately $1,800 annually, based on Mr. Fricke spending
less than 5% of his time on his law practice.
20
<PAGE>
EMPLOYMENT AGREEMENTS
Each of the officers of the Company has executed an employment contract with
substantially similar provisions concerning covenants not to compete and
confidentiality.
Stephen J. Thompson's employment agreement was executed on August 13, 1991
(the "Thompson Employment Agreement") and provides, other than the standard
provisions described above, that he will be Chief Executive Officer of the
Company for an undetermined term. Since the execution of the Thompson Employment
Agreement, the Board of Directors appointed Mr. Thompson to the additional
position of President and Director. Pursuant to the terms of the Thompson
Employment Agreement, in addition to his stated salary, Mr. Thompson is entitled
to a bonus of ten percent (10%) of the annual net income of the Company and an
annual stock option bonus of options to purchase 1% of the number of shares of
Common Stock. issued and outstanding as of the end of the fiscal year for which
such options are granted, exercisable for ten years at an exercise price of $.01
per share. The Thompson Employment Agreement also provides that the Company
shall pay for Mr. Thompson's automobile, health and major medical insurance and
life insurance.
Richard J. Fricke's employment agreement was executed on August 13, 1991 (the
"Fricke Employment Agreement") and provides, other than the standard provisions
described above, that he will be Corporate Counsel for an undetermined term.
Since the execution of the Fricke Employment Agreement, the Board of Directors
appointed Mr. Fricke to the additional position of Secretary and Director.
Pursuant to the terms of the Fricke Employment Agreement, in addition to his
salary, Mr. Fricke is entitled to a bonus of ten percent (10%) of the annual net
income of the Company and an annual stock option bonus of options to purchase 1%
of the number of shares of Common Stock. issued and outstanding as of the end of
the fiscal year for which such options are granted, exercisable for ten years at
an exercise price of $.01 per share. The Fricke Employment Agreement also
provides that the Company shall pay for Mr. Fricke's automobile, health and
major medical insurance and life insurance.
Robert F. Thompson's employment agreement was executed on January 31, 1996
and provides, other than the standard provisions described above, that he will
serve as the Company's Chief Operating Officer and Chief Financial Officer.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's By-Laws provide for the indemnification, to the full extent
allowed by Florida law, of its directors, officers, employees and agents who are
or were a party, or are threatened to be made a party to any threatened, pending
or completed legal action, suit or proceeding by reason of the fact that he or
she is or was serving a director, officer, employee or agent of the Company or
is or was serving in such capacity at another entity at the Company's request.
The extent, amount and eligibility for such indemnification are determined by a
majority vote of a quorum of disinterested directors, or by a majority vote of a
quorum of disinterested shareholders.
Section 607.0850 of the Florida Business Corporation Act empowers a Florida
corporation to indemnify any person who is a party to any proceeding (other than
an action by or in the right of such corporation) by reason of the fact that
such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise,
provided that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. A Florida corporation may indemnify any person who is a
party to any proceeding by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable in the proceeding.
Where an officer, director, employee or agent of a corporation is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which he actually and
reasonably incurred in
21
<PAGE>
connection therewith.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31,
1996 known to the Company regarding beneficial ownership of the Company's Common
Stock by the officers and directors and any shareholder of more than ten percent
(10%) of the Company's issued and outstanding Common Stock, and the total number
of shares of Common Stock owned by the directors and officers of the Company as
a group.
<TABLE>
<CAPTION>
Name and address Number of Shares Percent
of owner Owned(1) of Class
- ------------------------------------------------------------------
<S> <C> <C>
Stephen J. Thompson 1,343,593(2) 14.44%
- ------------------------------------------------------------------
Robert F. Thompson 82,080 0.88%
- ------------------------------------------------------------------
Richard J. Fricke 1,274,564(3) 13.70%
- ------------------------------------------------------------------
Penny Fricke 1,274,564(4) 13.70%
- ------------------------------------------------------------------
Officers and Directors as a group 2,700,237(5) 29%
- ------------------------------------------------------------------
</TABLE>
(1) Beneficial ownership as reported in the table above has been determined in
accordance with Rule 13d-3 promulgated under the Securities Exchange Act of
1934. Accordingly, except as noted, all of the Company's securities over
which the officers and directors named, or as a group, directly or
indirectly have, or share voting or investment power, have been deemed
beneficially owned.
