<PAGE>
As filed with the Securities and Exchange Commission on August _____, 1998
Registration No.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
TTI TECHNOLOGIES, INC.
---------------------------------
(Exact Name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 47-0755991 3569
------------------------------- ---------------------------- -------------------------
<S> <C> <C>
(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification Number) Classification Code Number)
------------------------
</TABLE>
444 Regency Parkway Drive
Suite 311
Omaha, Nebraska 68114
402/391-6611
(Address, including zip code, and
telephone number, including area code, of
registrant's principal executive offices)
Timothy J. McReynolds
444 Regency Parkway Drive
Suite 311
Omaha, Nebraska 68114
402/391-6611
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to: Cassidy & Associates, 1504 R Street, N.W.
Washington, D.C. 20009, 202/387-5400
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / X /
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Amount Proposed Proposed Amount of
Securities to be Registered to be Maximum Maximum Registration
Registered Offering Aggregate Fee(1)
Price Per Share(2) Offering Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 500,000 $5.00 $2,500,000 $825
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock held by Selling
Securityholders 888,500 0.01 (3) 8,885 3
- ----------------------------------------------------------------------------------------------------------------------------------
Series A Warrants 196,875 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying
Series A Warrants 196,875 5.00 984,375 325
- ----------------------------------------------------------------------------------------------------------------------------------
Series B Warrants 592,818
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying
Series B Warrants 592,818 2.29 1,357,553 448
- ----------------------------------------------------------------------------------------------------------------------------------
Series C Warrants 300,000
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying
Series C Warrants 300,000 .10 30,000 10
- ----------------------------------------------------------------------------------------------------------------------------------
Series D Warrants 43,750
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying
Series D Warrants 43,750 6.00 262,500 87
- ----------------------------------------------------------------------------------------------------------------------------------
Pierce Mill Warrants 150,000
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying
Pierce Mill warrants 150,000 2.00 300,000 99
- ----------------------------------------------------------------------------------------------------------------------------------
Fahey Warrants 83,664 1.43
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying
Series Fahey Warrants 83,664 1.43 119,639 39
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $5,562,952 $1,836 (4)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) There is no current market for the securities.
(2) Estimated solely for the purpose of calculating the registration
fee based on Rule 457(f)(2).
(3) Based on present book value.
(4) Paid by electronic transfer.
<PAGE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
The information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE>
PROSPECTUS Subject to Completion, Dated August ______, 1998
TTI TECHNOLOGIES, INC.
500,000 Shares of Common Stock; and
888,500 shares of Common Stock, 1,367,103 Warrants and
1,367,103 Shares of Common Stock underlying such Warrants
to be sold by the Holders thereof
The Registration Statement of which this Prospectus is a part relates
to the offer and sale by TTI Technologies, Inc., a Delaware corporation (the
"Company") of 500,000 shares (the "Company Shares") of common stock, $.0001 par
value per share (the "Common Stock") at $5.00 per share and certain securities
of the Company by the holders thereof (the "Selling Securityholders")consisting
of (i) 888,500 shares of Common Stock, (ii) warrants to purchase 196,875 shares
of Common Stock previously issued by the Company (the "Series A Warrants") and
196,875 shares of Common Stock underlying the Series A Warrants, (iii) warrants
to purchase 592,818 shares of Common Stock previously issued by the Company (the
"Series B Warrants") and 592,818 Shares of Common Stock underlying the Series B
Warrants, (iv) warrants to purchase 300,000 shares of Common Stock previously
issued by the Company (the "Series C Warrants") and 300,000 shares of Common
Stock underlying the Series C Warrants, (v) warrants to purchase 43,750 shares
of Common Stock previously issued by the Company (the "Series D Warrants") and
43,750 shares of Common Stock underlying the Series D Warrants, (vi) warrants to
purchase 83,664 shares of Common Stock previously issued by the Company to
Michael Fahey (the "Fahey Warrants") and 83,664 shares of Common Stock
underlying the Fahey Warrants, and (vii) warrants to purchase 150,000 shares of
Common Stock previously issued to Pierce Mill Associates, Inc. (the "Pierce Mill
Warrants") and 150,000 shares of Common Stock underlying the Pierce Mill
Warrants. (The Series A through Series D Warrants, the Fahey Warrants and the
Pierce Mill Warrants may hereinafter be collectively referred to as the
"Warrants"; the Company Shares and the securities listed in (i) through (vi)
above may hereinafter be collectively referred to as the "Securities"; the
Company Shares and the Common Stock offered by the Selling Securityholders may
hereinafter collectively be referred to as the "Shares"). See "DESCRIPTION OF
SECURITIES". All costs incurred in the registration of the Securities are being
borne by the Company.
The Company is in the initial stages of commercializing its POWER
System, a patented system of organic waste reduction. The POWER System will
reduce organic waste by up to 85% of its original mass and generates a synthetic
gas that can be used to produce electricity. The Company's waste-reduction-to-
energy generation business is in its development stage and there is no assurance
that the Company will be able to successfully market and install the POWER
System or any commercially viable waste reduction product. The Company's target
customers will be manufacturers which generate a large amount of homogeneous
waste and have places of business in areas with high waste disposal and
electricity costs.
The Company's wholly-owned subsidiary, TTI Exeter, Inc. ("TTI Exeter")
sells mechanized material-handling products, computerized process controls, and
electronic optical recognition systems. TTI Exeter operates in the agricultural
market selling graders, sizers and automated instrument and process controls
machinery and continuous emissions monitoring systems primarily in the citrus
and potato processing industries, municipal water telemetry systems, and
processed produce industries.
Each Series A Warrant entitles the holder thereof to purchase one
share of Common Stock at a per share exercise price of 100% of the initial
public offering price. Each Series B Warrant entitles the holder thereof to
purchase one share of Common Stock at a per share exercise price of $2.29. Each
Series C Warrant entitles the holder thereof to purchase one share of Common
Stock at a per share exercise price of $.10. Each Series D Warrant entitles the
holder thereof to purchase one share of Common Stock at a per share exercise
price of 120% of the initial public offering price. Each Fahey warrant entitles
the holder thereof to purchase one share of Common Stock at a per share exercise
price of $1.43. Each Pierce Mill warrant entitles the holder thereof to purchase
one share of Common Stock at a per share exercise price of $2.00. The exercise
price and maturity date of the Warrants are subject to adjustment at the
discretion of the Company. See "DESCRIPTION OF SECURITIES."
<PAGE>
Prior to the Company's offering of the securities described herein,
there has been no public market for the Common Stock or the Warrants, and no
assurances can be given that a public market will develop following completion
of this Offering or that, if any such market does develop, it will be sustained.
The offering price of the Common Stock was determined arbitrarily by the Company
and the offering price of the Common Stock and the exercise price of the
Warrants are not necessarily related to asset or book value, net worth or any
other established criteria of value. The Company will receive the proceeds (net
of certain expenses) from the sale of the Company Shares and the exercise of the
Warrants. No assurances can be given that any of the Warrants will be exercised.
See "USE OF PROCEEDS."
Sales of the Securities being offered by Selling Securityholders, or
even the potential of such sales, may likely have an adverse effect on the
market prices of the securities of the Company. The Selling Securityholders will
receive the proceeds from the sale of the Securities being offered by them. The
Company will not receive any of the proceeds from such sales and will receive
proceeds only from the sale of the Company Shares and the exercise of the
Warrants, if any. The Selling Securityholders, directly or through agents,
dealers or representatives to be designated from time to time, may sell their
Securities on terms to be determined at the time of sale. See "PLAN OF
DISTRIBUTION." The Selling Securityholders reserve the sole right to accept or
reject, in whole or in part, any proposed purchase of the Selling
Securityholders' Securities being offered by them pursuant hereto.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
CONTAINED IN THIS PROSPECTUS BEGINNING ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CERTAIN SECURITIES DESCRIBED HEREIN ARE OFFERED BY THE SELLING
SHAREHOLDERS SUBJECT TO PRIOR SALE, WITHDRAWAL, CANCELLATION OR MODIFICATION OF
THE OFFERING, WITHOUT NOTICE. IN ADDITION, THE RIGHT IS RESERVED TO CANCEL ANY
CONFIRMATION OF SALE EVEN IF THE PURCHASE PRICE HAS BEEN PAID, IF IN THE OPINION
OF THE COMPANY OR ANY PARTICIPATING BROKER-DEALER, COMPLETION OF SUCH SALE WOULD
VIOLATE FEDERAL OR STATE SECURITIES LAWS OR A RULE OR POLICY OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
FOLLOWING THE COMPLETION OF THIS OFFERING, CERTAIN BROKER-DEALERS MAY
BE THE PRINCIPAL MARKET MAKERS FOR THE SECURITIES OFFERED HEREBY. UNDER THESE
CIRCUMSTANCES, THE MARKET BID AND ASKED PRICES FOR THE SECURITIES MAY BE
SIGNIFICANTLY INFLUENCED BY DECISIONS OF THE MARKET MAKERS TO BUY OR SELL THE
SECURITIES FOR THEIR OWN ACCOUNT. NO ASSURANCE CAN BE GIVEN THAT ANY MARKET
MAKING ACTIVITIES, IF COMMENCED, WILL BE CONTINUED.
FOR A PERIOD OF AT LEAST ONE YEAR FOLLOWING CLOSING OF THIS OFFERING,
THE COMPANY WILL BE REQUIRED BY THE SECURITIES EXCHANGE ACT OF 1934 TO FILE
PERIODIC REPORTS AND OTHER INFORMATION WITH THE SECURITIES AND EXCHANGE
COMMISSION. SUCH MATERIAL MAY BE INSPECTED AT THE COMMISSION'S PRINCIPAL OFFICES
AT JUDICIARY PLAZA, 450 FIFTH STREET, N.W. WASHINGTON, D.C. 20459 AND COPIES MAY
BE OBTAINED ON PAYMENT OF CERTAIN FEES PRESCRIBED BY THE COMMISSION. THE COMPANY
WILL FURNISH TO HOLDERS OF ITS COMMON STOCK ANNUAL REPORTS CONTAINING AUDITED
FINANCIAL STATEMENTS EXAMINED AND REPORTED UPON, AND WITH AN OPINION EXPRESSED
BY AN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT. THE COMPANY MAY ISSUE OTHER
UNAUDITED INTERIM REPORTS TO ITS SHAREHOLDERS AS IT DEEMS APPROPRIATE.
CERTAIN SECURITIES HEREIN ARE TRANSFERRABLE WARRANTS. IT IS POSSIBLE
THAT THE WARRANTS MAY BE ACQUIRED BY PERSONS RESIDING IN STATES WHERE THE
COMPANY
2
<PAGE>
IS UNABLE TO QUALIFY THE SHARES OF COMMON STOCK UNDERLYING THE WARRANTS FOR SALE
UPON EXERCISE. WARRANTHOLDERS IN THOSE STATES WOULD HAVE NO CHOICE BUT TO
ATTEMPT TO SELL THEIR WARRANTS OR LET THEM EXPIRE UNEXERCISED. IT IS ALSO
POSSIBLE THAT THE COMPANY MAY BE UNABLE, FOR UNFORESEEN REASONS, TO CAUSE A
REGISTRATION STATEMENT COVERING THE SHARES UNDERLYING THE WARRANTS TO BE IN
EFFECT WHEN THE WARRANTS ARE EXERCISABLE. IN THAT EVENT, THE WARRANTS MAY EXPIRE
UNLESS EXTENDED BY THE COMPANY AS PERMITTED BY THE WARRANTS BECAUSE A
REGISTRATION STATEMENT MUST BE IN EFFECT, IN ORDER FOR WARRANTHOLDERS TO
EXERCISE THEIR WARRANTS.
The date of this Prospectus is August ____, 1998.
3
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this summary is qualified by, the
more detailed information set forth in this Prospectus, which should be read in
its entirety.
THE COMPANY
TTI Technologies, Inc. (the "Company") is incorporated under the laws of
Delaware and was formed through a merger effective December 30, 1997, between
its predecessor TTI Technologies, Inc. and a pre-existing Delaware corporation,
Lanham Acquisitions, Inc. The Company is developing, has patented and plans to
sell the "POWER System", a commercial waste reduction system able to reduce
biomass industrial solid waste by up to 85% of its original mass and convert it
into a useable gas capable of generating electricity. The Company has performed
limited testing on the POWER System but has not installed any commercial
systems. The Company has no contracts with any waste generators or other
customers to date to install its system and there is no assurance that the
Company will be able to acquire any customers or install its system
commercially.
The Company's wholly owned subsidiary, TTI Exeter, Inc ("TTI Exeter"), was
formed through a merger, effective for accounting purposes on January 29, 1998,
between Exeter Engineering, Inc., a California Company, ("Exeter Engineering")
and TTI Control Technologies, Inc ("TTIC") a Delaware corporation and wholly
owned subsidiary of the Company. TTI Exeter is an established designer,
developer and installer of materials-handling equipment, designer and fabricator
of produce packing facilities, and designer and installer of computerized
process controls, and continuous emissions monitoring systems serving mainly the
produce, potato, and citrus industries. TTI Exeter has had sales to customers
in the United States, North America, Europe and Australia but has operated at a
loss for the past three years.
RISK FACTORS
There are substantial risk factors involved in investment in the Company.
Investment in the Company is speculative and no assurances can be made of any
return to investors. See CERTAIN RISK FACTORS".
TRANSFER AGENT
Continental Stock Transfer and Trust Company, New York, New York, is the
transfer agent for the Securities. See "DESCRIPTION OF SECURITIES--Transfer
Agent and Registrar."
TRADING MARKET
There is currently no trading market for the Company's Securities. The
Company intends to apply for admission to quotation of its Securities on the
NASD OTC Bulletin Board and intends to apply for listing on the Nasdaq SmallCap
Market when, and if, it qualifies therefor. Until such time that the Company
can qualify and is accepted for admission to quotation on the NASD OTC, the
Securities will be quoted on the daily quotation sheets published by the
National Quotation Bureau, Inc., commonly known as the "pink sheets". There can
be no assurance that the Company will qualify for quotation of the Securities on
the NASD OTC Bulletin Board. See "RISK FACTORS--Absence of Trading Markets" and
"DESCRIPTION OF SECURITIES--Admission to Quotation on Nasdaq SmallCap Market or
the NASD OTC Bulletin Board".
SELECTED FINANCIAL DATA
The following table sets forth the selected consolidated financial data for
the Company as of December 31, 1996 and 1997, and June 30, 1998, and for each of
the years in the three-year period ended December 31, 1997 and for the six
months ended June 30, 1997 and 1998. The selected consolidated historical
financial data presented below as of December 31, 1996 and 1997 and for each of
the years in the three year period ended December, 1997 are derived from the
consolidated financial statements of the Company included elsewhere in this
Prospectus. The report of KPMG Peat Marwick LLP concerning the December 31,
1997 financial statements contains an explanatory
4
<PAGE>
paragraph that states that the Company's recurring losses from operations and
net working capital and stockholders' deficit raise substantial doubt about the
entity's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
that uncertainty. The selected consolidated financial data presented as of June
30, 1998 and for the six months ended June 30, 1997 and 1998 have been derived
from the Company's unaudited condensed consolidated financial statements. In the
opinion of management, the unaudited consolidated financial statements for such
periods include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the consolidated financial position and
results of operations for these periods. Results of operations are not
necessarily indicative of results to be expected for the full year. The
information should be read in conjunction with the Consolidated Financial
Statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere herein.
Historical income statement data:
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended Year Ended Year Ended ended ended
December 31, December 31, December 31, June 30, June 30,
1995 1996 1997 1997 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 48,840 2,418,012 5,518,437 2,064,087 2,128,729
Cost of goods sold 43,317 3,763,316 5,295,229 1,652,507 2,110,864
----------------------------------------------------------------------
Gross profit (loss) 5,523 (1,345,304) 223,208 411,580 17,865
Selling, general, and 981,394 1,738,419 2,390,122 963,663 2,508,057
administrative expenses
Other expenses (income), net (1,518) 168,049 464,953 166,059 361,422
----------------------------------------------------------------------
Net loss $ (974,353) (3,251,772) (2,631,867) (718,142) (2,851,614)
======================================================================
</TABLE>
Historical balance sheet data:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1996 1997 1998
-----------------------------------------------
<S> <C> <C> <C>
Current Assets $ 650,298 892,279 2,536,080
Fixed and other long-term assets 507,397 1,301,745 5,331,182
-----------------------------------------------
Total assets $ 1,157,695 2,194,024 7,867,262
===============================================
Current liabilities $ 4,145,084 5,673,078 7,209,062
Long-term liabilities 13,178 286,140 2,169,462
Stockholders' deficit (3,000,567) (3,765,194) (1,511,262)
-----------------------------------------------
Total liabilities and stockholders' deficit $ 1,157,695 2,194,024 7,867,262
===============================================
</TABLE>
Pro forma income statement data (Unaudited):
The following table sets forth the unaudited pro forma income statement data as
if the merger with Exeter Engineering, Inc. had occurred as of January 1, 1997.
This pro forma information may not necessarily be indicative of actual results
had the merger occurred on January 1, 1997.
<TABLE>
<CAPTION>
Six months
Year Ended ended
December 31, June 30,
1997 1998
------------------------------------
<S> <C> <C>
Net sales 9,241,188 2,302,292
Cost of goods sold 7,528,177 2,075,521
------------------------------------
Gross profit (loss) 1,713,011 226,771
Operating expenses 4,479,731 2,821,000
Other expenses, net 560,828 367,149
------------------------------------
Net loss (3,327,548) (2,961,378)
====================================
</TABLE>
5
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE IN NATURE AND INVOLVE A HIGH
DEGREE OF RISK. THE SECURITIES OFFERED HEREBY SHOULD BE PURCHASED ONLY BY
PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. THEREFORE, EACH
PROSPECTIVE INVESTOR SHOULD, PRIOR TO PURCHASE, CONSIDER VERY CAREFULLY THE
FOLLOWING RISK FACTORS, AS WELL AS ALL OF THE OTHER INFORMATION SET FORTH
ELSEWHERE IN THIS PROSPECTUS AND THE INFORMATION CONTAINED IN THE FINANCIAL
STATEMENTS, INCLUDING ALL NOTES THERETO.