(2) Includes 205,200 shares owned by his wife and The Thompson Family Trust.
Mr. Thompson disclaims beneficial ownership of such shares. Includes 10,562
shares which are owned by The Ridge Group, a Connecticut general
partnership in which Penny Fricke and Stephen J.Thompson each own a 50%
equity interest.
(3) Includes (i) 973,802 shares which are owned by his wife, Penny Fricke, (ii)
41,040 shares owned by his daughter, Laura J. Main, (iii) 41,040 shares
owned by his daughter, Amanda C. Frick, (iv) 82,080 shares owned by the
Fricke Family Trust, (v) 10,562 shares which are owned by The Ridge
Group, a Connecticut general partnership in which Penny Fricke and Stephen
J. Thompson each own a 50% equity interest and (vi) 41,040 shares owned by
his son, Richard L. Fricke. Mr. Fricke disclaims beneficial ownership of
such shares.
(4) Includes (i) 85,000 shares owned by her husband, Richard J. Fricke, (ii)
41,040 shares owned by her step-daughter, Laura J. Main, (iii) 41,040
shares owned by her step-daughter, Amanda C. Fricke, (v) 41,040 shares
owned by his son, Richard L. Fricke and (v) 82,080 shares
owned by the Fricke Family Trust . Mrs. Fricke disclaims beneficial
ownership of such shares. Includes 10,562 shares owned by The Ridge Group,
a Connecticut general partnership in which Penny Fricke and Stephen J.
Thompson each own a 50% equity interest.
(5) Includes (i) 205,200 shares which are owned by Stephen Thompson's wife and
The Thompson Family Trust, (ii) 973,802 shares which are owned by Richard
J. Fricke's wife, Penny Fricke, (iii) 41,040 shares owned by Mr. Fricke's
daughter, Laura J. Main, (iv) 41,040 shares owned by his son, Richard L.
Fricke and 41,040 shares owned by Mr. Fricke's daughter, Amanda C. Fricke,
and (v) 41,040 shares owned by his son, Richard L. Fricke and (vi) 82,080
shares owned by the Fricke Family trust. Mr. Thompson and Mr. Fricke,
respectively, disclaim beneficial ownership with respect to such shares.
Includes 21,124 shares which are owned by The Ridge Group, a Connecticut
general partnership in which Penny Fricke and Stephen J. Thompson each own
a 50% equity interest. Mr. Fricke disclaims beneficial ownership with
respect to such shares.
22
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has agreed to provide Richard J. Fricke, a Director and Secretary
of the Company, with office space, facilities, fixtures, equipment supplies and
secretarial services and to allow him to operate and maintain a legal practice
independent of the Company. The value of such services are estimated to be
approximately $1,800 annually, based on the Mr. Fricke spending less than 5% of
his time on his law practice.
Mr. Fricke is one of the licensors under the foam Technology license. See
"Business - Licenses"
The Ridge Group, a Connecticut general partnership in which Mr. Fricke's
wife, Penny Fricke, a beneficial owner of more than 16 % of the outstanding
Common Stock, and Stephen Thompson, a Director and the President and Chief
Executive Officer of the Company and a beneficial owner of more than 15% of the
Common Stock, each own a 50% equity interest, has loaned the Company $221,624 in
demand obligations at no interest. In addition, Stephen Thompson has in his
individual capacity loaned the Company an additional $108,100 in demand
obligations at no interest.
The Company employs Stephen J. Thompson as the President and Chief Executive
Officer of the Company; Richard J. Fricke as Secretary and General Counsel of
the Company; and Mr. Thompson's father, Robert F. Thompson, as Chief Financial
Officer and Chief Operating Officer of the Company. See "Management".
Mrs. Kathleen Kennedy, a holder of approximately three percent (3%) of the
issued and outstanding shares of Common Stock, is licensor under the Technology
licenses for the Company's foam, coatings and sealants, and recycling solvents
Technologies.
The Company believes that the terms of the transactions discussed herein are
better than those which the Company could have negotiated with unaffiliated
parties.
23
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1* Certificate of Incorporation of the Company
3.2* By-Laws of the Company
4* Copy of specimen certificate representing
shares of common stock, $.0001 par
value per share, of the Company
10.1* Asset Purchase Agreement and
Plan of Reorganization between
the Company and SAC Delaware
dated August 21, 1995
10.2* Lease Agreement between Nicholas
R. Dinapoli, Jr., as Trustee for
Brookfield Commerce and the
Company for property located at
27 Governor Street, Ridgefield, Connecticut,
dated February 22, 1993
10.3* Lease Agreement between Nicholas R. Dinapoli,
as trustee for Brookfield Commerce,
and the Company for property located at
91 Commerce Drive, Brookfield, Connecticut,
dated February 22, 1993
10.4* Supply Agreement for paint stripping
products between Samax Enterprises, Inc.
and the Company dated January 5, 1996
10.5* License Agreement for coatings and sealants
Technologies between Richard B.Kennedy
and the Company as licensee dated
December 9, 1992
10.6* License Agreement for packaging applications
of foam Technologies between Richard B.
Kennedy, Patrick J. Crehan and Richard J.
Fricke as licensors and the Company as
licensee dated December 9, 1992
10.7* License Agreement for fire retardant applications
of foam Technologies between Richard B.
Kennedy, Patrick J. Crehan and Richard J.Fricke
as licensors and the Company as licensee dated
December 9, 1992
10.8* Amendment to Technology License Agreements
of foam Technologies between Richard B.Kennedy,
Patrick J. Crehan and Richard J.Fricke as licensors
and the Company as licensee dated August 23, 1993
10.9* Employment Agreement between
the Company and Mr. Stephen J.
Thompson dated August 13, 1991,
as amended.
10.10* Employment Agreement between
the Company and Mr. Richard J.
Fricke dated August 13, 1991, as
amended.
10.11* Employment Agreement between
the Company and Mr. Robert F.
Thompson dated January 31, 1996.
10.12* Consulting Agreement between SSC
Marketing, Inc and the Company
dated as of November 1, 1996.
10.13* Customer Service Agreement between SSC
Marketing, Inc and the Company
dated as of November 1, 1996.
27 Financial Data Schedule
* Incorporated by reference from the Registrant's Registration Statement on
Form 10 filed December 31, 1996.
(b) Reports on Form 8-K
None
24
<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.
SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
Date: March 31, 1996 By: s/Stephen J. Thompson
-------------------------------
Stephen J. Thompson
President and Chief Executive Officer
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
--------- ----- ----
President, Director and Chief March 31, 1997
Executive Officer (Principal
/s/ Stephen J. Thompson Executive Officer)
- -----------------------
Stephen J. Thompson
/s/ Richard J. Fricke Secretary and Director March 31, 1997
- ---------------------
Richard J. Fricke
Executive Vice President, March 31, 1997
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and
/s/ Robert F. Thompson Accounting Officer)
- ----------------------
Robert F. Thompson
25
<PAGE>
INDEX TO AUDITED FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors F-1
Balance Sheet at December 31, 1996 and 1995 F-2
Statement of Operations for the years
ended December 31, 1996, 1995, and 1994 F-3
Statement of Changes in Stockholders'
Deficit for the years ended December 31,
1996, 1995, and 1994 F-4
Statement of Cash Flows for the years ended
December 31, 1996, 1995, and 1994 F-5
Notes to Financial Statements F-6
<PAGE>
AUDITED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
To the Board of Directors and Stockholders
Safe Alternatives Corporation of America, Inc.
We have audited the accompanying balance sheet of Safe Alternatives Corporation
of America, Inc., as of December 31, 1996 and 1995, and the related statements
of operations, changes in stockholders' deficit and cash flows for each of the
three years in the period ended December 31, 1996. 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 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 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 Safe Alternatives Corporation
of America, Inc. at December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, 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 more fully described in Note 1, the
Company has incurred recurring operating losses and has a working capital
deficiency. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Stamford, CT
February 24, 1997
F-1
<PAGE>
Safe Alternatives Corporation of America, Inc.