LIMITED OPERATING HISTORY
The Company has no operating history in regard to production, sale or
installation of POWER System units. As the POWER System is not yet commercially
viable, the Company has not sold any POWER System units for commercial use.
There can be no assurance that the Company will be successful in implementing
its strategy to sell its waste to energy system. The construction of a POWER
System at a commercial site will require significant time, expenditures and
personnel, and specific POWER System applications may require substantial
additional research, development and testing in order to become commercially
available. There can be no assurance that the Company will ever be successful in
licensing, constructing or operating a POWER System for commercial use or that
the POWER System will be technically or commercially viable. Exeter Engineering
(now part of TTI Exeter, Inc., the Company's wholly owned subsidiary effective
January 29, 1998, for accounting purposes), has had established operations since
1979, but has operated at a loss for the past three years. See "FINANCIAL
STATEMENTS".
GOING CONCERN QUESTION; OPERATING LOSSES AND ACCUMULATED DEFICIT; UNCERTAINTY OF
FUTURE PROFITABILITY
The Company has suffered recurring losses from operations and has
working capital and stockholders' deficit that raise substantial doubt about its
ability to continue as a going concern. The Company had a net loss of $2,851,614
for the six months ended June 30, 1998, a net loss of $2,631,867 for the year
ended December 31, 1997, a net loss of $3,251,772 for the year ended December
31, 1996 and a net loss of $974,353 for the year ended December 31, 1995. There
are no assurances that the Company will not continue operating at a net loss in
the future or will be able to continue to operate. See "FINANCIAL STATEMENTS".
In 1998, the Company merged its subsidiary, TTI Control Technologies,
Inc. ("TTIC") with Exeter Engineering , Inc. ("Exeter Engineering") to create
TTI Exeter, Inc. Exeter Engineering has suffered recurring losses from
operations and has working capital and stockholders' deficits that raise
substantial doubt about its ability to continue as a going concern. Exeter
Engineering had a net loss of $44,536 for the year ended October 31, 1997, a net
loss of $757,891 for the year ended October 31, 1996, and a net loss of $429,380
for the year ended October 31, 1995. Losses since January 31, 1998 to June 30,
1998 are included in the Company accounting in the preceding paragraph. There
are no assurances that TTI Exeter will not continue to operate at a net loss in
the future or will be able to continue to operate. See "FINANCIAL STATEMENTS".
CURRENT FINANCING ARRANGEMENT
On May 4, 1998, the Company borrowed $4,000,000 from U.S. Bank
National Association ("U.S. Bank"). The Company entered into a promissory note
for repayment of the loan in one principal payment of $4,000,000 on May 1, 2000
plus interest set at the U.S. Bank National Association Reference Rate plus two
percent. When the loan was entered into, the applicable interest rate was 10.5%
per annum but is subject to change during the term of the loan. The loan is
unsecured by the Company but personally guaranteed by certain stockholders and
directors of the Company. In the event of a default, the entire loan amount will
become due and payable. Events of default include, among other items, the death
of any guarantor, any material adverse changes in the Company's financial
condition the lender's belief that the prospect of payment or performance of the
indebtedness is impaired; or whenever the lender in good faith deems itself
insecure. There can be no assurance that the Company will be able to repay the
loan and that U.S. Bank will not begin enforcement of collection against the
Company for such repayment. See "FINANCING". In addition, certain officers of
the Company as guarantors of the loan may be presented with a
6
<PAGE>
conflict of interest in making decisions determining the Company's repayment of
the loan or making other expenditures which may be more advantageous to the
Company.
OBLIGATIONS AND SECURITY INTEREST IN TTI EXETER AS A RESULT OF MERGER
The Company has incurred significant obligations as a result of the
merger with Exeter Engineering, a closely held Company whose sole shareholders
were Jeffrey Batchman and Michael Wilkinson. As part of the merger, the Company
agreed to pay Jeffrey Batchman and Michael Wilkinson an aggregate of $500,000
and 800,000 shares of the Company's Common Stock. The Company has agreed to
assure a minimum sales price of $5.00 per share for shares issued to Messrs.
Batchman and Wilkinson. Mr. Batchman was elected to the Board of Directors of
the Company. 400,000 shares of the 800,000 shares of Common Stock issued to
Messrs. Batchman and Wilkinson are included in the Securities offered hereby.
The registered shares are subject to an agreement with the Company limiting
sales of these shares by Messrs. Batchman and Wilkinson to a total of 50,000
shares per month. Pursuant to Rule 144 of the General Rules and Regulations of
the Securities and Exchange Commission, Messrs. Wilkinson and Batchman will be
able to sell the remaining 400,000 unregistered shares in brokered transactions
commencing one year from the date of issue subject to certain volume
limitations.
If the Company is unable to create a market for its securities, the
Company may be obligated to pay Messrs. Batchman and Wilkinson up to an
aggregate of $4,000,000 over the next two years to satisfy the $5.00 per share
guarantee. The Company has pledged 100% of its stock ownership in TTI Exeter as
a security interest to Messrs. Batchman and Wilkinson in the case the Company
does not honor all of its obligations contained in the TTI and Exeter
Engineering merger agreement. See "THE COMPANY--Merger with Exeter Engineering,
Inc."
If the Company defaults on any of the provisions of the merger
agreement, it is possible that it will lose ownership of TTI Exeter. The Company
plans to rely on TTI Exeter for its manufacturing facility and to supply
material handling systems and computerized process controls for the Company's
gasification system. Aside from relying on TTI Exeter as a supplier of processes
integral to the POWER System and as manufacturer of the POWER System, TTI Exeter
is currently the primary source of revenues earned by the Company. If the
Company lost its primary supplier, manufacturing facility and the primary source
of its current revenues, its ability to continue operations would be materially
adversely impaired and such a loss would jeopardize the ability of the Company
to continue operations.
NEED FOR ADDITIONAL FINANCING TO CONTINUE OPERATIONS
The capital raised from earlier sales of its securities, operating
revenues, and the $4,000,000 loan will not be sufficient to meet the Company's
operating expenses and capital requirements for the next twelve months. The
Company's capital requirements depend on numerous factors, including its ability
to have its securities listed and trading at a certain price, rate of market
acceptance of the Company's products, the Company's ability to maintain and
expand its customer base, the level of resources required to expand the
Company's marketing and sales organization, and research and development
activities, and other factors. The Company believes that in order to meet
operating expenses and capital requirements for the next twelve months that it
will have to secure additional financing. There is no assurance that the Company
will be able to obtain such financing on terms acceptable to it.
The Company may be obligated to pay Jeffrey Batchman and Michael
Wilkinson up to $4,000,000 in cash or stock depending on the trading price and
demand for the Company's securities, if any. Therefore, the timing and amount of
such capital requirements cannot accurately be predicted. If capital
requirements vary materially from those currently planned, the Company may
require financing sooner than anticipated. The Company is currently seeking
additional financing; however, there can be no assurance that any such
commitments can be obtained on favorable terms, if at all. Any equity financing
may be dilutive to the Company's stockholders, and debt financing, if available,
may involve restrictive covenants with respect to dividends, raising future
capital and other financial and operational matters. If the Company is unable to
obtain financing as needed, the Company may default on its obligations to its
creditors who would have the right to foreclose on TTI Exeter which currently
generates nearly all of the Company's revenues. Such an event would have a
material adverse effect on the Company, as well as the market price of its
Common Stock and jeopardize the ability of the Company to continue operations.
See "BUSINESS."
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ABSENCE OF TRADING MARKET
There is currently no established public trading market for the
Shares. The Company intends to apply for admission to quotation of the Shares on
the NASD OTC Bulletin Board and, when and if qualified, it intends to apply for
admission to quotation on the Nasdaq SmallCap Market. Until such time, if ever,
that the Company can qualify and is accepted for admission to quotation on the
NASD OTC, the Securities will be quoted on the daily quotation sheets published
by the National Quotation Bureau, Inc., commonly known as the "pink sheets". See
"DESCRIPTION OF SECURITIES". A company must have at least one market maker in
place to sponsor its securities for acceptance for listing on the NASD OTC
Bulletin Board. The Company has limited business operations, revenues, and no
market maker for its securities. There can be no assurance that a listing on the
NASD OTC Bulletin Board can be obtained or if obtained there can be no assurance
that a regular trading market for the Shares will develop or that, if developed,
it will be sustained. Various factors, such as the Company's operating results,
competition, ability to develop and market products, changes in laws, rules or
regulations may have a significant impact on the market price of the Securities.
Further, the market price for the securities of public companies often
experience wide fluctuations which may not necessarily be related to the
operating performance of such public companies.
NO UNDERWRITER OR MARKET MAKER
There is no underwriter for this Offering. The Company Shares will be
offered on a "best efforts" basis through the Company's officers and directors.
No sales commission will be paid to any officer or director of the Company. The
Company will reimburse its officers and directors for expenses incurred in
connection with the offer and sale of the Shares. In order to comply with the
applicable securities laws, if any, of certain states, the Company Shares may be
required to be offered or sold in such states only through registered or
licensed brokers or dealers in those states.
As of the date hereof, the Company has not located a market maker or
broker/dealer and there can be no assurance that the Company will be able to
locate a market maker for its securities. A company must have at least one
market maker in place to sponsor its securities for acceptance for listing on
the NASD OTC Bulletin Board. If the Company is unable to locate a market maker,
the Company may not be able to apply for listing on the NASD OTC Bulletin Board
and purchasers of its securities may have increased difficulty in locating
buyers should they want to sell the Company's securities.
ARBITRARY DETERMINATION OF OFFERING PRICE
The initial public offering price of the Securities and the exercise
price and terms of the Warrants have been arbitrarily determined by the Company
and do not necessarily bear any relationship to the Company's assets, net worth
or other established criteria of value. The exercise and redemption prices of
the Warrants should not be construed to imply or predict the market price of the
Common Stock.
UNCERTAINTY OF MARKET ACCEPTANCE: WASTE DISPOSAL
The Company is in the process of developing, refining and implementing
its technologies for waste reduction. The Company's future growth will be
dependent in part upon the acceptance and implementation of the Company's
gasification technology. The Company has no outstanding orders currently for its
POWER System. There can be no assurance that the Company will be able to
successfully commercialize such technology. The successful commercialization of
the Company's gasification technology may depend in part on ongoing comparisons
with other competing technologies and more traditional treatment, storage and
disposal alternatives, as well as the continuing high cost and limited
availability of commercial disposal options. There can be no assurance that the
Company's gasification and related technologies will prove to be commercially
viable or cost effective, or if commercially viable and cost effective, that the
Company will be successful in timely securing the requisite regulatory licenses,
permits and approvals for such technologies. The Company's inability to develop,
commercialize or secure the requisite licenses, permits and approvals for its
waste treatment technologies on a timely basis would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "BUSINESS."
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UNCERTAINTY OF MARKET ACCEPTANCE: TTI EXETER UPGRADER
TTI Exeter's operating results may depend upon its ability to improve
and market existing products and to develop and successfully market new
products, including its recently introduced Accu Vision Upgrader (the
"Upgrader") system. As of the date hereof, the Company has installed two
Upgraders in England and has contracted to install two Upgraders in Idaho. There
can be no assurance that a market for Upgraders will develop or, if a market
does develop, that the Company will be able to enhance its existing products or
to develop new products in response to customer requirements of product
introductions by competitors, which could have a material adverse effect on the
Company's results of operations and jeopardize the ability of the Company to
continue operations. See "BUSINESS--TTI Exeter."
DEPENDENCE OF TTI EXETER ON CERTAIN MARKETS
The future success and growth of TTI Exeter is dependent upon
continuing sales in certain food packaging processing markets, as well as
successful penetration of other existing and potential markets. A substantial
portion of TTI Exeter's historical sales has been in the citrus and potato
markets, both fresh and processed. Reductions in capital equipment expenditures
by such processors due to commodity surpluses, product price fluctuations,
changing consumer preferences or other factors would have a material adverse
effect on the Company's results of operations and jeopardize the ability of the
Company to continue operations.
PROPRIETARY TECHNOLOGY AND UNPREDICTABILITY OF PATENT PROTECTION
The Company relies on patents, trade secrets and proprietary know-how,
which it seeks to protect, and will seek to protect, in part, through
appropriate confidentiality and proprietary information agreements with its
customers, employees and consultants. There can be no assurance that the
proprietary information or confidentiality agreements will not be breached, that
the Company will have adequate remedies for any breach, or that the Company's
trade secrets and proprietary know-how will not otherwise become known to or be
independently developed by others.
There can be no assurance that any patents from pending patent
applications or from any future patent applications will be issued, that the
scope of any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents will be held valid
if subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company. Since patent
applications are secret until patents are issued in the United States or
corresponding applications are published in international countries, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it was the first
to make the inventions covered by each of its pending patent applications or
that it was the first to file patent applications for such inventions.
There can be no assurance that competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use or sell its products
either in the United States or in international markets. Furthermore, the laws
of certain foreign countries do not protect the Company's intellectual property
rights to the same extent as do the laws of the United States. Litigation or
regulatory proceedings, which could result in substantial cost and uncertainty
to the Company, may also be necessary to enforce patent or other intellectual
property rights of the Company or to determine the scope and validity of other
parties' proprietary rights. There can be no assurance that the Company will
have the financial resources to defend its patents from infringement or claims
of invalidity.
It is possible that the Company may need to acquire licenses to, or
contest the validity of, issued or pending patents of third parties relating to
the Company's technology. There can be no assurance that any of such licenses
would be made available to the Company on acceptable terms, if at all, or that
if the Company were to contest the validity of any issued or pending patents, it
would prevail. In addition, the Company could incur substantial costs in
defending itself in suits brought against the Company on its patents or in
bringing suits against third parties. See "BUSINESS--Intellectual Property."
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DEPENDENCE ON CERTAIN ENVIRONMENTAL REGULATIONS
A substantial portion of the Company's revenue is expected to be generated
as a result of requirements arising under federal and state laws and regulations
and programs related to protection of the environment. Environmental laws and
regulations are, and will continue to be, a principal factor affecting demand
for the services offered by the Company. The level of enforcement activities by
federal, state and local environmental protection agencies and changes in such
laws and regulations also affect the demand for such services. If the
requirements of compliance with environmental laws and regulations were to be
modified in the future, particularly those relating to the transportation,
treatment, storage or disposal of waste, the demand for the Company's services,
and its business, financial condition and results of operations, could be
materially adversely affected.
UNCERTAINTY OF REGULATORY ACCEPTANCE
Many of the Company's prospective customers are likely to be required to
comply with environmental laws and regulations in the United States and
elsewhere. Such environmental laws and regulations also restrict the methods
which companies may use to reduce or eliminate toxic emissions and often require
the permitting of emission control equipment.
Incinerators, a form of waste reduction, are regulated by federal and state
laws. These laws make it difficult and costly to operate an incinerator. If laws
and regulations are amended and licenses are more freely issued to incinerators
and regulations governing incinerators are relaxed, incineration could become a
more inexpensive alternative to the Company's method of waste reduction which
could materially adversely affect operations and jeopardize the ability of the
Company to continue operations. The Company believes that its technology does
not come under the United States Environmental Protection Agency's ("EPA")
current definitions of incineration. The Company has received two state
permanent air quality permits for its gasification process from Washington and
North Carolina. Although these states have found that the Company's process is
not incineration, it is possible that the EPA could classify the process as
incineration technology which could significantly increase the length of time
and cost of the permitting process for customers because of the requirement for
a public hearing, especially where community sentiment is opposed to
incineration technology. There can be no assurance that the EPA will not
classify the Company's technology as an incineration technology in the future or
that there will not be other federal, state or foreign regulatory developments
that increase the regulatory burden on the Company's customers, including
requirements for more extensive permitting, in order to utilize the Company's
systems.
A lengthier permitting process could reduce the competitive advantages of
the Company's technology and materially adversely affect the Company's business,
results of operations and financial condition. In addition, the level of
enforcement activities by environmental protection agencies and changes in laws
and regulations will also affect demand for the Company's systems. To the extent
that the burdens of complying with such environmental laws and regulations may
be eased, the demand for the Company's systems could be materially adversely
affected. In addition, the existence of environmental regulations and the level
of enforcement vary by country and may affect the Company's ability to sell its
systems outside the United States.
HIGHLY COMPETITIVE INDUSTRY
The Company competes specifically against other companies who sell waste
reduction technologies and in general against the entire solid waste services
industry. The current competing technologies for waste reduction include
incineration, a catalytic extraction process, fluidized bed systems, super
compaction and recycling. There can be no assurance that the markets targeted by
the Company will not perceive these technologies as superior to the POWER System
or that a competitor will not develop additional technologies superior to those
of the Company.
The solid waste services industry is highly competitive, very fragmented
and requires substantial labor and capital resources. Each of the markets in
which the Company competes or will likely compete is served by one or more of
the large nationwide solid waste companies, as well as numerous regional and
local solid waste companies of varying sizes and resources. The Company also
competes with those counties, municipalities, and solid waste districts that
maintain their own waste collection and disposal operations. These counties,
municipalities and solid waste districts may have financial advantages due to
the availability to them of users fees, similar charges or tax
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revenues and the greater availability to them of tax exempt financing. Intense
competition exists not only to provide services to customers but also to acquire
other businesses within each market.
The nationwide solid waste companies and some of the large regional
companies have significantly greater financial and other resources than the
Company. From time to time, these or other competitors may reduce the price of
their services in an effort to expand market share or to win a competitively bid
contract. These practices may either require the Company to reduce the pricing
of its services or result in the Company's loss of business. These contracts are
sometimes subject to periodic competitive bidding. There can be no assurance
that the Company will be the successful bidder to obtain or retain these
contracts. The Company's inability to compete with larger and better capitalized
companies, or other revenue sources could have a material adverse effect on the
Company's results of operations and jeopardize the ability of the Company to
continue operations.