Balance Sheet
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
--------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 3,994 $ 12,331
Accounts receivable 12,162 11,209
Advances to Employees 19,922 7,978
Inventories 13,187 3,968
Prepaid expenses and other current
assets -- 2,744
------------- ---------------
Total current assets 49,265 38,230
Fixed assets
Equipment 134,548 93,775
Leasehold improvements 64,722 64,722
Furniture and fixtures 107,032 102,217
------------- ---------------
306,302 260,714
Less accumulated depreciation 174,085 119,570
------------- ---------------
132,217 141,144
Other assets
Organization costs, less accumulated
amortization of $52,713 and $40,548
in 1996 and 1995, respectively 8,109 20,274
Deposits and other noncurrent assets 12,564 24,058
------------- ---------------
20,673 44,332
------------- ---------------
$ 202,155 $ 223,706
============= ===============
LIABILITIES AND STOCKHOLDERS'
DEFICIT
Current liabilities
Accounts payable and other accrued
expenses $ 260,972 $ 99,723
Stockholders' loans 467,065 474,300
------------- -------------
Total liabilities 728,037 574,023
Stockholders' deficit
Common stock, $.0001 par value,
200,000,000 shares authorized:
Issued (including shares in treasury)
9,304,000 shares in 1996 and
8,500,000 in 1995 931 850
Additional paid-in capital 11,155,273 7,413,260
Accumulated deficit (11,684,245) (7,766,480)
Subscriptions issuable 2,160 2,160
-------------- ------------
(525,881) (350,210)
Common stock in treasury at par
value--11,682 shares in 1996 and
1,065,066 shares in 1995 (1) (107)
-------------- ------------
Total stockholders' deficit (525,882) (350,317)
-------------- ------------
$ 202,155 $ 223,706
============== =============
</TABLE>
See accompanying notes.
F-2
<PAGE>
Safe Alternatives Corporation of America, Inc.
Statement of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
<S> <C> <C> <C>
Sales $ 63,854 $ 38,359 $ 16,425
Costs and expenses:
Cost of goods sold 39,501 15,554 9,170
Selling, general and administrative 3,600,506 2,131,560 2,578,653
Research and development 274,932 273,150 369,791
Depreciation and amortization 66,680 59,708 53,430
-----------------------------------------
3,981,619 2,479,972 3,011,044
-----------------------------------------
Net loss $(3,917,765) $(2,441,613) $(2,994,619)
=========================================
Net loss per common share $(.47) $(.36) $(.49)
==========================================
Average number of common shares
outstanding 8,342,511 6,862,688 6,137,128
=========================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Safe Alternatives Corporation of America, Inc.
Statement of Changes in Stockholders' Deficit
<TABLE>
<CAPTION>
Common Additional
Stock Paid-in Accumulated Subscriptions Treasury Stock
----------------------- --------------------------------------
Shares Amount Capital Deficit Issuable Shares Amount Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993 6,617,122 $663 $2,407,029 $(2,330,248) $250,000 (820,800) $(82) $327,362
Issuance of common stock
to treasury 273,600 27 (273,600) (27) --
Proceeds from sale of
common stock, net of
expenses of $35,700 44,478 4 1,090,682 136,142 13 1,090,699
Issuance of common stock
previously subscribed 91,200 9 249,991 (250,000) --
Common stock held for
issuance (27,557 shares) 122,160 122,160
Issuance of common stock
as compensation 137,411 14 1,409,133 96,253 9 1,409,156
Net loss (2,994,619) (2,994,619)
---------------------------------------------------------------------------------------------------------
Balance at December 31,
1994 7,163,811 717 5,156,835 (5,324,867) 122,160 (862,005) (87) (45,242)
Issuance of common stock
to treasury 498,678 50 (498,678) (50) --
Proceeds from sale of
common stock, net of
expenses of $46,500 223,557 22 1,244,668 77,063 8 1,244,698
Issuance of common stock
previously subscribed 119,997 (120,000) 27,360 3 --
Issuance of common stock
as compensation 113,954 11 891,810 191,194 19 891,840
Shares issued related to
business acquisition 500,000 50 (50) --
Net loss (2,441,613) (2,441,613)
---------------------------------------------------------------------------------------------------------
Balance at December 31,
1995 8,500,000 850 7,413,260 (7,766,480) 2,160 (1,065,066) (107) (350,317)
Proceeds from sale of
common stock, net of
expenses of $128,728 406,100 41 1,706,503 482,000 48 1,706,592
Issuance of common
stock as compensation 397,900 40 2,035,510 571,384 58 2,035,608
Net loss (3,917,765) (3,917,765)
--------------------------------------------------------------------------------------------------------
Balance at December
31, 1996 9,304,000 $931 $11,155,273 $(11,684,245) $ 2,160 (11,682) $ (1) $ (525,882)
========================================================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Safe Alternatives Corporation of America, Inc.