DEPENDENCE ON SUBCONTRACTORS
The Company relies on subcontractors to build its gasifier. The Company's
ability to deliver high quality systems on time will depend upon the reliability
and performance of its subcontractors. The failure of a subcontractor to meet
delivery schedules could cause the Company to default on its obligations to its
customers, which could materially adversely affect the Company's reputation,
business, results of operations and financial condition. In addition, the
Company's reliance on subcontractors for manufacturing, assembly and
installation places a significant part of the Company's quality control
responsibilities on these subcontractors. There can be no assurance that the
Company will be able to continue to contract for the level of quality control
required by the Company's customers. The failure to provide such quality control
could result in manufacturing and installation delays which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon its executive
officers, particularly Timothy J. McReynolds, Chairman, President and Chief
Executive Officer of the Company, and John J. Fitzgerald, Executive Vice
President and Director of Operations of the Company and Chief Executive Office
of TTI Exeter, as well as other key operational, engineering, sales, marketing,
financial and technical personnel. Because the Company is still at an early
stage of growth, the Company has limited personnel resources available to
address the different activities in its business. Dr. Robert Aldrich served as
interim president of the Company from January 1, 1998 through April 30, 1998.
Dr. Aldrich remains a director of the Company. The loss of the services of one
or more of the Company's key employees could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company maintains key employee life insurance on the life of Timothy J.
McReynolds in the amount of $1,000,000 and on the life of John J. Fitzgerald in
the amount of $500,000. There can be no assurance that such amount will be
sufficient to compensate the Company for the loss of the services of either
individual.
The Company also believes that its future success will depend in large part
upon its ability to attract and retain additional highly skilled personnel,
particularly design and process engineers. Because of the technical
sophistication of the Company's systems and the sophisticated software utilized
by the Company, design and process engineers who join the Company generally are
required to have advanced technical knowledge and significant training to
perform efficiently and productively. The availability of such personnel is
limited, and the Company has at times experienced difficulty in locating new
employees with the requisite level of expertise and experience. There can be no
assurance that the Company will be successful in retaining its existing key
personnel or in attracting and retaining the personnel it requires in the
future. See "BUSINESS--Employees" and "MANAGEMENT."
RISKS ASSOCIATED WITH DEVELOPMENT PROGRAMS
The Company may need to engage in extensive and costly applications
development and engineering in order to commercialize the POWER System for such
use, and there can be no assurance as to the success of any such effort. See
"BUSINESS"
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WARRANTY EXPOSURE AND PERFORMANCE SPECIFICATIONS
TTI Exeter provides a limited one year guarantee and on-going service
contracts to its customers. The Company may incur substantial cost honoring
guarantees in the future with respect to new products, as well as established
products, or with respect to its obligations to meet performance specifications
which may have a material adverse effect on its results of operation and
customer relationships. See "BUSINESS--Warranty".
EQUIPMENT PERFORMANCE; SAFETY AND LICENSE VIOLATIONS
The Company's ability to perform under its current waste reduction contract
with Camp Lejeune, North Carolina, and to successfully bid for future contracts
is dependent upon the consistent performance of its POWER System in conformity
with safety and other requirements of the licenses under which the Company
operates. The Company's future consumers may be subject to frequent routine
inspections by the regulatory authorities issuing such licenses. In the event
that any of the Company's POWER System were to be shut down for any appreciable
period of time, either due to equipment breakdown or as the result of regulatory
action in response to an alleged safety or other violation of the terms of the
licenses under which the Company operates, the Company's business, financial
condition and results of operations would be materially adversely affected. See
"BUSINESS"
POSSIBLE PRODUCT LIABILITY
If the Company's systems and equipment are improperly designed or operated
outside of design parameters and operating instructions provided by the Company,
there is a risk of system failure, which could require the Company to defend
itself against a product liability or personal injury claim. Although the
Company has product liability and commercial general liability insurance in
scope and amount of $2,000,000 which it believes to be sufficient for the
conduct of its business, there can be no assurance that such insurance will
cover or be adequate to cover such claims. In addition, the Company's general
liability insurance is subject to coverage limits. Accordingly, the Company's
efforts to defend itself against such claims could have a material adverse
effect on the Company's business, results of operations and financial condition.
POTENTIAL ENVIRONMENTAL LIABILITY
Although the Company does not believe that its activities would directly
expose it to liabilities under local, state or federal environmental laws and
regulations, if the Company were to improperly design, manufacture or test its
systems or fail to properly train its customers' employees in the operation of
the systems, it could be exposed to possible liability for investigation and
clean-up costs under such environmental laws.
The Company generally conducts performance tests on its systems at its
customers' facilities. However, in the future the Company may perform prototype
testing in its own facilities. If such testing were to involve hazardous
substances, it could subject the Company to liability under environmental laws
and regulations.
The Company could also be exposed to possible liability under environmental
laws for violations of those requirements applicable to the generation, storage,
treatment and disposal of waste. Under some environmental laws and various
theories of tort and contract law, it is also possible that the Company could be
liable for damages to its customers and third parties resulting from the actions
of its customers or arising from the failure or malfunction, or the design,
construction or operation of, the Company's systems or products, even if the
Company were not at fault. The Company's general liability insurance is subject
to coverage limits. The Company's business, results of operations and financial
condition could be materially adversely affected by an uninsured or partially
insured claim. See "BUSINESS--Environmental Matters."
RISKS ASSOCIATED WITH FIXED PRICE CONTRACTS
The Company's and its subsidiary's contracts may be performed using "fixed-
price" rather than "cost-plus" terms. Under fixed-price terms, the Company
quotes firm prices to its customers and bears the full risk of cost overruns
caused by estimates that differ from actual costs incurred or manufacturing
delays during the course of the
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contract. Some costs, including component costs, are beyond the Company's
control and may be difficult to predict. If manufacturing or installation costs
for a particular project exceed anticipated levels, gross margins would be
materially adversely affected, and the Company could experience losses. In
addition, the manufacturing process may be subject to significant change orders.
However, the cost of these change orders may not be negotiated until after the
system is installed. The failure of the Company to recover the full cost of
these change orders could materially adversely affect gross margins and also
cause the Company to experience losses.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND SALES
The Company and TTI Exeter plan to increase revenues, in part, through
overseas operations. International sales and operations may be limited or
disrupted by the imposition of government controls, export license requirements,
trade restrictions, changes in tariffs, difficulties in staffing, the transport
of machinery, managing international operations and other factors. Regulatory
compliance requirements differ among foreign countries and are also different
from those established in the United States. If the Company's customers are
unable to obtain the necessary foreign regulatory approvals on a timely basis,
the Company's international sales, and thereby its business, results of
operations and financial condition, could be materially adversely affected.
Additionally, the Company's business, results of operations and financial
condition may be materially adversely affected by fluctuations in currency
exchange rates as well as increases in duty rates, difficulties in obtaining
export licenses, ability to maintain or increase prices and competition. The
Company denominates international sales in United States dollars. Sales in
Europe have been primarily denominated in pounds sterling. Since the bulk of
expenses in connection with international contracts are often incurred in United
States dollars, there can be a short-term exchange risk created.
SEASONALITY OF BUSINESS
TTI Exeter's results of operations tend to vary seasonally, with the first
quarter of the year typically generating the least amount of revenues, and with
revenues higher in the second and third quarter, followed by a decline in the
fourth quarter. This seasonality reflects the lower volume of crops generated
and decreased revenue for project-based and other farming services during the
fall and winter months, as well as the operating difficulties experienced from
inclement weather during the winter. Certain operating and other fixed costs
remain relatively constant throughout the calendar year, resulting in a similar
seasonality of revenues.
ABILITY TO MANAGE GROWTH
The Company's goal is to increase the scale of its operations through
growth and synergies derived from its newly acquired business. Consequently,
the Company may experience periods of significantly increased staffing
requirements. Such growth, if it were to occur, could place a significant
strain on the Company's management and on its operational, financial and other
resources. The Company's ability to maintain and manage its growth effectively
will require it to expand its management information systems capabilities and
improve its operational systems and controls. Moreover, the Company will need
to attract, train, motivate, retain and manage its senior managers, technical
professionals and other employees. Any failure to expand its management
capabilities and its operational and financial systems and controls or to
recruit appropriate additional personnel in an efficient manner at a pace
consistent with any business growth the Company may experience would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has no outstanding orders at this time for
its POWER System.
SENSITIVITY TO MAJOR PROJECTS
The Company's results of operations are likely to be dependent on major
projects. Such a reliance on major orders is likely to lead to fluctuations in,
and to reduce the predictability of, quarterly results. The sales cycle for
larger projects tends to be longer than for smaller projects, and, when orders
are received, projects may be delayed by factors outside the Company's control,
including customer budget decisions, design changes and delays in obtaining
permits. Also the costs of providing warranty services could increase. The
Company's business, results of operations and financial condition could be
materially adversely affected if the Company were to fail to obtain major
project orders, if such orders were delayed, if installations of such systems
were delayed, or if such installations encountered operating, warranty or other
problems.
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Furthermore, the purchase of the Company's products, particularly for major
projects, may involve a significant commitment of capital, with the attendant
delays frequently associated with large capital expenditures and authorization
procedures within its potential customers' organization. For these and other
reasons, the sales cycle for the Company's products can be lengthy and subject
to a number of significant risks over which the Company has little or no
control, including customer budgetary constraints. Currently, there are no
outstanding orders for the Company's POWER system as it is not yet commercially
viable.
COMPUTER SYSTEMS REDESIGNED FOR YEAR 2000
Many existing computer programs use only two digits to identify a year in
such program's date field. These programs were designed and developed without
consideration of the impact of the change in the century for which four digits
will be required to accurately report the date. If not corrected, many computer
applications could fail or create erroneous results by or following the year
2000. Many of the computer programs containing such date language problems have
been corrected by the companies or governments operating such programs.
Although none of the Company's systems, manufacturing equipment, and products
are affected by this problem, the Company could be impacted by the failure of
other companies to timely correct their computer systems. The Company's
operations are dependent on the Internet, the telephone system, and delivery
systems. If any of these systems or systems of other companies by which the
Company is affected become inoperational the Company will be directly and
significantly affected.
CONTROL BY MANAGEMENT AND AFFILIATES
Upon the closing of this Offering, the Company's executive officers and
directors, together with entities affiliated with them, will beneficially own
approximately 45.5% of the outstanding Common Stock. As a result, these
stockholders will be able to exercise controlling interest over matters
requiring stockholder approval, including the election of directors and the
approval of material corporate matters such as change of control transactions.
The effects of such control could be to delay or prevent a change of control of
the Company unless the terms are approved by such stockholders.
ISSUANCE OF FUTURE SHARES MAY DILUTE PRESENT INVESTORS' PER SHARE VALUE
The Certificate of Incorporation of the Company authorizes the issuance of
a maximum of 100,000,000 shares of Common Stock, $.0001 par value and 20,000,000
shares of "non-designated" preferred stock. As of the date hereof there are
6,545,008 shares of Common Stock outstanding and no shares of preferred stock
outstanding. The future issuance of all or part of the remaining authorized
Common Stock may result in substantial dilution in the percentage of the
Company's Common Stock held by the Company's then existing shareholders.
Moreover, any Common Stock issued in the future may be valued on an arbitrary
basis by the Company. The issuance of Company's shares for future acquisitions,
or other items, may have the effect of diluting the value of shares held by
investors, and might have a material adverse effect on any trading market,
should a trading market develop for the Company's securities. See "BUSINESS"
POSSIBILITY OF ISSUANCE OF ADDITIONAL PREFERRED STOCK COULD DEPRESS MARKET PRICE
The Company has 20,000,000 shares of non-designated preferred stock which
it may issue from time to time by action of the Board of Directors. As of the
date hereof, the Company has not issued any shares of preferred stock. The Board
may designate voting and other preferences which designations may give the
holders of the preferred stock voting control and other preferred rights such as
to liquidation and dividends. The authority of the Board to issue such stock
without shareholder consent may have a depressive effect on the market price of
the Company's Common Stock even prior to any such designation or issuance of the
preferred stock.
POTENTIAL ANTI-TAKEOVER EFFECT OF ISSUANCE OF PREFERRED STOCK
The Board of Directors has the authority, without further approval of the
Company's stockholders, to issue preferred stock, having such rights,
preferences and privileges as the Board of Directors may determine. Any such
issuance of shares of preferred stock, under certain circumstances, could have
the effect of delaying or preventing a
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change in control of the Company or other take-over attempt and could adversely
materially affect the rights of holders of shares of Common Stock. In addition,
the Company is subject to provisions of the General Corporation Law of the State
of Delaware respecting business combinations which could, under certain
circumstances, hinder or delay a change in control.
POSSIBLE INABILITY TO EXERCISE WARRANTS
Because the Warrants included in this Offering may be transferred, it is
possible that the Warrants may be acquired by persons residing in states where
the Company is unable to qualify the Shares of Common Stock underlying the
Warrants for sale upon exercise. Warrantholders residing in those states would
have no choice but to attempt to sell their Warrants (if a market then exists
for the Warrants, as to which there can be no assurance) or let them expire
unexercised. Also, it is possible that the Company may be unable, for
unforeseen reasons, to cause a Registration Statement covering the Shares
underlying the Warrants to be in effect when the Warrants are exercisable. In
that event, the Warrants may expire unless extended by the Company as permitted
by the Warrants because a Registration Statement must be in effect in order for
Warrantholders to exercise their Warrants. See "DESCRIPTION OF SECURITIES"
FACTORS BEYOND THE COMPANY'S CONTROL
Numerous conditions beyond the Company's control may substantially affect
its success such as rates of, and costs associated with, new customer
acquisition, customer retention, capital expenditures and other costs relating
to the expansion of operations, including upgrading the Company's systems and
infrastructure, the timing and market acceptance of new and upgraded service
introductions, changes in the pricing policies of the Company and its
competitors, changes in operating expenses (including telecommunications costs),
personnel changes, the introduction of alternative technologies, the effect of
potential acquisitions, increased competition in the Company's markets and other
general economic factors.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Certificate of Incorporation and By-Laws of the Company provide that
the Company shall indemnify its officers and directors against losses sustained
or liabilities incurred which arise from any transaction in such officer's or
director's respective managerial capacity unless such officer or director
violates a duty of loyalty, did not act in good faith, engaged in intentional
misconduct or knowingly violated the law, approved an improper dividend, or
derived an improper benefit from the transaction. The Company's Certificate of
Incorporation and By-Laws also provide for the indemnification by it of its
officers and directors against any losses or liabilities incurred as a result of
the manner in which such officers and directors operate the Company's business
or conduct its internal affairs, provided that in connection with these
activities they act in good faith and in a manner which they reasonably believe
to be in, or not opposed to, the best interests of the Company, and their
conduct does not constitute gross negligence, misconduct or breach of fiduciary
obligations. The Company carries directors and officers liability insurance in
an amount of $3,000,000.
PENNY STOCK REGULATION
Penny stocks generally are equity securities with a price of less than
$5.00 per share other than securities registered on certain national securities
exchanges or quoted on the Nasdaq Stock Market, provided that current price and
volume information with respect to transactions in such securities is provided
by the exchange or system. The Company's securities may be subject to "penny
stock" rules that impose additional sales practice requirements on broker-
dealers who sell such securities to persons other than established customers and
accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a disclosure schedule
prescribed by the Commission relating to the penny stock market. The broker-
dealer also must disclose the commissions payable to both the broker-dealer and
the registered representative and current quotations for the securities.
Finally, monthly statements must be sent disclosing recent
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price information on the limited market in penny stocks. Consequently, the
"penny stock" rules may restrict the ability of broker-dealers to sell the
Company's securities.
SHARES AVAILABLE FOR RESALE PURSUANT TO RULE 144
All the issued and outstanding shares of the Company, to the extent not
sold or transferred pursuant to this Offering, are "restricted securities" as
such term is defined in Rule 144 ("Rule 144") promulgated under the Securities
Act of 1933 (the "1933 Act"). In general, under Rule 144, if adequate public
information is available with respect to a company, a person who has satisfied a
one year holding period as to his restricted securities or an affiliate who
holds unrestricted securities may sell, within any three month period, a number
of that company's shares that does not exceed the greater of one percent of the
then outstanding shares of the class of securities being sold or, if the
security is trading on the Nasdaq Stock Market or on an exchange, the average
weekly trading volume during the four calendar weeks prior to such sale. Sales
of restricted securities by a person who is not an affiliate of the company (as
defined in the 1933 Act) and who has satisfied a two year holding period may be
made without any volume limitation. The outstanding restricted securities of the
Company may become eligible for sale in the public market pursuant to Rule 144
without additional capital contribution to the Company. Possible or actual
sales of the Company's outstanding Common Stock by all or some of the present
stockholders may have a material adverse effect on the market price of the
Company's Shares should a public trading market develop.
POTENTIAL DILUTION
Investors in the securities offered herein may suffer immediate and
substantial dilution in the value of their shares. "Dilution" means the
difference between the public offering price and the net tangible book value per
share after giving effect to the Offering. Additional dilution in the value of
such securities may occur upon the exercise of the warrants. See "DILUTION".
DIVIDENDS
Any cash dividends will depend on earnings, if any, and on the Company's
financial requirements and other factors. Dividends are paid at the discretion
of the Board of Directors. There can be no assurance that the Company will be
able to pay any dividends or, if able to so make such dividends, that the Board
of Directors will deem it in the best interest of the Company to do so.
Investors who anticipate the need of immediate income from their investment
should refrain from the purchase of the Shares offered hereby. The Company has
not paid any cash dividends on its Common Stock since inception. For the
foreseeable future, it is anticipated that any earnings which may be generated
from the Company's operations will be used to finance the growth of the Company.
THE COMPANY
HISTORY
TTI Technologies, Inc. was incorporated under the name of Waste Conversion,
Inc. on May 21, 1992 under the laws of Nevada. On August 8, 1992, the original
Articles of Incorporation were amended to change the name to Waste-Mart, Inc.
and on July 21, 1994 the name was changed to Thermal Technologies, Inc. On
November 6, 1995 the Company reincorporated under the laws of Delaware and
changed its name to TTI Technologies, Inc. In 1996, the Company acquired the
principal assets of Hi-Tech, Inc., a company incorporated under the laws of
Washington, and transferred the assets to a newly formed subsidiary, TTI Control
Technologies, Inc ("TTIC") incorporated under the laws of Delaware. On December
30, 1997, TTI Technologies, Inc. (the "Company") merged with Lanham
Acquisitions, Inc., a Delaware corporation which changed its name to TTI
Technologies, Inc. In January, 1998, the Company acquired Exeter Engineering,
Inc. ("Exeter Engineering"), a closely-held California corporation and, in June
1998, completed the merger of its subsidiary, TTIC, with it. The surviving
company was named TTI Exeter, Inc. ("TTI Exeter").
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MERGER WITH EXETER ENGINEERING, INC.