Statement of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,917,765) $(2,441,613) $(2,994,619)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 66,680 59,708 53,430
Write-off of obsolete inventory -- 10,802 --
Non-cash compensation and commission 2,035,608 891,840 1,409,156
Changes in operating assets and
liabilities:
Accounts receivable (953) 4,679 (15,888)
Advances to employees (11,944) (7,978) --
Inventories (9,219) (642) (14,128)
Prepaid expense and other current assets 2,744 (1,500)
Deposits and other noncurrent assets 11,494 (2,800)
Accounts payable and accrued expenses 161,249 30,383 28,883
-------------------------------------------
Net cash used in operating activities (1,662,106) (1,457,121) (1,533,166)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to fixed assets (45,588) (23,668) (39,019)
-------------------------------------------
Net cash used by investing activities (45,588) (23,668) (39,019)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stockholders' loans 332,115 383,600 215,500
Repayments of stockholders' loans (339,350) (156,800) (42,500)
Proceeds from issuance of common stock
and subscriptions 1,835,320 1,291,198 1,248,559
Less expenses from sale of common stock (128,728) (46,500) (35,700)
-------------------------------------------
Net cash provided by financing
activities 1,699,357 1,471,498 1,385,859
Net decrease in cash (8,337) (9,291) (186,326)
Cash at beginning of year 12,331 21,622 207,948
-------------------------------------------
Cash at end of year $ 3,994 $ 12,331 $ 21,622
===========================================
Supplemental disclosure of cash paid:
State income taxes paid $ -- $ 760 $ 703
===========================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Safe Alternatives Corporation of America, Inc.
Notes to Financial Statements
December 31, 1995
1. REORGANIZATION AND BASIS OF PRESENTATION
On September 15, 1995, the stockholders of Safe Alternatives Corporation of
America, Inc., a Delaware corporation, ("SAC Delaware") approved an Asset
Purchase Agreement and Plan of Reorganization (the "Reorganization") whereby the
assets of SAC Delaware were sold to Safe Alternatives of America, Inc., a
Florida corporation then operating under the name Portsmouth Corporation (the
"Company"), in exchange for 8,000,000 shares of the Common Stock of the Company
and the assumption of SAC Delaware's liabilities. Subsequent to the
Reorganization, SAC Delaware was liquidated. Pursuant to such liquidation, SAC
Delaware distributed to each stockholder 0.2736 shares of the Company's Common
Stock for each share of SAC Delaware that was owned. As a result of the
Reorganization, the stockholders of SAC Delaware, controlled 94% of the issued
and outstanding Common Stock of the Company and therefore, the Reorganization
has been accounted for as the acquisition of the Company by SAC Delaware. The
financial statements presented therefore include the historical financial
statements of SAC Delaware prior to the reorganization. Prior to the
Reorganization, the Company had been an inactive public entity with no assets,
liabilities, or net worth. The costs of this transaction have been charged to
expense.
In addition, as part of the Reorganization, the Company agreed to pay a six
percent royalty (the "Royalty") on the gross revenues of the Company
attributable to the assets of the Company acquired in the Reorganization,
payable to the stockholders of SAC Delaware of record as of September 15, 1995
(representing 8,000,000 of the 8,500,000 common shares outstanding as of
December 31, 1995). The Royalty is payable on a quarterly basis during the sixty
months beginning September 28, 1995, and the cumulative total of all royalty
payments is limited to $8,500,000. No Royalty payments have been made as of
December 31, 1996.
The issuance of 8,000,000 shares of the Company's Common Stock in connection
with the Reorganization has been treated as a reverse stock split and the shares
of issued and outstanding Common Stock of the Company prior to the
Reorganization have been restated for all periods presented.