Prior to the merger with Exeter Engineering, the Company and TTIC, its
wholly owned subsidiary, had two distinct lines of business. The Company was in
the research and development stage of developing its POWER System waste to
energy product and it did not generate any income. TTIC, located in Prosser,
Washington, sold automated instrument and process controls and continuous
emissions monitoring systems to customers in the fresh produce, municipal water
telemetry systems, and processed produce industries. TTIC focused on installing
computerized controls throughout an entire plant and in whole plant design and
installation. Exeter Engineering sold packing, sorting and grading materials-
handling equipment in the produce, potato and citrus industries. Exeter
Engineering concentrated on selling products aimed at a particular portion of an
entire processing plant in the produce, potato and citrus markets. Exeter
Engineering typically sold specific mechanical equipment for a certain portion
of the plant. The Company became interested in combining businesses with Exeter
in order to take advantage of Exeter Engineering's manufacturing facilities and
the ability to unite and market their respective complimentary services where
prior to the merger there was some competitive overlap. The merger will also
allow the Company to manufacture its POWER System product at Exeter
Engineering's California manufacturing facility.
In December 1997, the Company and Exeter Engineering entered into an
agreement of merger. Due to the Company's need to locate alternative financing
the merger was not effective until Exeter Engineering and the Company signed an
amended restated Agreement and Plan of Merger, effective as of January 29, 1998
(the "Merger Agreement"). Exeter Engineering merged with and into TTIC, the
separate existence of Exeter Engineering ceased, and TTIC continued as the
surviving corporation under the name TTI Exeter, Inc. Under the terms of the
Merger Agreement, the Company issued an aggregate of 800,000 shares of the
Company's Common Stock and $500,000 in cash to the sole shareholders of Exeter
Engineering, Jeffrey Batchman and Michael Wilkinson, in exchange for all the
issued and outstanding shares of stock of Exeter Engineering. As a result, TTI
Exeter is a wholly owned subsidiary of the Company. The Company has guaranteed
Messrs. Batchman and Wilkinson a sales price of not less than $5.00 per share
for their 800,000 shares, with any deficiency payable at the sellers' option in
either stock or cash. The Company has structured this guarantee by agreeing to
pay the difference between $5.00 and the sales price received by Jeffrey
Batchman and Michael Wilkinson for each share sold with such deficiencies, if
any, due at scheduled settlement dates. Mr. Batchman was appointed to the Board
of Directors of the Company and Messrs. Batchman and Wilkinson were appointed
to the Board of Directors of TTI Exeter.
Pursuant to the terms of the Merger Agreement, the Company agreed to
register with the United States Securities and Exchange Commission (the "SEC")
400,000 of the 800,000 shares of the Company's Common Stock issued pursuant to
the merger. The Merger Agreement provides for lockup periods governing the sale
of the 400,000 shares being registered. The first lockup period consists of the
two months following the Effective Date of the Registration Statement of which
this Prospectus is a part. During the first lockup period, Messrs. Batchman and
Wilkinson may sell an aggregate of not more than 50,000 registered shares per
month. The second lockup period runs from September 1, 1998 through November
30, 1998. During the second lock up period, Messrs. Batchman and Wilkinson may
sell an aggregate of not more than 50,000 registered shares per month . The
third lockup period runs from January 1, 1999 through June 30, 1999. During the
third lockup period, Messrs. Batchman and Wilkinson may sell an aggregate of not
more than 50,000 registered shares per month so long as no more than an
aggregate of 150,000 registered shares are sold by Messrs. Batchman and
Wilkinson during this six month period.
The Company has also agreed that John J. Fitzgerald, Executive Vice
President of the Company, and management of TTI Exeter will prepare a business
plan and organization chart for TTI Exeter for fiscal years 1998 and 1999 to be
submitted for approval by the Company's Board of Directors within 60 to 90 days
following the date of the merger. The Company has agreed to provide TTI Exeter
with capital and operating budgets which include the Company providing to TTI
Exeter, by January 28, 1999, a $500,000 line of credit for operations, $100,000
in research and development monies, $500,000 for improvement of equipment and
facilities, approximately $150,000 in marketing funding, and $150,000 for
application against TTIC's accounts payable.
In order to guarantee the payment obligations arising from the Merger
Agreement, the Company entered into a pledge agreement with Jeffrey Batchman and
Michael Wilkinson. Under the terms of the pledge agreement, the Company has
secured its Merger Agreement payment obligations to Messrs. Batchman and
Wilkinson with all of the stock of TTI Exeter. The Company will be in default
on its obligation if it (1) fails to perform on its obligation to
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assure a minimum $5.00 per share sales price for the shares (2) fails to make
funding available to TTI Exeter by January 28, 1999 (3) had made any warranty in
the pledge agreement that proves to be false in any material respect when made
or furnished or (4) transfers all or substantially all of TTI Exeter's assets in
a single or series of transactions without consent of Jeffrey Batchman and
Michael Wilkinson.
If the Company defaults on any of its obligations under the pledge
agreement, Messrs. Batchman and Wilkinson may pursue all remedies available to
them at law, including foreclosure action. If the Company is unable to create a
market for its securities, the Company may be obligated to pay Jeffrey Batchman
and Michael Wilkinson up to an aggregate of $4,000,000 in cash or stock over the
next two years.
If the Company defaults on any of the provisions, it is possible that it
will lose ownership of TTI Exeter. The Company plans to rely on TTI Exeter for
its manufacturing facility and to supply material handling systems and
computerized process controls for the Company's gasification system. Aside from
relying on TTI Exeter as a supplier of processes integral to the POWER System
and as manufacturer of the POWER System, TTI Exeter is currently the primary
source of revenues earned by the Company. If the Company lost its primary
supplier, manufacturing facility and the primary source of its current revenues,
its ability to continue operations would be materially adversely impaired. Such
a loss would jeopardize the ability of the Company to continue operations.
RESEARCH AND DEVELOPMENT
Research and development expenses were $85,298, $135,526 and $41,764 for
the years ended December 31, 1997, 1996, and 1995 respectively.
EMPLOYEES
The Company has 10 full-time employees and TTI Exeter has 55 full-time
employees.
OFFICES
The Company leases the office space for its headquarters at $3,325 per
month until June 30, 2000 at 444 Regency Parkway Drive, Suite 311, Omaha
Nebraska 68114. The telephone number is 402/391-6611 and the facsimile number
402/391-6616. TTI Exeter leases office space in Exeter, California at $4,000 per
month plus property tax through April 30, 2000 and at Prosser, Washington at
$2,300 per month plus property tax through May 31, 2007.
GLOSSARY
Accu Pack System Equipment which sorts potatoes, citrus, and produce
utilizing an infrared scanning device. TTI Exeter
licenses the system from International Accu Pack
Systems.
Accu Vision System TTI Exeter's proprietary equipment which optically
grades potatoes, citrus and produce for defects and
removes products that do not meet threshold criteria.
CERCLA (Superfund) Comprehensive Environmental Response, Compensation, and
Liability Act providing funds for cleaning hazardous
waste sites left uncontrolled and abandoned and
cleaning up accidents, spills and contaminants placed
in the environment.
Clean Air Act The Clean Air Act of 1970. Regulates the emission of
pollutants into the air, including pollutants from
certain landfills, and specifies new requirements for
scrubbing devices on industrial emission and
incinerating sites.
The Company TTI Technologies, Inc., the company whose Securities
are offered hereby.
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Exchange Act The Securities Exchange Act of 1934, as amended.
Gasifier Equipment which thermally converts densified and
pelletized biomass material into a combustible
synthetic gas and carbon residue.
Hazardous Solid Waste As defined under the Resource Conservation and Recovery
Act, any solid waste, which, because of its physical
chemical or infectious characteristics may pose a
hazard when improperly managed.
Incineration A waste treatment technology involving destruction of
waste by controlled burning at high temperatures.
Industrial Solid Wastes from industrial processes, as distinct from
Waste ("ISW") domestic or sanitary wastes.
Low Level Radioactive
Waste ("LLRW") Wastes less hazardous than most of those generated by a
nuclear reactor. Usually generated by hospitals,
research laboratories, and certain industries. The
Department of Energy, Nuclear Regulatory Commission,
and the Environmental Protection Agency ("EPA") share
responsibilities for management thereof.
Municipal Solid
Waste ("MSW") Garbage generated from residential, commercial,
institutional and industrial sources that falls into
durable goods, non-durable goods, containers and
packaging, food wastes, yard trimmings and
miscellaneous organic and inorganic wastes. Wastes from
these groups can include appliances, newspapers,
clothing, food scraps, boxes, disposable tableware,
office and classroom paper, wood pallets and cafeteria
wastes.
Nuclear Regulatory
Commission ("NRC") United States agency responsible for licensing and
regulating the civilian use of nuclear energy,
including setting safety standards for and overseeing
the building of nuclear plants. It took over the
functions of the former Atomic Energy Commission,
established in 1946 to regulate the development and
operation of the United States atomic energy program
"Penny Stock" Security As defined in Rule 3a51-1 of the Exchange Act, a "penny
stock" security is any equity security other than a
security (i) that is a reported security (ii) that is
issued by an investment company (iii) that is a put or
call issued by the Option Clearing Corporation; (iv)
that has a price of $5.00 or more (except for purposes
of Rule 419 of the Securities Act); (v) that is
registered on a national securities exchange; (vi) that
is authorized for quotation on the Nasdaq Stock Market,
unless other provisions of Rule 3a51-1 are not
satisfied; or (vii) that is issued by an issuer with
(a) net tangible assets in excess of $2,000,000, if in
continuous operation for more than three years or
$5,000,000 if in operation for less than three years,
or (b) average revenue of at least $6,000,000 for the
last three years.
POWER System The Company's waste-reduction-to-energy generation
system which is under development.
Pyrolysis Process of thermally converting the fuel pellets into
gas and a reduced volume of carbon. Scientific name for
process that takes place in a gasifier.
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Recycling The series of activities by which discarded materials
are collected, sorted, processed and converted into raw
materials and used in the production of new products.
RCRA Resource Conversation and Recovery Act giving EPA the
authority to regulate hazardous waste from generation
to disposal and initiated non-hazardous solid waste
management. Later amendments required phasing out land
disposal of hazardous waste.
RTI Research Triangle Institute. A non-profit corporation
specializing in scientific research and consulting in
many disciplines including environmental sciences and
engineering.
Rule of Ten Calculation involving waste disposal and electricity
fees developed by the Company used for identifying
regions in which the optimal candidates for the POWER
System are most likely located. Under this method, the
formula assigns values to areas where the fees a waste
generator pays landfills to dispose of waste (tipping
fees) are high. Because the Company's system reduces
waste by up to 85%, it concludes that areas where
tipping costs are high will be most likely to be
interested in the POWER System. Because the POWER
System generates electricity, the Company's predicts
that its optimal candidates will be located in areas
where the cost of electricity is high. The formula
locates the most attractive regions are those that have
combined costs of tipping fees (based on the cost per
ton divided by ten) and electricity costs (based on the
cost per kilowatt hour times 100) that total at least
ten.
The Securities Act The Securities Act of 1933, as amended.
Tipping Fees Fees paid to a landfill to dispose of waste.
Twenty Year Patent Historically patents lasted 17 years from date of
issuance. In 1995, a change was made to a term of 20
years from the date of filing the application. Some of
the Company's patents are 17 year patents and some are
twenty year patents.
Upgrader TTI Exeter's new generation of optical sizing and
grading equipment which is being developed to transport
round (oranges), oblong (potatoes) and elongated
products (cucumbers, carrots) and determine the size
and surface defects of the fruit and vegetables .
Waste-to-Energy ("WTE") The conversion and recovery of the energy value in
waste materials through the application of high
temperature controlled combustions. The recovered
thermal energy can then be converted to electrical
energy in steam driven turbine generators for plant
use.
USE OF PROCEEDS
The maximum capital the Company will receive from this Offering is
$2,500,000 from the sale of the Company Shares and $3,054,055 from the exercise
of all the Warrants, if such Warrants were exercised, of which there can be no
assurance. The Company plans on using any proceeds from this offering to repay
debt obligations or for future operating capital.
The Company believes that capital raised from the sales of its securities,
exercise of the Warrants, operating revenues, and the Company's current
$4,000,000 line of credit (fully drawn as of June 30, 1998) may not be
sufficient to meet the Company's operating expenses and capital requirements for
the next twelve months. The Company's
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capital requirements depend on numerous factors, including its ability to have
its securities listed and trading at a certain price, rate of market acceptance
of the Company's products, the Company's ability to maintain and expand its
customer base, the level of resources required to expand the Company's marketing
and sales organization, and research and development activities, and other
factors. The Company believes that in order to meet operating expenses and
capital requirements for the next twelve months that it will have to secure
additional financing. The Company is negotiating for an additional credit
facility in the amount of $10,000,000. See "FINANCING". There is no assurance
that the Company will be able to obtain such financing on terms acceptable to
it.
The Company may be obligated to pay Jeffrey Batchman and Michael Wilkinson
up to $4,000,000 over the next two years depending on the trading price and
demand for the Company's securities, if any. Therefore, the timing and amount of
such capital requirements cannot accurately be predicted. If capital
requirements vary materially from those currently planned, the Company may
require financing sooner than anticipated. The Company is currently seeking
additional financing; however, there can be no assurance that any such
commitments can be obtained on favorable terms, if at all. Any equity financing
may be dilutive to the Company's stockholders, and debt financing, if available,
may involve restrictive covenants with respect to dividends, raising future
capital and other financial and operational matters. If the Company is unable to
obtain financing as needed, the Company may default on its obligations to its
creditors who would have the right to seek foreclosure against TTI Exeter. TTI
Exeter currently generates nearly all the Company's revenues and any action in
foreclosure would have a material adverse impact on the Company, as well as the
market price of the Company's Common Stock and jeopardize the ability of the
Company to continue operations.
The Company has also promised to fund TTI Exeter with approximately
$1,400,000 by January, 1999. There can be no assurance that the Company will be
successful in obtaining financing to meet its obligation.
DILUTION
Purchasers of the Company Shares may experience immediate and substantial
dilution in the value of the Common Stock. Dilution represents the difference
between the initial public offering price per share paid by the purchasers in
the Offering and the net tangible book value per share immediately after
completion of the Offering. Net tangible book value per share represents the net
tangible assets of the Company (total assets less total liabilities), divided by
the number of shares of Common Stock outstanding.
At December 31, 1997, the Company had a net tangible book value of
($3,888,330) or $(0.73) per share. Subsequent to the merger with Exeter
Engineering, as of June 30, 1998, the Company had a net tangible book value of
($5,470,772) or $(0.84) per share. Assuming sale of all the Company shares at
$5.00 per share (and further assuming no exercise of any Warrants and taking
into consideration expenses of the Offering), the net tangible book value of the
Company as of June 30, 1998, would be $(3,170,772) or $(0.45) per share. This
represents an immediate dilution to investors in the Offering of $5.45 per share
and the aggregate increase in net tangible book value to present shareholders of
$0.39 per share. The following table illustrates such effect:
Initial public price per Share $ 5.00
Net tangible book per share value before Offering $(0.84)
Increase per share attributable to
new investors $ 0.39
Net tangible book value per share after Offering $(0.45)
Dilution per share to new investors $ 5.45
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FINANCING
On May 4, 1998, the Company secured a $4,000,000 line of credit with U.S.
Bank National Association of Omaha, Nebraska. The Company has drawn down the
full $4,000,000 on this line of credit. Under the terms of the related
promissory note, the Company will repay U.S. Bank the entire principal in one
payment on May 1, 2000. Interest is payable quarterly. The interest rate on the
promissory note is subject to change from time to time based on changes in the
U.S. Bank National Association Reference Rate (the "Index"). The amount of
interest to be paid by the Company is set at the Index plus two percent. The
Index at the time of the loan execution was 8.5% and the initial interest rate
is 10.5% per annum.
The Company will be considered in default under the promissory note if (a)
the Company fails to make any payment when due; (b) the Company breaks any
representation in the promissory note to U.S. Bank; (c) the Company has made or
makes any misleading statements; (d) the Company becomes insolvent or a receiver
is appointed for any part of the Company's property, makes an assignment for the
benefit of creditors, or any proceeding is commenced either against or by the
Company under any bankruptcy or insolvency laws; (e) any creditor attempts to
take property of the Company in which U.S. Bank has a lien or security interest;
(f) any guarantor dies; (g) any material adverse change in the Company's
financial condition occurs or U.S. Bank believes the prospect of payment or
performance of the indebtedness is impaired; or (h) U.S. Bank in good faith
deems itself insecure.
While the Company has certain rights to cure the above events causing
default, upon default U.S. Bank may declare the entire unpaid principal balance
on the promissory note and all accrued unpaid interest immediately due and
payable, without notice. If the Company does not pay the outstanding amount when
due, U.S. Bank may increase the interest rate five percent over the Index, if so
permitted by law.
This line of credit is unsecured by the Company. Timothy McReynolds,
President and a director of the Company, Michael Fahey, a director of the
Company, and Ronald J. Burns, a director of the Company, have acted as
guarantors for this line of credit. The line of credit was obtained to replace
the Company's former available lines of credit in the amounts of $2,000,000,
$250,000 and $50,000. All previous lines of credit and related loans have been
repaid. As of July, 1998, the Company has drawn down the entire $4,000,000 line
of credit established with U.S. Bank.
The Company is negotiating for a $10,000,000 credit facility comprised of a
$6,500,000 term loan combined with a $3,500,000 asset-based line of credit.
There is no assurance that the Company receive all or any of this loan. Under
current negotiations, Timothy J. McReynolds, President and a director of the
Company, Michael G. Fahey, a director of the Company and Ronald J. Burns, a
director of the Company, will guarantee the $6,500,000 term loan portion of the
credit facility. The $3,500,000 line of credit will be dependent on the Company
having enough assets and generating enough operating activity to support the
line of credit. If the Company is successful in securing this credit facility,
it plans to use a portion of the $6,500,000 to retire its current $4,000,000
line of credit with U.S. Bank.
There is no assurance that the Company will secure this or any other credit
facility or loan.
In May, 1996, the Company borrowed $500,000 from Spring Ridge corporation,
a Nebraska corporation, by execution of a promissory note with 12% interest per
annum, with principal and all accrued interest due on or before January 2, 1999.
In August, 1996, the Company borrowed $603,125 from First Westroads Bank by
execution of a promissory note guaranteed by Jeanette M. McReynolds and Timothy
J. McReynolds, the President and a director of the Company, at 9.5% interest per
annum, with principal and all accrued interest due on or before October 30,
1998.
On March 1, 1998, the Company borrowed $500,000 from Ridges Corporation, a
Nebraska corporation, by execution of a promissory note with 12% interest per
annum, with principal and all accrued interest due on or before January 2, 1999.
In 1998, the Company has borrowed $192,923 from Timothy McReynolds for use
as working capital. The debt is evidenced by a demand note bearing an annual
interest rate of 12%.
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The Company anticipates that it will repay the aforementioned loans timely
with funds from the proceeds of its new credit facility, provided such facility
is obtained.
BUSINESS
TTI TECHNOLOGIES, INC.
The Company was founded in 1992 by Timothy J. McReynolds, the President and
Chief Executive Officer of the Company, and two others who are shareholders of
the Company. The Company and its wholly owned subsidiary have two distinct lines
of business which can be identified as the POWER System, the Company's waste
reduction to energy technology, and TTI Exeter's material-handling systems and
integrated systems for computerized automation of machinery which grade produce,
vegetables and citrus products.
THE COMPANY'S POWER (PYROLYSIS OF WASTE/ENERGY RECAPTURE ) SYSTEM
Since 1992, the Company has acquired patents, conducted research,
documented operational performance, and invested nearly $7,000,000 of funds
raised by equity and debt financing in development of the POWER System. The
POWER System is being developed to thermally convert densified and pelletized
biomass material into a combustible synthetic gas and carbon residue. The
thermal conversion occurs in a computer-controlled, oxygen-constrained
environment at temperatures of 1600 degrees Fahrenheit to yield a gaseous
product substantially free from undesirable by-products.
The POWER System is a stand-alone integrated waste disposal and energy-
generating system designed to be installed at the customer's plant. The actual
size of the POWER System unit will differ depending upon the amount of waste to
be disposed and energy generated. A building to house the unit will have side
wall eave heights of approximately 16 to 24 feet. The two demonstration units
installed by the Company (discussed herein below) have been in facilities having
4,000 and 6,000 square feet in area. It will be the customer's responsibility to
provide housing and personnel for the POWER System. The Company will provide
installation, training and on-going technical support.
The POWER System is primarily composed of at least one gasifier, the main
blower, the primary heat exchanger, the engine generator set, the shredder and
the pelletizer. Each POWER System also is connected to a computer system which
provides monitoring and automatic operation tasks. The Company anticipates that
it will purchase certain parts that make up the POWER System from various
suppliers. The Company believes that all of the parts it uses can be purchased
from several sources and if the Company were unable to purchase a part from one
supplier, it could find a substitute supplier at competitive prices for that
part.
The POWER System operates in four stages outlined in this paragraph and
further discussed below. The first stage, the sorting stage, separates out
unacceptable materials. The remaining waste is then further separated into
plastic materials and cellulose based materials. The second stage shreds
materials and applies a proprietary mixing formula which blends together the
materials in proportions optimal for the gasification process. At the third
stage, the mixed materials are pelletized and transported to the gasifier, a
vertical, cylindrical steel chamber. As the pellets move down the chamber they
are decomposed into a carbon residue and hydrogen gas with the reaction
producing heat which decomposes the pellets subsequently placed in the chamber.
The carbon residue is removed from the chamber by rotating valves on the floor
of the chamber. The fourth and final stage is the capture of the gas for energy
conversion. The gas is extracted from the chamber by external blowers and fed
into regulated gas lines that in turn feed into an engine, or boiler system for
steam turbine operation, or other designed application generator. The entire
process results in the waste being reduced up to 85% and the creation of
electricity from synthetic gas driven generator systems.
Stage One. Before waste can be reduced, it is separated into waste that
can be processed and waste that can not be processed. The Company is targeting
industrial waste producers because they produce more homogeneous waste than the
waste produced by municipalities. For the industries the Company is currently
targeting, most of the
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waste can be processed and very little non-processable waste needs to be
removed. The waste that can be processed is placed through a mechanical
shredding device that cuts the waste into small particles no greater than 3/4"-
3/4"-3/4" in size. If these particles are produced from plastic, they are
measured and combined with cellulose biomass via a proprietary mixing formula to
generate a consistent waste stream with properties that qualify for the
pelletization phase. The ratio of each type of material to the total waste
stream entering the shredder is controlled to optimize the heat conversion
process as it relates to BTU value, moisture content, and the structural
integrity of the pellet. The Company believes that its proprietary rights in the
mixing process ensuring the fuel pellets' integrity distinguishes its procedure
from other pre-pyrolysis procedures.
Stage Two. The waste particles generated from the shredding process are
then placed in a stationary mixing tank whose purpose is to create a
substantially homogeneous mixture of shredded biomass. A screw conveyer then
transports the particles to a pellet press where the waste is compacted and
extruded through a die resulting in a densified continuous pellet stream with an
average length of one to two inches.
Stage Three. Fuel pellets are moved from a storage bin by a screw conveyer
and placed in a cylindrical steel chamber. As the pellets move down the chamber,
internally generated reaction heat at between 1500 F and 1700 F converts the
pellets from solid to gas, excepting the carbon residue. The pyrolysis chamber
contains other fuel pellets in various stages of the pyrolysis process and
pyrolyzed fuel at the bottom of the chamber consisting of carbon residue.
The Company concluded that the preferred design is to cluster and connect
multiple, smaller-sized chambers for the pyrolysis process, rather than
fabricate a single, much larger chamber. Using a modular design with smaller
units permits more precise control of the air flow dynamics within the chamber
during the thermal process, allowing for a flexible system that can be
controlled to accommodate uneven waste fuel streams, changing power scheduling
requirements, and the ability to readily expand the total system's capacity. The
clustered chamber design also hedges the risk of down time for the POWER System
and reduces the cost of fabricating, installing, and operating the system.
The pyrolysis process is self sustaining and does not require an
independent energy source to sustain the thermal process. The process is
initiated and controlled by operation of gas removal blowers which draw air
through the fuel pellet bed. The gas produced through pyrolysis is hydrogen-
rich, clean and suitable for fueling internal combustion engines or boiler
systems used to generate electricity. The carbon residue produced from non-
hazardous/non-radioactive biomass has a high iodine rating and may be sold for
activation and possible use in industrial and municipal filtration systems. The
carbon residue produced from low level radioactive waste cannot be resold but
provides a stable element to which radioactive particles can attach. Such
radioactive carbon can then be disposed of without further vitrification
process.
Stage Four. The final step for the POWER System is the conversion of the
synthetic gas into usable energy. The gas is pulled from the lower section of
the pyrolysis chamber by external blowers into gas lines into an electrical
generating device such as an engine/generator, a gas-fired boiler/steam
generator or other gas conversion apparatus. The conversion apparatus depends
upon the most efficient method applicable to needs and configuration of the
plant or facility housing the POWER System. Continuous emission monitoring
systems, now produced by TTI Exeter, continuously monitor the gas providing data
to control programs that automatically alter system performance, thereby
maximizing the conversion process. The electricity generated from the POWER
System can be delivered to the facility itself, thus offsetting power expenses
for operations, or sold to the public grid system. The Company estimates that
3,000 pounds of biomass per hour will generate one megawatt of electricity per
hour. Residual heat from the conversion process can be recovered and used on-
site for facilities heating and other purposes.
POWER SYSTEM UNIT CONTROL SYSTEM
The Company has designed a proprietary process control system for the POWER
System that automates and controls much of the waste reduction and energy
production equation, including fuel dimension, materials-handling, airflow
dynamics, the thermal gasification reaction, the continuous emissions monitoring
system and the power generation system. The process control system consists of
input from various strategically located temperature, optic, infrared, contact,
amperage, air flow, emission and other electrical or mechanical sensors whose
digital or analog signals are translated and directed by programmable logic
control units ("PLCs") and the Company's proprietary
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software. The system is equipped with alarms and automatic controls that monitor
and otherwise turn on or off various motors and valves which effect the
continuity of a uniform process. This continuous duty monitoring and control of
the POWER System largely accounts for its economic and operational viability
with minimal human intervention. The control system is installed as a client
server system on PC networks at the site, which allows monitoring on a local,
remote or enterprise-wide basis.
The control system seeks to eliminate human error and labor costs. The
controls system also monitors the thermal reactions occurring inside the
pyrolysis chamber in order to anticipate and correct fluctuation that would
otherwise disrupt the continuity of the pyrolysis process. By modifying the
software program, the POWER System can easily be adapted to accept modified
material forms and input levels of waste fuel. Program alterations may also
regulate the thermal process itself, thereby producing by-products with varied
compositions.
BUSINESS OPERATIONS
The Company has not made any sales or commercial installations of the POWER
System but has installed two POWER System units for demonstration and testing
purposes. In August, 1995, the Company completed installation and testing of its
first POWER System in Richland, Washington for demonstration and permitting
purposes. Subsequent to the tests performed at the Richland site, the State of
Washington issued the Company a permanent air quality permit for processing of
low level radioactive waste. The Richland demonstration was concluded in 1995.
The Company provided a modified POWER System for installation at Camp Lejeune,
North Carolina, as part of a project principally sponsored by the Environmental
Protection Agency (the "EPA"). The Company received $863,164 in federal funds
and contributed $1,924,594 in equipment, personnel and services.
Richland, Washington Demonstration System. The Company installed its first
POWER System in Richland, Washington for demonstration and permitting purposes
adjacent to the Hanford Nuclear Waste Reservation in Benton, Washington, a
former government nuclear production facility and a present nuclear disposal
site and the location of an operating nuclear power generation plant. The entire
Richland unit covered 4,000 square feet and housed a fuel preparation system,
the gasifier, the off gas treatment system, the filtration system, and an
emission monitoring system. The unit was designed for processing special waste
at a rate of approximately 500 pounds per hour.
In August, 1995, the Company performed initial operations and testing of
the Richland Plant under a temporary air quality permit for processing non-
radioactive/non-hazardous waste streams. Additionally, an independent EPA
certified testing service conducted emissions testing on the Richland Plant as a
prerequisite for the Company to obtain a permanent air quality permit to process
low level radioactive waste ("LLRW"). The State of Washington subsequently
issued the Company a permanent air quality permit for processing of low level
radioactive waste.
The Richland demonstration was concluded in 1995. The Company disassembled
the equipment and technology it had contributed and stored it in its Prosser,
Washington facilities where it is currently held for sale.
Camp Lejeune Plant. The Company was subcontracted by Research Triangle
Institute ("RTI"), a non-profit corporation specializing in scientific research
and consulting in many disciplines including environmental sciences and
engineering, to provide a modified POWER System to be installed in Camp Lejeune.
The project was awarded as part of a project principally sponsored by the EPA
which provided the Company with approximately $863,164 in federal funds. The
Company contributed approximately $1,924,594 in equipment, personnel and
services.
The Camp Lejeune project required that the Company install a POWER System
in a plant facility that could test and demonstrate its capability to convert
waste wood chips into electricity on a continuous basis. This POWER System
consisted solely of a pryolysis energy conversion system. The material handling
and processing system was provided by other parties. The Camp Lejeune facilities
covered 6,000 square feet and housed the fuel preparation system, the gasifier,
the off gas treatment equipment and the engine generator set. This system was
designed to process approximately 2300 to 2500 pounds per hour.
The Camp Lejeune facility is still operational and the State of North
Carolina has issued the Company a permanent air quality permit to operate the
POWER System at Camp Lejeune. The Company has also tested the
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energy producing capacity of the POWER System including operating a Waukesha
engine, a KATO generator and a system that relays electricity to the local
utility. The Company is not presently deriving any revenue from this facility.
Although the Company is satisfied with the testing of its product at the
Camp Lejeune and Richland sites, there is no assurance that the POWER System
will function satisfactorily on a commercial basis if the Company is able to
locate customers.
PLANNED COMMERCIAL OPERATIONS
The Company has not installed any POWER System units commercially. The
Company has manufactured four POWER System gasifier units including (1) an 8"
diameter demonstration unit which processes about approximately 20 pounds per
hour (2) a 30" diameter unit for research and development which processes
approximately 300 pounds per hour (3) a 4' diameter unit which processes
approximately 500 pounds per hour, and (4) an 8' diameter unit which processes
approximately 2300 pounds per hour. The Company considers the 4' unit as its
standard unit and anticipates that the POWER System will be custom configured to
the potential customer's waste and energy needs. For example a Company with
large waste capacity needs may be built a POWER System that contains 20
gasifiers with 4' diameters while a Company with smaller needs may only require
a system with one gasifier. The difference in the size of a POWER System is not
in the gasifier itself, rather it is the number of gasifiers used in a modular
fashion in one system.
The gasifier unit can be manufactured by material fabrication shops with
whom the Company will contract, including the TTI Exeter facilities in
California. POWER System units will be installed at the customer's plant and
housed in facilities with side wall eave heights of 16 to 24 feet. It will be
the customer's responsibility to provide housing and personnel for the POWER
System. The Company will provide installation, training and on going technical
support. The operational and maintenance cost of the system will be dependent
upon size and configuration for an identified customer. The Company believes
that it target customers will generally require three to five persons to operate
the POWER System. If a three person operational and maintenance system was in
place, the Company anticipates that one person would be a supervisor and
technical expert, one would be general mechanical maintenance and operations
person, and one would be the material handling and preparation foreman. Due to
the POWER System's ability to stockpile fuel prepared at a rate in excess of the
gasifier's consumption rate, a customer may have additional people for a single
shift to produce fuel with a round-the-clock operation of the gasifier being
reduced to a three person crew.
SPECIFIC POTENTIAL CUSTOMERS
The Company is presently in discussions with four companies for the
installation of the POWER System. These are a paper and label manufacturer, a
sports equipment manufacturer, a poultry plant and a wood furniture
manufacturer. The Company is in initial discussions with these companies and
there is no assurance that it will ever contract with any of these or any other
companies.
The wood furniture manufacturing company has a specific need for a system
that can handle its daily waste output. The furniture company produces a
homogeneous waste which is well-suited for the POWER System. The Company
estimates if it constructed a POWER System to handle this waste requirement such
system would produce sufficient electricity to meet the energy needs of the
furniture manufacturer. In this case, the Company anticipates that the POWER
System could handle all of the waste and energy requirements of the potential
customer. There is no assurance that the Company will contract with this or any
other customer or that the POWER System will be able to handle the waste and
energy needs of this or any other customer.
The Company anticipates that it may market the POWER System to customers of
TTI Exeter. The Company believes that these customers will be more interested in
the waste reduction than the energy production functionality of the POWER
System. Most of these customers' plants are located in the West and Northwest
where electricity costs are low but many of these plants have problems reducing
their waste in order to cut down on land fill costs and comply with state and
federal ground disposal regulations. The Company believes that the POWER System
can perform these functions especially for the processors of potato and citrus
products. There is no assurance that the
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Company will sell any POWER Systems to companies in this or any other industry
or that even if the Company does obtain a contract that the POWER System will
operate efficiently.
OTHER TARGET CUSTOMERS
The Company intends to target industrial companies that generate large
volumes of biomass waste that need to be transported to landfills or disposed of
by other means. The Company believes that the typical customers for a POWER
System will have over $50 million in annual sales, will require 1 to 10
megawatts of power per hour and will have waste disposal requirements of 3,000
to 10,000 pounds per hour.
The Company has commissioned market research studies by Prenosil &
Associates, a market research firm, to define the market for the POWER System by
industry and geographic region. The study performed in the first quarter of 1997
for a cost of $15,000 identified 47 industries that are significant biomass
producers. These represent approximately one-third of all manufacturing
categories listed by the United States Office of Management and Budget.
Collectively, they represent nearly 135,000 establishments that are potential
customers for the POWER System.
The Company will focus initially on the paper, wood and food processing
related industries. Prenosil & Associates estimates that there are 73,052
businesses in the following industries: commercial printing and lithography,
logging, newspapers, sawmills and planning mills, periodicals, wood household
furniture, bread, cake and related industries, book publishing, wood containers,
food preparations, corrugated and solid fiber boxes, greeting cards, meat
packing plants, sausage and prepared meats, wood buildings and mobile homes,
office furniture, manifold business forms, candy and other confections, canned
fruits and vegetables, poultry slaughtering and processing, cookies and
crackers, paper mills, flavoring extracts and syrups, paperboard mills, sanitary
paper products, non-cellulosic organic fibers and cereal breakfast foods.
Process waste generated by the wood and paper producers and food processors
are well suited for the POWER System because the waste is relatively
homogeneous, produces clean by-products and has high energy content.
Furthermore, food processors are also large utilizers of cardboard and paper
packaging materials and these materials often compromise a high percentage of
their waste. Food packagers who produce wax treated paper are a particularly
attractive target customer because pyrolysis separates wax more efficiently than
recycling.
Although the Company will initially focus on the above mentioned
industries, it plans to create awareness in other markets including the
municipal solid waste market and the hazardous solid waste market. The Company
considers smaller to medium size municipalities as a potential target customers
because these municipalities typically have less rigorous procedural
requirements for awarding contracts and are therefore able to award contracts
relatively quickly. The Company also thinks that it might be potentially
attractive to the hazardous solid waste industry because the Company already has
established credibility in this market through its Richland facility, which was
permitted to handle low level radioactive waste.
Prensoil & Associates utilized a methodology developed by the Company,
called "Rule of Ten", for identifying geographic regions in which the optimal
candidates for the POWER System are most likely to be located. The Company has
deduced that the system will be most attractive to companies who operate in a
geographic area where the land fill or tipping costs are high and a waste
reduction system would represent a substantial savings. Because the POWER System
also generates electricity, the Company targets areas with high electricity
costs. The Company developed the "Rule of Ten" to identify areas where tipping
fees are high and the cost of electricity is high.
Under this method, the most attractive regions are those that have combined
costs of tipping fees (based on the cost per ton divided by ten) and electricity
costs (based on the cost per kilowatt hour times 100) that total at least ten.
For example, a region that is associated with $50 per ton tipping fees and
electricity rates of $.05 per kWh, would score a ten and therefore be a likely
target region for the POWER System. A region that is associated with $30 per ton
tipping fees and electricity rates of $.04 per kWh, would only score a seven and
would be less likely to have industrial candidates with strong financial
incentives to consider the POWER System.