Subsequent to the Reorganization, the Company changed its name to Safe
Alternatives Corporation of America, Inc.
OPERATIONS
The Company has secured exclusive manufacturing, marketing, and distribution
rights to certain patented, patent pending and application-in-process
technologies. Such technologies are associated with paint stripping chemicals,
water-based foams, flame retardant coatings, recycling solvents, and sealants.
The Company has incurred significant losses since inception and expects to incur
additional losses in 1997. The Company plans to continue to finance its
operations with a combination of sales of common stock and, in the longer term,
borrowings and revenues from product sales. The Company's ability to continue as
a going concern, in the near term, is dependent upon obtaining additional
financing. The accompanying financial statements have been prepared assuming the
Company will continue as a going concern, and do not include any adjustments
that might result from the outcome of this uncertainty.
F-6
<PAGE>
Safe Alternatives Corporation of America, Inc.
Notes to Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is computed on a
straight-line basis over estimated useful lives of 5 to 7 years. Leasehold
improvements are depreciated over the shorter of the lease term or economic life
of the related improvement. Depreciation expense was $54,515, $47,543, and
$43,158 in 1996, 1995 and 1994, respectively.
ORGANIZATION COSTS
Organization costs are amortized over 60 months using the straight-line method.
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of shares of
Common Stock outstanding in each period.
INVENTORIES
Inventories, primarily finished goods, are stated at the lower of cost (first-
in, first-out) or market value.
STOCKHOLDERS' LOANS
Stockholders' loans are unsecured, non-interest bearing, demand notes.
ADVERTISING COSTS
All costs associated with advertising products are expensed in the year
incurred. Advertising expense was $46,328, $17,774, and $11,958 in 1996, 1995,
and 1994, respectively.
CONCENTRATION OF CREDIT RISK
Concentration of credit risk with respect to receivables is limited due to the
number of customers and their dispersion across geographic areas. The Company
generally does not require collateral. At December 31, 1996 and 1995, the
Company does not have significant credit risk concentrations. No single
customer represents greater than 10% of total accounts receivable.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
3. LEASES
The Company maintains its headquarters at offices that are leased under a
noncancelable operating lease expiring on September 30, 1998. In addition, the
Company is leasing a laboratory and testing facility under a noncancelable
operating lease expiring on February 28, 1998.
F-7
<PAGE>
Safe Alternatives Corporation of America, Inc.
Notes to Financial Statements (continued)
3. LEASES (CONTINUED)
Future minimum rental payments under the Company's operating leases are $123,918
and $44,181 in 1997 and 1998, respectively. Rent expense was $138,868, $113,885,
and $111,009 in 1996, 1995, and 1994, respectively.
4. STOCKHOLDERS' DEFICIT
TREASURY STOCK
Treasury stock represents shares (recorded at par value) being held in trust (by
Richard J. Fricke, an officer of the Company) to be used for future issuance to
employees, investors, and other potential funding sources. As the Company
directly benefits from the sales of the shares in the trust, these shares
(11,682 at December 31, 1996) have been recorded as treasury stock.
SHARES ISSUED AS COMPENSATION AND COMMISSION
During 1996, 1995 and 1994, respectively, 799,284, 135,648 and 233,664 fully
vested shares of the Company's Common Stock were issued to outside consultants.
The fair value of shares awarded, based upon the value of Common Stock sold
during those periods, was $1,697,608, $474,840 and $1,409,156 for 1996, 1995
and 1994, respectively, and has been recorded as compensation expense.
In addition during 1996 and 1995, respectively, 170,000 and 169,500 fully vested
shares of the Company's Common Stock were issued to officers of the Company. The
fair value of shares awarded, based upon the value of Common Stock sold during
these periods, was $338,000 and $417,000 for 1996 and 1995, respectively, and
has been recorded as compensation expense. No shares were issued to officers in
1994.
5. INCOME TAXES
At December 31, 1996 and 1995, the Company had deferred tax assets relating
primarily to net operating loss carryforwards of approximately $9,636,000 and
$5,600,000, respectively, offset by a valuation allowance.