The "Rule of Ten" calculation has identified New Jersey, Connecticut,
Massachusetts, New York, Rhode Island, New Hampshire, Vermont, Maine, Maryland,
Pennsylvania, Delaware, Florida, Minnesota, California,
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Alaska, and Hawaii as prime areas that the Company will target in its marketing
efforts. Although production of electricity adds to the POWER System's economic
benefit, the primary financial benefit to most potential customers of the POWER
System will be waste reduction and the avoidance of tipping fees. The Company
projects that the elimination of tipping fees, transportation and associated
costs (e.g. fees to haulers, insurance, storage, etc.) will, on average, account
for 65% of the financial benefit to customers utilizing the POWER System. For
some customers, lowering waste management costs may be so substantial that the
power generating capacity may not be a consideration in their decision.
Tipping fees vary by region and also by the nature of waste. Generally,
tipping fees are higher in the East than in the West, although location with
regard to access and urban proximity are variables that affect tipping fees
nationally. The Company intends to concentrate on industrial companies in mainly
eastern regions because tipping costs for industrial waste in these regions tend
to be more expensive than tipping costs in other regions.
SALES AND MARKETING
The Company utilizes the sales personnel of the Company and TTI Exeter and
consultants to market its POWER System. In addition, the Company benefits from
certain scientific papers and poster presentations given by the EPA and RTI at
regional and international public biomass energy conferences which may refer to
the POWER System. Customers, vendors, and other companies with which the Company
has worked provide word-of-mouth marketing for the Company. If the POWER System
proves to be effective, the Company plans to utilize its customers' endorsements
to further penetrate the market. While it is building its customer base in its
initial markets, the Company intends to begin to create awareness of the POWER
System among other industries and other segments of the solid waste industry,
such as municipalities; however, it will postpone aggressive marketing into
these market segments until it has developed a strong presence in its initial
markets.
The size and price of a POWER System will be dependent on the customers
waste disposal and energy needs. The Company estimates that the POWER System on
the scale of its 1995 project in Richland, Washington or the Camp Lejeune
project would currently cost the customer approximately $1,500,000. The Company
estimates that future projects would be in proportion to these prices. For
example, if a client had a waste stream and an energy requirement of
approximately three megawatts an hour, the Company estimates the current cost to
the customer at approximately $3,500,000 to 4,000,000, including installation.
The Company does not have any customers and all the prices listed are estimated.
There is no assurance that the Company will sell, if it sells any POWER Systems
at all, at these estimated prices.
FIXED PRICE CONTRACTS
The Company's contracts may be performed using "fixed-price" rather than
"cost-plus" terms. Under fixed-price terms, the Company quotes firm prices to
its customers and bears the full risk of cost overruns caused by estimates that
differ from actual costs incurred or manufacturing delays during the course of
the contract. Some costs, including component costs, are beyond the Company's
control and may be difficult to predict. If manufacturing or installation costs
for a particular project exceed anticipated levels, gross margins would be
materially adversely affected, and the Company could experience losses. In
addition, the manufacturing process may be subject to significant change orders.
However, the cost of these change orders may not be negotiated until after the
system is installed. The failure of the Company to recover the full cost of
these change orders could materially adversely affect gross margins and also
cause the Company to experience losses.
COMPETITION
The POWER System competes with other forms of gasification, including
updraft pyrolysis systems, fluidized bed systems, systems using catalysts, and
competitors utilizing the downdraft system, which is the technique the POWER
System employs. Competitors who currently sell gasifiers commercially or are
anticipated to begin to sell gasifiers commercially in the near future include
Energy Products of Idaho, Brightstar Syngas Co. of Houston, Texas, Prime Energy
of Tulsa, Oklahoma and Plasma Gasification of Gloucester, Ontario. Some of these
competitor companies employ the updraft and catalytic pyrolysis techniques which
the Company believes are more expensive to build and operate than the Company's
method and do not produce a clean gas by-product suitable for immediate
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conversion to useable energy. Although these companies may offer a similar
product, the Company believes that because the industrial and commercial
gasification market is in its infancy, its initial challenge will be locating
customers who are willing to invest in a new technology rather than competing
with the other gasification manufacturers for market share.
Aside from pyrolysis manufacturers, the Company most directly competes
against incinerator operators which have a large market share of biomass
reduction. Incineration is the predominant mass-burn method of waste reduction
in most waste-to-energy systems, although the gas produced is frequently high in
particulate matter. The NOX emissions require capital intensive scrubbing
systems to capture particulate matter and such gas is undesirable for use in
internal combustion engines. The Company, insofar as it is competing for dollars
spent on disposing of waste also competes against truck hauling companies which
haul waste product. These Companies include BFI Industries, USA Warsaw and
similar truck hauling companies. These companies are larger and have far more
resources than the Company.
Although incinerators have long been the market leader in waste reduction,
the Company believes that the POWER System's economic benefits relative to
alternative waste treatment methods will enable the Company to attract a growing
base of customers, particularly in areas that have high waste disposal costs.
There is no assurance that even if the Company is correct in its assessment of
potential cost benefits to customers that it will be able to acquire or retain
any customers who either use more traditional forms of waste disposal or
incineration.
POWER SYSTEM WARRANTY
The Company is in the process of developing a warranty plan. The Company
anticipates that it will offer a one year repair or replacement warranty on
primary mechanical components. The Company anticipates that it will condition
the warranty on full payment for the equipment and operation of the POWER System
within the Company authorized operational specifications.
INDUSTRY BACKGROUND
The solid waste market consists of industrial solid waste ("ISW"),
municipal solid waste ("MSW") and hazardous solid waste ("HSW"). Over seven
billion tons of ISW are generated each year, much of which is disposed in
private landfills or handled on-site. Approximately six million tons of ISW are
recycled, which is less than one out of every 1,000 tons of ISW. MSW totals
approximately 325 million tons per year, and consists primarily of residential
waste. HSW generated by the 20,000 largest producers totaled 279 million tons in
1995. Of total solid waste, approximately 50% is estimated to be biomass. Solid
waste tonnage is closely correlated to growth of the population and gross
domestic product and is, therefore, expected to continue to increase.
The waste disposal industry has become subject to increasing stringent
regulation that limit usage of traditional waste disposal methods and increase
costs. Landfills were significantly impacted by the Resource Conservation and
Recovery Act of 1976 ("RCRA") and later amendments to the Act. The significant
cost of complying with RCRA has at least in part caused the closure of
approximately 50% of existing landfills since RCRA's enactment. As a result of
the closure of half of the nation's landfills and the large costs of operating
landfills, the fees that the remaining landfills charge for disposal have risen
since RCRA was enacted.
Another form of waste disposal, incineration, has become increasingly
regulated and the newest amendments to the Clean Air Act are expected, according
to some industry analysts , to increase incinerator operating costs and may
result in many incinerators shutting down when the amendments are scheduled to
be enforced in 1998. See BUSINESS - Government Regulation.
PRODUCT APPLICATION, HISTORY AND SERVICES
The POWER System is based on the scientific process of pyrolysis, which is
the decomposition of biomass to its gaseous state by thermal conversion in an
oxygen constrained environment with a resulting carbon residue. Biomass, as it
relates to the Company's products, is organic solid waste generated by industry
or populations, excluding glass, metals and certain types of plastics.
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Pyrolysis was developed more than a century ago for the gasification of
coal into coke and, later, for the production of coal gas. In World War II,
pyrolysis was used to produce synthetic gas in response to the war time
petroleum shortages. Lack of computer technological innovations at that time
necessitated that the process be run by manual control and human intervention
which resulted in the pyrolysis process converting only a fraction of the
potential BTU content of the biomass fuel. Through technological innovations,
the Company's POWER System reduces biomass to approximately 10%-15% of its
original mass and volume and produces a synthetic gas which can fuel a
combustion engine/generator system. The 10%-15% of the waste that is not turned
into gas is carbon residue. This residue can either be disposed of in a
landfill, sold to a carbon activator, or sold to a coal-fired power plant as a
blending fuel.
The POWER System can be used to reduce organic waste including non-
hazardous industrial solid waste, municipal solid waste, and hazardous waste.
The POWER System, however, operates best with homogeneous biomass materials
because the system must first separate inorganic materials such as glass and
metal from the biomass before the pyrolysis procedure is activated. The POWER
System is most efficiently used for the disposal of wood chips, paper and
cardboard refuse and other consistent biomass materials including certain
plastics. Concentrated homogenous waste streams of these materials are found in
certain industrial processes, in MSW produced in "green" communities and, to a
lesser extent, in hazardous waste situations where sorting is mandated due to
environmental regulations.
GOVERNMENT REGULATION
Environmental legislation and regulations concerning all forms of solid and
liquid waste have been promulgated and enforced to varying degrees over the
years by the EPA and, in the case of low level radioactive waste ("LLRW") and
mixed waste, by both the EPA and the Nuclear Regulatory Commission ("NRC"). The
level of enforcement of regulations has varied and in recent years there has
been a strong interest in the environment, including waste management. As a
result, there has been greater enforcement of past legislation and the
promulgation and proposal of new legislation. The regulations that most likely
impact the market for the POWER System are (1) the Resource Conservation and
Recovery Act of 1976 ("RCRA"); (2) the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA" or "SUPERFUND"); and (3) the
Clean Air Act of 1970 and its 1990 Amendments.
RCRA is a comprehensive body of legislation that addresses the generation,
treatment, storage, handling, transportation and disposal of solid waste and
requires the individual states to develop programs to ensure the safe disposal
of such waste. RCRA separates waste into non-hazardous waste regulated by
Subtitle D and hazardous waste regulated by Subtitle C.
Subtitle C of RCRA imposes a comprehensive "cradle to grave" system for
tracking the generation, transportation, treatment, storage and disposal of
hazardous wastes. Stringent standards are imposed upon generators, transporters
and disposers of hazardous waste which involve detailed operating, inspection,
training, emergency preparedness, record keeping and reporting requirements.
Facilities accepting hazardous waste are burdened with extensive permitting,
facility closure, post-closure and financial responsibilities.
Subtitle D, which governs non-hazardous solid waste landfills, was adopted
in October, 1991 and became effective in October 1993. It dramatically affected
the economic viability of many of the nation's landfills. Subtitle D specifies
landfill locations, facility design standards, operating criteria, closure and
post-closure requirements, financial assurance requirements, groundwater
monitoring requirements, groundwater remediation standards and corrective action
measures.
Each state was required to revise its landfill regulations to meet or
exceed those stipulated by the EPA and to adopt and implement a permit program
or other monitoring system to insure that landfills comply with Subtitle D
standards. Many states have adopted standards that were more stringent than
those of Subtitle D. The requirements under Subtitle D substantially increased
the cost of operating existing landfills and constructing new ones. This led to
the closure of many landfills, and the Company anticipates additional landfill
closures during the remainder of the decade.
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CERCLA established a program for regulation and remediation of facilities
that cause or threaten to cause the release of hazardous substances into the
environment. CERCLA makes the owners and former owners of the facilities,
generators of the hazardous substances and transporters arranging for the
transportation and disposal of the materials accountable for clean-up of the
hazardous substances and places substantial fines for hazardous substances that
are not remediated. CERCLA classifies 700 substances as hazardous (substantially
broader than RCRA), many of which are found in household waste. Enforcement of
CERCLA has varied depending on the state. The principal effect has been a
heightened awareness of the costs related to the proper disposal of hazardous
waste.
The Clean Air Act of 1970 and the amendments of 1990 concern the emission
of pollutants into the air, including pollutants from certain landfills, and
specifies new requirements for scrubbing devices on industrial emission and
incinerating sites. Enforcement of the most recent amendments in 1998 are
expected to make incinerators significantly more expensive to operate.
Other environmental legislation and regulations that are applicable to the
Company's operations in the United States are the Federal Water Pollution
Control Act of 1972, the Safe Drinking Water Act which was reauthorized in 1996,
the Clean Water Act, the Hazardous and Solid Waste Amendments of 1984, the
Superfund Amendments and Reauthorization Act and the Pollution Prevention Act of
1990. Collectively, these laws regulate the management, storage and disposal
of hazardous and non-hazardous liquid and solid wastes; mandate discharge limits
of pollutants into the air, ground and water; provide for the investigation and
remediation of contaminated land and groundwater resources; and establish
pollution prevention programs.
The Company benefits from the deregulation of the electric utility industry
which has occurred in recent years. Prior to deregulation, back-up power sources
from public utilities, which are required by law for independent power
production operators, were expensive, often impacting the viability of small
electricity generating operations. Deregulation has led to the moderation of
fees associated with public grid access, making access for back-up power and
resale of excess electricity more viable for smaller systems, such as the POWER
System, and increasing their ability to compete with traditional utility
sources. POWER Systems customers need to have a back-up source of power in the
event that the system is not operating 24 hours per day, the customer requires
more power than the POWER System generates, or the waste stream flow is not
consistent creating the risk of disrupting in-house power production. Recent
deregulation decisions improve the economics of these requirements and decrease
the ability of utilities to create obstacles for smaller generating systems.
INTELLECTUAL PROPERTY
The Company owns six primary patents that are registered in the United
States and in several other countries. Four other patent applications are being
prepared for filing. Three primary patents, which are 17-year patents, were
purchased by the Company in 1992. The fourth, fifth and sixth below-listed
patents, which are 20-year patents, directly resulted from the Company's
research and development expenditures.
Summary information about these patents is provided below.
1. Method for Producing Fuel Gas from Organic Material, Capable of Self-
Sustaining Operation; Patent number: 4,530,702; Date of issue: July 23, 1985;
Expiration Date: January 23, 2002.
This patent protects the method by which the pyrolysis process is self-
sustaining. Whereas prior patents required a heat source for effectuating the
thermal process, this patent describes uniform pelletized fuel that, once
ignited and in conjunction with a downdraft mechanism, insures the continuous,
self-sustaining process in an environment that is uniform and self-regulating.
Patent filed in the United States, Phillippines, and India.
2. Apparatus for Converting Organic Material Into Fuel; Patent number
4,268,275; Date of issue: May 19, 1981; Expiration Date: May 19, 1998.
This patent relates to the fuel processing art and more specifically
concerns a method and apparatus using principles of pyrolysis by which fuel
gases without tars are produced from organic materials. Patent filed in the
United States. This patent is also filed in Argentina.
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3. Method of Converting Organic Material Into Fuel; Patent number
4,421,524; Date of issue: December 20, 1983; Expiration Date: December 20, 2000.
4. Pyrolysis Gasifier with Inner Sleeve Insert; Patent number 5,618,321;
Date of issue: April 8, 1997; Expiration date: September 15, 2014.
This patent protects a structural development in the pyrolysis chamber that
contributes to the efficiency of the entire thermal process. The patent has
resulted in two continuation-in-process patents. Patent filed in the United
States, including Canada, Europe, Malaysia, Philippines, Mexico, and PCT
International, a consortium of 54 countries that permit patents to be filed for
many countries for approximately the same cost as filing in three or four
countries directly.
5. Fuel Spreader Assembly for Use in a Gasifier; Patent number: 5,755,837;
Date of issue: May 28, 1998; Expiration Date: September 15, 2014.
This patent features a fuel spreader assembly which distributes the fuel
uniformly upon its entry into the upper portion of the gasifier to insure proper
operation of the gasifier. Patent filed in the United States.
6. Airlock Valve in a Carbon Extraction Portion of a Pyrolysis Gasifier;
Patent number: 5,762,657; Date of issue: June 9, 1998; Expiration Date:
September 15, 2014.
This patent features an airlock valve for use in a carbon extraction system
portion of the gasifier. The airlock valve permits carbon to move into the
carbon collection tank but prevents air from entering back into the gasifier.
Patent filed in the United States.
The Company believes that the key to the POWER System is not the basic
thermal process, which has been generally known for years throughout the world,
but rather in the refinements of the apparatus and computerized control of the
process that the Company has developed. The Company's strategy is to patent key
future developments that contribute to the control process.
The Company is currently preparing four additional process patent
applications. There is no assurance that the Company will be able to effect the
patent on these processes.
1. A patent for the preparation and processing of low-level contaminated
organic waste, utilizing the Company's pyrolysis as a component. This patent
will protect refinements to the basic thermal process necessary for Low Level
Radioactive Waste ("LLRW") as a fuel source;
2. A patent for the continuous, automated maintenance of the pyrenzone of
a gasifier and the computerized control of gasifier system. This patent will
protect the Company's technology as it relates to monitoring, regulating and
providing sensory information for control of the thermal process;
3. A patent for material handling and preparation of a densified fuel
pellet for gasifier feedstock.
4. A patent for the control of mass airflow for a gasification system
that provides for continuous operation, the filtration of contaminants, and
maximization of thermal efficiency. This patent concerns added technology and
modifications to the thermal chamber that insure greater control of the thermal
process.
The POWER System has applications to a broad range of industries in most
countries of the world. Ideally, patent protection in most countries is
desirable. The Company intends to file initially for dominant patents in the
United States because of the strength of the U.S. Patent and Trademark Office.
The Company anticipates that it will make subsequent filings for the most
important patents under the PCT system, which is a consortium of 54 countries
that permit patents to be filed for approximately the same cost as filing in
three or four countries directly. The PCT examining process serves to validate
the patent for consortium members, after which the inventor may elect to pay
fees directly in select countries on a pre-approved basis. The Company has
utilized and intends to utilize the PCT
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mechanism for broader coverage over less important regions and to file directly
only in countries with significant market potential for the specific
application.
INSURANCE
The Company carries insurance with United States Fire and Guaranty Company
for a general aggregate liability limit of $2,000,000. The policy was renewed
and increased on October 1, 1997 for a term of one year expiring on October 10,
1998. The Company anticipates it will negotiate a new policy to cover its
recent acquisition of Exeter Engineering. The Company is currently insured
against product, personal and advertising injury, theft and fire damage. The
Company also carries directors and officers liability insurance in the amount of
$3,000,000. While the Company believes it has sufficient coverage to insure
against potential claims, there is no assurance that the Company will not suffer
judgments against it that exceed its policy limitations. If a Company suffered
such a judgment, it may have to pay the difference between the judgement against
it and the policy limitations.
TTI EXETER, INC.
The Company's subsidiary, TTI Exeter, Inc. ("TTI Exeter") designs, produces
and installs materials handling systems including integrated sorting, sizing and
grading systems serving mainly the produce, potato, and citrus industries. The
TTI Exeter material-handling systems are integrated sorting, sizing and grading
systems consisting of an assortment of mechanical equipment (conveyor lines,
holding and washing bins and sizing and inspection equipment) and computerized
optical image processing. TTI Exeter designs, fabricates and installs these
systems, many of which are driven and integrated by automated control systems.
Most of TTI Exeter's material-handling systems have been developed for use by
fresh agricultural product packaging and processing plants and food processing
concerns. The systems are used for a variety of tasks, typically related to
cleaning, filtering, grading, sorting, and boxing and bagging. TTI Exeter's
primary products are the Accu Pack Sizer, the Accu Vision Grader, and the Accu
Vision Upgrader. In 1997, on a pro forma basis, TTI Exeter had sales of
approximately $9,200,000.
OVERVIEW
TTI Exeter was formed in June, 1998 (effective January 29, 1998 for
accounting purposes) by the merger of Exeter Engineering, Inc. ("Exeter
Engineering"), a closely held California corporation, with TTI Control
Technologies, Inc., a Delaware Corporation ("TTIC"), a wholly owned subsidiary
of the Company. Exeter Engineering, founded in 1979, was a manufacturer and
installer of material-handling equipment primarily in the citrus and potato
markets. TTIC was formed when the Company acquired all of the assets of Hi-
Tech, Inc., a closely held Washington corporation and placed Hi-Tech's assets in
TTIC, a newly formed Delaware corporation. Hi-Tech originally contracted with
the Company to develop the software required to automate the control and
monitoring system of the POWER System at the Richland Plant. TTIC develops in-
house specialized software programs to automate varied systems and processes
including full featured supervisory control and data acquisition systems. TTI
Exeter is a wholly-owned subsidiary of the Company.
TTI Exeter operates as a (1) designer, developer and installer of material-
handling equipment; (2) designer and fabricator of produce facilities; and (3)
designer and manufacturer of automated instrument and controls and continuous
emissions monitoring systems. TTI Exeter has identified packing and processing
of produce as its most targeted market. TTI Exeter's strategy is to address the
produce processing industry problems of high labor costs, inadequate yields and
inconsistent quality by providing automated inspection systems, real-time
quality analysis systems and specialized conveying systems.
PRODUCTS AND SERVICES
The conveyor system used with the Accu Pack Sizer, Accu Vision Grader and
combination systems is designed for strength, durability and ease of
maintenance. The conveyor system operates with a cable pulley and high
strength polyurethane jacketed cables which slide smoothly on ultra high
molecular weight ("UHMW ") guides. Potato removal is accomplished by a solenoid
actuated air cylinder shear. The high speed shear advances, removes the
product, and retracts without disrupting potatoes on either side of the one
being removed. A soft plastic is used
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for the removal shoe and padded and inclined delivery boards with curtains allow
for gentle handling of all potatoes to help minimize bruising.
TTI Exeter in some applications combines the proprietary and patented Accu
Pack Sizer infrared sizing system with its Accu Vision optical defect detection
grading system. The result of the combination affords increased efficiency,
accuracy and cost effectiveness in materials process handling and packing.
Accu Pack Sizer. The Accu Pack Sizer is generally approximately 40' long,
12' wide and 8' tall including its support stand. The Accu Pack Sizer employs
an infrared scanning device to measure individual potatoes as a series of 1/128"
slices. From the summation of these slices an overall volumetric measure is
obtained, illustrating the potato's height, width, length and shape. The Accu
Pack Sizer also sorts by weight by using an equation involving specific gravity
whereby the system can calculate the precise weight of the potato from its
particular shape. This combination of dimensional shape and weight sizing gives
the Accu Pack Sizer operation flexibility in attaining accurate, highly-
specialized packaging. The Accu Pack Sizer system is driven by proprietary
software and IBM compatible equipment allowing for as many 16 different grading
factors and the flexibility to meet highly specialized packing requirements.
TTI Exeter believes that the Accu Pack Sizer is a durable system resilient to
the hazards commonly found in processing and fresh-pack facilities.
Accu Vision Grader. The Accu Vision Grader is generally approximately 40'
long, 12' wide and 8' tall including it support stand and was designed to reduce
labor costs and increase grading efficiency while emphasizing speed and
accuracy. The Accu Vision Grader sorts produce for external defects optically
analyzing up to 16 different grade factors. The Accu Vision Grader process than
has the ability to sort by color, shape and size and spot internal and external
defects while improving speed and precision. When used for grading potatoes,
Accu Vision Grader separates and grades potatoes while eliminating any remaining
potatoes not meeting the USDA requirement of 2"/ 4 ounce minimum. The Accu
Vision Grader's dual camera system views the potato's surface from two
directions and scans at a rate of four to five pieces per second per lane. When
used for oranges, the grader analyzes up to approximately 10 bins per hour per
lane based on an average fruit size of 113 and eliminating 10% due to their
small size. The high resolution cameras used by Accu Vision Grader readily
detect even the smallest of defects on fruit surface.
Accu Vision Upgrader. TTI Exeter plans on expanding its product line and
anticipates introducing the Accu Visions Upgrader (the "Upgrader"), a new
generation of optical sizing and grading equipment. The Upgrader is
approximately 15' long, 4' wide and 6' tall. This machine, which is now being
tested after spending four years in development, will transport round (oranges),
oblong (potatoes) and elongated products (cucumbers, carrots) and determine the
size and all surface defects of the fruit and vegetables. While primarily
designed for process applications such as juice plants, french fry or potato
chip plants, the Upgrader will have new applications as well. The Upgrader has
been installed in two facilities in England and is under contract for
installation in Idaho during the last quarter of 1998.
Computerized Controls Systems. Aside from selling equipment and machinery,
TTI Exeter also sells computerized controls systems necessary for plant
operations. This technology consists of computer hardware and software that is
configured to ensure that all parts of a plant are operating in synchronicity.
In a plant, one machine is often entirely dependant on another piece of
equipment performing a different function in order to avoid a labor intensive
plant there is need for a controls system that communicates among the many
pieces of equipment that make up a plant. For example, if the Accu Pack Sizer
should stop functioning, then the machine which feeds the Accu Pack Sizer must
be shut down, otherwise the products would pile up on the machine. The controls
system sold by TTI Exeter communicates with and shuts down the feeder when the
Accu Pack Sizer shuts down, and start the feeder when the Accu Pack Sizer starts
up.
TTI Exeter believes that the TTIC and Exeter merger will afford it with a
opportunity to expand its computerized controls business. The Company believes
that prior to the merger Exeter Engineering excelled at developing controls
systems for individual machines while TTIC's expertise was in constructing
control systems for an entire plant. With the combination of the companies, TTI
Exeter believes that its computerized controls systems product line will be
improved.
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OPERATIONS
The Accu Pack sizer, Accu Vision Grader, and the Accu Vision Upgrader are
all manufactured at TTI Exeter's production facilities in Exeter, California.
The machines are custom made depending on the customer's needs and may vary in
size. After the machines are manufactured, they are shipped to the customer's
site and installed by TTI Exeter personnel. The parts that make up the machine
are carried in TTI Exeter's inventory or specially ordered. TTI Exeter has a
full service and technical maintenance group which provides both installation
and operational training as well as follow up services.
TTI Exeter operates as a contractor or subcontractor to the processors and
packers in the citrus and produce industries where it designs, produces and
installs the electrical, mechanical and electronic components of its systems in
facilities in United States, Canada, South America, Australia, and Europe. TTI
Exeter's automated controls systems are electro-mechanical systems consisting of
computer hardware and software linked to sensors and switches that control and
monitor the mechanical components of an industrial process or operation. They
are key to the efficient and cost effective operation of most industrial
processes including TTI Exeter's material-handling systems as well as the POWER
System. TTI Exeter projects are varied and have included optical sizing,
grading and sorting, plant design and layout, automated controls and data
acquisition, turn key project management, computerized material handling and
transport systems, and service and maintenance.
AGREEMENT WITH ACCU PACK SYSTEMS, INC.
In 1986, Exeter Engineering (now TTI Exeter) entered into a manufacturing
agreement with International Accu Pack Systems, Inc. ("Accu Pack Systems"), a
closely held Californian company. Accu Pack Systems developed and owned the
infrared technology of the Accu Pack Sizer. Under the terms of the agreement
TTI Exeter will produce, install, service and maintain Accu Pack Sizers in
accordance with the plans and specifications provided by Accu Pack Systems.
Under the terms of the agreement, Accu Pack Systems retains ownership of its
proprietary technology and TTI Exeter has the exclusive right to sell the Accu
Pack Sizer. Accu Pack Systems receives 10% of the net revenues from sales of
the Accu Pack Sizer. Over the past five year period, Accu Pack Systems received
approximately $60,000 per year. Accu Pack Systems co-developed the transport
system for the potato graders and as a result received 2% of the net sales from
revenues of the Accu Vision potato grader.
AGREEMENT WITH GEORGE MILLS FOR ACCU VISION
Upon effectiveness of the merger creating TTI Exeter, TTI Exeter assumed
the existing exclusive consulting and license agreement between Exeter
Engineering, Inc. and George Mills dated January 1, 1992 . As a consultant, Mr.
Mills is paid an annual sum of $60,000, payable monthly, with 5% annual
increases. TTI Exeter exclusively licenses the rights to the Accu Vision Grader
from Mr. Mills who receives a royalty fee on various applications of the Accu
Vision Grader. Mr. Mills receives 3% of net revenues from sales of the citrus
grader and citrus puff detection systems, 3% of net revenues from sales of the
Accu Vision Potato Grader, and 1.5% of net revenues from sales of the combined
potato grader/sizers.
SALES AND MARKETING
Within the produce industry there exists a finite market of potential
customers. TTI Exeter believes that the critical success factors for continual
growth are (1) to uncover and solve problems though TTI Exeter's innovative
capabilities; (2) to expand its product line through technological advancement;
(3) to expand the capability of its equipment to adapt to new produce and (4) to
expand into other geographical markets.
TTI Exeter has developed a proprietary electronic optical recognition
("EOR") program used in its sorting and grading and defect detection system.
Its unique and differentiating features have transferable qualities to other
industries. EOR provides the ability to link criteria and automate multi-tasks,
reduce costs, improve quality and performance, and complemented by automated
computer controls, to provide management with valuable data from which to
increase control. TTI Exeter plans to direct its marketing effort first within
its existing client base, and then plans to take advantage of its expertise in
the produce and energy industries and to seek new business from companies not
currently doing business with TTI Exeter.
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TTI Exeter markets its computerized process controls systems based on the
following benefits it believes its customers will enjoy: (1) more precise
control of industrial process that enables better responsiveness to changing
market factors; (2) lower expenses by automating many functions that would
otherwise require human intervention; (3) reduced human exposure to potentially
hazardous mechanical operations and assistance in compliance with OSHA and other
federal and state regulation; (4) scheduled maintenance reporting, a
preventative maintenance function that monitors and anticipates the useful life
of motors and various mechanical components thereby enabling parts to be
replaced before they fail or contribute to unnecessary wear on the system; (5)
significant improvements in throughput, that reduces operating costs, expands
production capacity and reduces capital expenditures; and (6) more precise
control of the industrial process, that contributes to the ability to adapt to
market fluctuations and meet changing inventory requirements.
CUSTOMERS AND PRICING
TTI Exeter sells its Accu Pack Sizers, Accu Vision Graders and Accu Vision
Upgraders for prices usually ranging between $200,000 and $400,000. TTI Exeter
will also offer support equipment with its sizers and graders. The support
equipment will generally range in prices from $50,000 to $800,000. Support
equipment includes such items as delivery conveyors, grading tables, roll
tables, tilt belts, augers, and holding bins. TTI Exeter also sells
computerized control systems which range from $25,000 to $150,000. The cost for
an entire project ranges from approximately $300,000 to over $2,000,000.
TTI Exeter has sold and installed over 100 systems domestically in Idaho,
Washington, California, Oregon, Colorado, North Carolina, Texas, Wisconsin, and
Pennsylvania. Internationally, TTI Exeter has worked with distributors to sell
its graders and sizers in England, Australia and South America. No single
customer of TTI Exeter accounted for over 10% of its 1997 revenues. Examples of
customers in the potato industry include Simplot-Fresh and Sunglo Potato located
in Idaho. Examples of customers in the citrus industry include Bee Sweet Citrus
and Kaweah Citrus located in California.
RESEARCH AND DEVELOPMENT
The mechanical group of TTI Exeter has collaborated with Herbert
Engineering, Ltd., a British engineering, fabrication and installation company,
for the development of the Upgrader mechanical system. The optical computerized
controls have been solely developed by TTI Exeter. The verbal agreement between
TTI Exeter and Herbert Engineering provides for mechanical frame manufacturing
by Herbert Engineering, Ltd., and a non-exclusive sales license for the Upgrader
in Europe. In regard to sales of the Upgrader made in Europe by Herbert
Engineering, it must purchase the electronic and optics package from TTI Exeter
at prices negotiated on a per sales basis. In regard to sales of the Upgrader
made worldwide by TTI Exeter, it is TTI Exeter's sole option whether to acquire
the mechanical system from Herbert Engineering or to manufacture it in-house.
TTI Exeter has no revenue obligation to Herbert Engineering for any mechanical
or electronic system it sells. The Company believes that the association with
Herbert Engineering, a respected and known European firm, provides the Company
with a European sales and service group.
WARRANTY
The Accu Vision Grader and Accu Pack Sizer equipment come with a one-year
warranty on materials and workmanship. This warranty covers any of the
electrical or mechanical portions of the machine and all other peripheral
equipment provided by the Accu Vision Grader product. TTI Exeter requires that
a skilled operator be provided and the machine be properly maintained including
replacement of parts and machine performance testing.
COMPETITION
The markets for automated inspection systems and specialized conveying
systems are highly competitive. Important competitive factors include price,
performance, reliability, and customer support and service. TTI Exeter believes
that it currently competes effectively with respect to these factors, although
there can be no assurance that existing or future competitors will not introduce
comparable or superior products at lower prices.
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Competition includes small local electricians who install automated control
systems to the largest companies in the produce industry such as Sunkist.
Examples of competitors include Lektro-Tek, builders of electronic weight
sizers, Jim Hagan, builders of graders and sorters, and Autoline, manufactures
of conveyor systems.
Certain of TTI Exeter's competitors may have substantially greater
financial, technical, marketing and other resources. For example, the largest
organizations in the produce industry, also produce material-handling, sorting
and grading technologies. TTI Exeter believes that in the near future
competition in this industry will be concentrated on development of image
processing ("EOR") technologies and it believes that it will be able to compete
in this market.
INTELLECTUAL PROPERTY
TTI Exeter has licensed the United States rights to "Photoelectric
Apparatus for Sorting Articles According to Size," the process used by the Accu
Pack Sizer equipment. The patent, number 4,911,307 with an expiration date of
March 27, 2007, is owned by International Accu Pack Systems of Exeter,
California and is filed in the United States.
TTI Exeter has four patent applications pending for apparatus and methods
for grading articles. TTI Exeter is also preparing to file a patent for
improvements in transport system for an automatic article-grading apparatus, a
new release chain pin arrangement and a new roller element for the roller
assembly portion of a transport system used in an automatic grading and sorting
apparatus for fruits and vegetables. Patents have been filed in the United
States, Canada, Australia, and New Zealand and Europe under the PCT umbrella.
These patents have not been issued and there is no assurance they ever will be
issued.
INDUSTRY BACKGROUND
Historically, defect removal and quality control in the food processing
industry have been labor intensive and dependent upon, and limited by, the
variability of the work force. Food processors must process large quantities of
raw product through different stages, including sorting to remove defective
pieces and inspection for quality. The frequency and severity of defects in the
raw product is highly variable depending upon local factors affecting crops. The
industry has sought to replace manual methods with automated systems that
achieve higher yield, better quality and reduced cost.
Quality analysis usually involves the manual removal of a sample of product
from the processing line at periodic intervals. Such samples are then analyzed
for color, length, width, area, perimeter, shape and defects. Imprecise sampling
techniques and the potential for human error in performing the laboratory
analysis are sources of error in generating statistical quality control data.
The delay between taking the sample and completing the laboratory analysis may
also result in large amounts of product being produced that do not meet quality
specifications. The companies in this industry compete on the level of
automation and precision with which their equipment can process food.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion under this Management's Discussion and Analysis of Financial
Condition and Results of Operations, as well as throughout this Prospectus,
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the Risk Factors and elsewhere in this Prospectus.
OVERVIEW
From 1992 to 1996, the Company's construction revenues have been derived
primarily from its participation in the Camp Lejeune, North Carolina and
Richland, Washington projects. The Company was subcontracted by Research
Triangle Institute ("RTI"). a non-profit corporation specializing in scientific
research and consulting in many disciplines including environmental sciences and
engineering, to provide a modified POWER System to be installed
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at the Department of Defense ("DOD") Marine Base at Camp Lejeune. The Company
worked with the Environmental Protection Agency and received funding from DOD
contracted through RTI. The Company installed a Power System unit in Richland,
Washington for permitting and demonstration purposes. See "BUSINESS". In this
project, the customer's engineers and other technical personnel worked closely
with the Company to refine and develop the POWER System. Although the Company
received no revenues from these installations, the Company believes that such
projects helped to establish the acceptance of the Company's technology and to
secure permanent air quality permits. As the Company's technological application
systems become established demand will increase and higher prices can be charged
and such systems can generally be produced at lower cost. The Company
anticipates that its technology will be further refined and become more
established through future commercial installations, if such occur. The Company
has no outstanding orders at this time for its POWER System.
The Company uses the percentage-of-completion method of accounting to
recognize contract revenues. Under percentage-of-completion, losses on contracts
are recognized in earnings as soon as such losses are determined to be probable
and reasonably estimated.
In 1995, 1996 and 1997, fabrication revenues of Exeter Engineering (now TTI
Exeter) have been generated from contracts to design, manufacture and install
material processing systems and computerized control systems for commercial
customers in the diverse fields of fresh produce, municipal water telemetry
systems, and processed produce. The produce industry, vegetable and citrus,
combine the mechanical systems' expertise with that of computerized controls.
Additionally, TTI Exeter is able to provide inter-company engineering,
manufacturing, computer controls systems and technical support.