The Company has reported net operating loss carryforwards for federal income tax
purposes of approximately $9,636,000 expiring during the period from 2007 to
2011. As a result of changes in ownership of the Company, the future tax
benefits from its net operating losses will be limited.
F-8
<PAGE>
Safe Alternatives Corporation of America, Inc.
Notes to Financial Statements (continued)
6. LICENSE AGREEMENTS
The Company maintains four significant licensing agreements. Each such license
has substantially the same terms and conditions and each is valid until April
17, 2050, unless the Company fails to pay a royalty of four percent of the gross
sales derived from the exploitation of the respective technology, with certain
limitations for sales derived from intercompany transfers or transactions with
subsidiaries. The Company has also agreed to pay all maintenance fees and fees
for filing and prosecuting patent applications pending at the time the licenses
were executed. All rights under the licenses are freely assignable by the
Company. The licenses were amended on August 23, 1993 to collectively provide
minimum monthly payment of $5,000, in the aggregate. In addition, a weekly
payment of $1,200 to Mrs. Kathleen Kennedy during her lifetime is required in
lieu of progressive sales minimums due beginning in 1993. The four percent
royalty payments described above however, would nonetheless survive.
7. RELATED PARTY TRANSACTIONS
The three officers of the Company have employment contracts entitling them to
aggregate cash compensation of $725,000 plus incentive bonuses. Amounts actually
paid to the officers in 1996, 1995 and 1994 amounted to $148,000, $183,000 and
$244,000, in each of the years, respectively. Each of the officers has waived
his rights with respect to salary arrearages. No bonuses have been paid out in
any of the years. In accordance with their employment agreements, the two
executive officers are entitled to options to purchase (at par value) 1% of the
outstanding Common Stock of the Company at December 31 of the prior year. Based
on these agreements, the Company issued to each of these officers 85,000 shares
of Common Stock from Treasury in 1996 and recorded additional compensation
expense to officers of $338,000.
An officer of the Company has an interest in one of the licenses discussed
above. Through December 31, 1996 there have been no payments to such officer
under the aforementioned agreements.
8. MARKETING AGREEMENT
The Company has entered into two agreements with SSC -- a consulting agreement
(the "Consulting Agreement") dated as of November 1, 1996 and a customer service
agreement (the "Service Agreement") dated as of December 15, 1996. Under the
terms of the Consulting Agreement, SSC will provide the Company with a
comprehensive sales and marketing program for the Company's products, including
hiring sales representatives, developing sales contacts, marketing plans,
advertising campaigns, customer service programs, and sales accounting and
reporting systems. The Company will pay SSC a flat fee of $8,000 per month, an
additional fee of $4,000 for each sales manager engaged by SSC to service the
Company's account, with a minimum of three such sales managers to be so engaged,
plus approved expenses of SSC and its sales managers. In addition, in the event
SAC's annual revenues exceed $2,600,000, the Company shall pay each sales
manager a 2% commission on gross revenues generated in their respective
territories. In the event the Company's annual revenues exceed $2,800,000, the
Company shall pay SSC a 5.5% commission on the Company's gross revenues, with
the $8,000 monthly payments to be credited against the payment of such
commissions. Under the terms of the Service Agreement, SSC will provide the
Company with order entry, billing, order tracking, sales forecasting and
planning, and information processing services. The Company will pay SSC an
additional $5,000 per month for such services, provided that, if at any time the
volume of SAC's business exceeds SSC's ability to adequately perform such
services, the parties shall agree upon an increased fee. A failure to so agree
will result in termination of the Service Agreement.
F-9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,994
<SECURITIES> 0
<RECEIVABLES> 12,162
<ALLOWANCES> 0
<INVENTORY> 13,187
<CURRENT-ASSETS> 49,265
<PP&E> 306,302
<DEPRECIATION> 174,185
<TOTAL-ASSETS> 202,155
<CURRENT-LIABILITIES> 728,037
<BONDS> 0
0
0
<COMMON> 931
<OTHER-SE> (526,813)
<TOTAL-LIABILITY-AND-EQUITY> 202,155
<SALES> 63,854
<TOTAL-REVENUES> 63,854
<CGS> 39,501
<TOTAL-COSTS> 39,501
<OTHER-EXPENSES> 3,942,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,917,765)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,917,765)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> 0
</TABLE>