The Company anticipates that the merger of Exeter with TTIC will afford
cost savings to the Company through consolidation of activities, manufacturing
efficiencies, margin recovery through in-house manufacturing, personnel
reduction or reassignment, and market share consolidation. Additionally,
technology application and adaptation across group and product lines provide for
combining market share with justified price increases from the technological
advancement of all products. The Company anticipates that these increased
efficiencies in market share and technology advancement will be reflected in
1998 and 1999 results, although there are no assurances that this will actually
occur.
The Company's core gasification technology has been successfully
demonstrated in the Richland, Washington project for low level radioactive
biomass waste and at Camp Lejeune for industrial wood waste to energy. The
Company will seek to expand its core technology into additional segments of the
industrial biomass waste market including chicken litter, waxed cardboard, rice
hulls, and general industrial biomass waste. Because the Company's technology
has been demonstrated for commercial application, the Company does not expect
that costs associated with further research and development of its core
technology will be material to the Company's results of operations.
The most significant task of TTI Exeter is to expand its market share, in
part accomplished by the merger of Exeter combined with an active marketing and
sales strategy. The continued refinement and advancement of TTI Exeter's
mechanical and computerized systems, although not to be classified as further
research and development, will not be material to the Company's results of
operations.
In expanding TTI Exeter's market share and overall revenues, both the
mechanical systems and computerized controls groups have introduced either new
or expanded products to TTI Exeter's commercial customers. The controls group
has expanded its integrated systems technology to include providing whole plant
automated computerized controls and data acquisition systems. The mechanical
group, in engineering collaboration with a British engineering and manufacturing
concern, Herbert Engineering, Ltd., has introduced a new mechanical grading
system driven by an electronic optical recognition system. Each of these
products have been commercially accepted, will carry a substantially increased
gross margin due to innovative technology application, and will significantly
expand the already anticipated market share. In its research and development
collaboration, the Company has retained all proprietary interests, including new
technology developments and patents rights.
As of June 30, 1998, the Company was continuing the testing of its project
at Camp Lejeune and TTI Exeter had a number of projects under contract in the
produce processing and computerized controls market, including projects ranging
in size from $350,000 to $1.2 million. These projects include a potato fresh
pack plant in Idaho
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scheduled for completion in the fourth quarter of 1998 for $1.2 million and a
potato fresh packing plant in Pennsylvania scheduled for completion in the first
half of 1999 for $1.2 million. Accordingly, the Company is likely to be
substantially dependent on major projects. The reliance on major orders could
lead to fluctuations in, and reduce the predictability of, quarterly results.
However, utilization of percentage-of-completion should minimize the historical
fluctuation in predictions and actual results. The backlog which includes signed
contracts pending commencement as well as the uncompleted portions of ongoing
contracts as of June 30, 1998, was approximately $2.0 million.
The Company denominates international sales in United States dollars. The
Company intends to focus its efforts to increase sales, primarily in England,
Australia, Canada and South America. Nonetheless, the Company expects the
substantial percentage of its sales in the next three years to be domestic. In
this same period, the Company intends international sales to be via an alliance
with a foreign distributor or an alliance with a foreign company such as Herbert
Engineering, Ltd.
RESULTS OF OPERATIONS
Fiscal years Ended December 31, 1996 and 1997
In 1996, company-wide revenues grew to $2.4 million from $48,840 in 1995
with 17 customers accounting for 65% of revenues. This increase in revenues
resulted from the Company's Department of Defense project commencement and the
acquisition of the Company's subsidiary TTIC, now TTI Exeter. In 1997, Company
revenues, including its subsidiary, grew to $5.5 million with 28 customers
accounting for 85% of revenues. Considering the 1998 acquisition and merger of
Exeter Engineering, 1997 revenues on a pro forma basis would have been $9.2
million, with over 40 customers accounting for 80% of revenues. The increase in
revenues from 1996 to 1997 represented expanded sales of the Company's
subsidiary in the material processing and computerized controls industries. The
decrease in the Company's revenues resulted from the Company's management
decision not to market the Company's POWER System until such time as the
Company's Department of Defense project is completed. As of the date hereof
testing of the POWER System at Camp Lejeune is continuing.
Cost of goods sold increased to $3,763,316 in 1996 from $43,317 in 1995.
The increase is attributable to (1) increases in the engineering and development
costs associated with manufacturing and installing the Department of Defense
facility and associated cost sharing and (2) increases in the number and size of
the subsidiary's mechanical and computerized controls projects and (3) write
down of construction in progress on plant held for sale by $524,000. Costs of
goods sold increased to $5,295,229 in 1997. The increase resulted from the
expanded sales of the Company's subsidiaries in the material processing and
computerized control industries offset by the lack of sales of the Company's
POWER System as described above.
Selling, general and administrative expenses in 1996 increased to
$1,738,419 from $981,394 in 1995. The increase resulted from the addition of
TTIC as well as increased employment and travel at the Company. Selling,
general and administrative expenses grew to $2,390,122 for the year ended
December 31, 1997. The increase resulted from training costs associated with
familiarizing new employees with the Company's and the subsidiary's technology.
These individuals were not fully engaged in revenue producing projects during
1997.
Interest expense was $502,658, $168,644 and $0 for the years ended December
31, 1997, 1996, and 1995. The increases were a result of increased debt levels
required to finance the Company.
Six Months Ended June 30, 1997 and 1998
Revenues remained stable at $2.1 million in the six months ended June 30,
1998, as in the six month period ended June 30, 1997; including February through
June, 1998, for Exeter Engineering. However, summarized in pro forma, to
include Exeter and eliminate inter-company transactions, 1997 sales would have
been $3.1 million and 1998 sales would have been $2.3 million.
Revenues in the six months ended June 30,1997, as well as for six months
ended June 31, 1998, resulted primarily from contracts with TTI Exeter customers
in the material-handling and computerized controls industry. For
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the six months ended June 30, 1998, company-wide revenues were depressed as the
direct result of the negotiation phase of the Exeter Engineering merger.
Specifically, continuing and potential customers of Exeter Engineering and TTIC
delayed contracting decisions until finalization of the merger.
With the merger completed as of June, 1998 (effective January 29, 1998, for
accounting purposes), the Company expects revenues to accelerate in the second
half of 1998, with anticipated acceleration in revenues throughout 1999,
although there can be no assurance such increase will actually occur.
Additionally, for the second half of 1998, and for 1999, the Company will have
implemented its commercial marketing and sales strategy for its core
gasification technology, leaving behind the primary research and development
phase and expenses.
Costs of goods sold for the six months ended June 30, 1998 increased to
$2.1 million from $1.7 million for the same period of 1997. The increase
resulted from the inclusion of the results of Exeter Engineering after January
29, 1998.
Selling, general and administrative expenses for the six months ended June
30, 1998 increased to $2.5 million from $963,663 for the same period in 1997.
The increase resulted from (1) the merger of Exeter Engineering and TTIC; (2)
duplication of operations and personnel which will not be corrected until the
second half of 1998; and (3) amortization of Exeter Engineering's goodwill of
$54,200 per month.
Interest expense for the six months ended June 30, 1998 increased to
$371,420 from $164,506 for the same period in 1997 as a result of the Company
drawing $4,000,000 on its line of credit secured in 1998.
The Company's quarterly revenues and operating results have varied
significantly in the past. Factors which are expected to reduce fluctuations
include contract commercialization of the Company's core gasification
technology, operational maturity of the Company's 1997 new employees,
consolidation of operations and personnel primarily resulting from the TTI
Exeter merger, manufacturing efficiencies, and increases in the Company's
customer base, however, there can be no assurances that revenues and operating
results will vary less significantly in the future.
Nonetheless, the purchase of the Company's products, particularly for major
projects, may involve a significant commitment of capital, with the attendant
delays frequently associated with authorization of large capital expenditures
within its customers' organization. For these and other reasons, the sales
cycles for the Company's products are typically lengthy and subject to a number
of significant risks over which the Company has little or no control, including
customer budgetary constraints. The Company historically has operated with
little backlog because (1) the Company's gasification technology is just
recently entered the commercial market, and (2) most customer orders are placed
with relatively short lead times, usually from two to eight months. Variations
in the timing of recognition of specific revenues may adversely and
disproportionately affect the Company's operating results for a quarter because
the Company establishes its expenditure levels on the basis of expected future
revenues. Nonetheless, a significant portion of the Company's expenses do not
vary with current revenues. Accordingly, the Company believes that year-to-
year, period-to-period comparisons of results of operations are not necessarily
meaningful and should not be relied upon as indicative of future performance.
COMPUTER SYSTEMS REDESIGNED FOR YEAR 2000
Many existing computer programs use only two digits to identify a year in
such program's date field. These programs were designed and developed without
consideration of the impact of the change in the century for which four digits
will be required to accurately report the date. If not corrected, many computer
applications could fail or create erroneous results by or following the year
2000. Many of the computer programs containing such date language problems have
been corrected by the companies or governments operating such programs.
Although none of the Company's systems, manufacturing equipment, and products
are affected by this problem, the Company could be impacted by the failure of
other companies to timely correct their computer systems. The Company's
operations are dependent on the Internet, the telephone system, and delivery
systems. If any of these systems or systems of other companies by which the
Company is affected become inoperational the Company will be directly and
significantly affected.
LIQUIDITY AND CAPITAL RESOURCES
40
<PAGE>
For 1992 through 1995, the Company relied primarily on equity investment
from the founders of the Company totaling an aggregate of $2.3 million. In
1996, the Company raised $1.9 million utilizing convertible notes with attached
warrants. In December, 1997, the $1.6 million in convertible notes, including
accrued interest, was converted to common stock by the holders of such notes.
The cash raised in this financing was used to restructure debt, hire key
individuals in operations and expand facilities for operations expansion.
During 1996, 1997 and 1998, the Company increased its commercial debt borrowings
from approximately $450,000 to $4.0 million to fund research and development,
operations expansion, and acquisitions. This debt has been secured by personal
guarantees of three principals of the Company. The Company has no amount
available under its credit facilities at June 30, 1998.
The $4,000,000 note payable to U.S. Bank includes various covenants and
events of defaults, including, among other items, any guarantor dies, any
material adverse change in the Company's financial condition occurs or U.S. Bank
believes the prospect of payment or performance of the indebtedness is impaired;
or U.S. Bank in good faith deems itself insecure. Upon default, U.S. Bank may
declare the entire unpaid principal balance on the promissory note and all
accrued unpaid interest immediately due and payable without notice.
In connection with the merger with Exeter Engineering, the Company has
agreed to assure a minimum sales price of $5.00 per share for the 800,000 shares
issued to the shareholders of Exeter Engineering. The Company could be
obligated to pay up to $4,000,000 over the next two years to satisfy the $5.00
per share guarantee. The Company has agreed to provide TTI Exeter, Inc. with
capital and operating budgets which include providing to TTI Exeter, Inc. by
January 28, 1999 a $500,000 line of credit for operations, $100,000 in research
and development monies, $500,000 for improvement of equipment and facilities,
approximately $150,000 in marketing funding, and $150,000 for application
against TTIC's accounts payable. The Company has pledged 100% of its stock
ownership in TTI Exeter, Inc. as a security interest to the selling shareholders
of Exeter in case the Company does not honor all of its obligations contained in
the merger agreement. The Company will be in default on its obligations if it
(1) fails to perform on its obligation to assure a minimum $5.00 per share sales
price for the shares, (2) fails to make funding available to TTI Exeter, Inc.
by January 28, 1999, (3) had made any warranty in the pledge agreement that
proves to be false in any material respect when made or furnished, or (4)
transfers all or substantially all of TTI Exeter, Inc.'s assets in a single or
series of transactions without the consent of the former shareholders of Exeter.
If the Company defaults on any of its obligations under the pledge agreement,
the former shareholders of Exeter may pursue all remedies available to them at
law, including foreclosure action.
The capital raised from earlier sales of its securities, operating
revenues, and the $4,000,000 loan will not be sufficient to meet the Company's
operating expenses and capital requirements for the next twelve months. The
Company's capital requirements depend upon numerous factors, including its
ability to have its securities listed and trading at a certain price, rate of
market acceptance of the Company's products, the Company's ability to maintain
and expand its customer base, the level of resources required to expand the
Company's marketing and sales organization, and research and development
activities, and other factors. The Company believes that in order to meet
operating expense and capital requirements for the next twelve months that it
will have to secure additional financing. There is no assurance that the Company
will be able to obtain such financing on terms acceptable to it.
The Company is negotiating for a $10,000,000 credit facility comprised of a
$6,500,000 term loan combined with a $3,500,000 asset-based line of credit.
There is no guaranty that the Company will be able to obtain this funding. There
is no assurance that the Company will receive all or any of this loan. Under
current negotiations, Timothy J. McReynolds, President and a director of the
Company, Michael G. Fahey, a director of the Company and Ronald J. Burns, a
director of the Company will guarantee the $6,500,000 term loan portion of the
credit facility. The $3,500,000 line of credit will be dependent on the Company
having enough assets and generating enough operating activity to support the
line of credit. If the Company is successful in securing this credit facility,
it plans to use a portion of the $6,500,000 to retire its current $4,000,000
line of credit with U.S. Bank. There is no assurances that the Company will
secure this or any other credit facility or loan.
During 1995, 1996, 1997 and the first six months of 1998, the Company used
$495,000, $1.2 million, $2.5 million, and $2.4 million, respectively, in
operating activities resulting primarily from net losses incurred. The Company
also used cash in investing activities of $101,000, $96,000, $987,000, and
$544,000 during 1995, 1996, 1997 and the first six months of 1998 respectively,
for capital equipment, patent expenditures, and acquisitions. The Company had
cash flows provided by financing activities of $578,000, $1.3 million, $3.6
million, $3.1 million
41
<PAGE>
during 1995, 1996, 1997, and the first six months of 1998, respectively,
resulting primarily from notes payable and long term debt to banks and related
parties. The Company has sustained recurring losses and has a working capital
and stockholders' deficit of $4.7 million and $1.5 million, respectively, at
June 30, 1998. The Company anticipates that it will continue to incur losses
through 1998 and will require increased levels of working capital to finance
future growth inclusive of larger projects. There is no assurance the Company
will be able to obtain any additional financing.
MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
Name Title
---- -----
Timothy J. McReynolds Chairman of the Board, President and
Chief Executive Officer;
Director of TTI Exeter
John J. Fitzgerald Director, Executive Vice President and
Director of Operations;
Chief Executive Officer and
Chairman of the Board of TTI Exeter
Robert S. Johnson Chief Financial Officer
Joseph J. Rahal Vice President, Marketing and Sales
Dr. Robert G. Aldrich Director
Ronald J. Burns Director
Michael G. Fahey Director
James M. McClymond Director
Bernard W. Reznicek Director
Dr. Donad A. Gall Director;
Director of TTI Exeter
Jeffrey Batchman Director
Director and President of TTI Exeter
Directors of the Company hold office until the next annual meeting of
shareholders or until their successors are elected and qualified. The By-laws
of the Company permit the Board of Directors to fill any vacancy and such
director may serve until the next annual meeting of shareholders or until a
successor is elected and qualified.
The principal occupation and business experience for each officer and
director of the Company for at least the last five years are as follows:
TIMOTHY J. MCREYNOLDS, 54, serves as Chairman of the Board, President and
Chief Executive Officer of the Company. Mr. McReynolds is co-founder of the
Company and has served as a director and the Company's President since its
inception in May 1992, except for the period of January 1, 1998 through April
30, 1998. Mr. McReynolds has served continuously as Chief Executive Officer of
the Company since February 1995. Mr.
42
<PAGE>
McReynolds is Managing Partner of Ridges Corporation (from 1991 to the present)
and Spring Ridge Corporate (from 1994 to the present), both of which companies
are involved in the development of commercial and residential property in Omaha,
Nebraska. Mr. McReynolds has served as director for Omega Computer Systems (from
1988 to the present) and Omega Legal Systems, Inc. (From 1995 to the present).
From 1990 to 1996, he served as President and Managing Attorney of McReynolds &
Associates, P.C., an Omaha-based law firm. From 1991 to the present, Mr.
McReynolds has served as the president of Ridges Corporation, the corporate
general partner of Ridges Limited Partnership and from 1994 to the present, he
has served as the president of Spring Ridge Corporation, the corporate general
partner of Spring Ridge Limited Partnership. In 1971, he received a J.D. degree
from Creighton University.
JOHN J. FITZGERALD, 45, serves as a director, Executive Vice President and
Director of Operations of the Company and Chief Executive Officer and Chairman
of the Board of TTI Exeter. Mr. Fitzgerald has been a director of the Company
since 1997 and Vice President of Operations since 1996. Prior to this
appointment, Mr. Fitzgerald served as Chairman and Chief Executive Officer of
the Company's subsidiary, TTIC (1996) and Operations Manager of TTIC (1995).
From 1992 to 1995, Mr. Fitzgerald was a project manager for the Company
responsible for the development of the POWER System. Mr. Fitzgerald is the co-
inventor for the three most recent patents issued to the Company. In 1975 Mr.
Fitzgerald received his Bachelor of Science degree from St John's University and
in 1978 received a J.D. degree from Creighton University.
ROBERT S. JOHNSON, 42, serves as Chief Financial Officer of the Company.
From 1987 to 1998, Mr. Johnson held several positions at Coleman Powermate
Incorporated including Vice President of Operational Finance (from 1997 to
1998), Vice President for inventory and distribution (from 1995 to 1997), and
Controller (from 1994 to 1995). From 1984 to 1986 Mr. Johnson worked as an
accountant in the private sector. Mr. Johnson received his Bachelor of Arts
degree from Hastings College in 1984 with a Business Administration/Accounting
and Computer Science Major. Mr. Johnson is a Certified Public Accountant and
holds a Certified Master Accountant certificate.
JOSEPH J. RAHAL, 52, serves as Vice President of Marketing and Investor
Relations of the Company. Prior to joining the Company in January 1998, Mr.
Rahal worked with NYNEX, the former regional Bell operating Company in the
Northeast and Bell Atlantic in the Boston area for fourteen years in marketing,
sales and labor relations. From 1973-1983, Mr. Rahal served as Publisher and
Director of Advertising for a privately-held Company with holdings in the
newspaper, printing, direct mail and radio industries in Central Massachusetts.
DR. ROBERT G. ALDRICH, 58, serves as a director of the Company. From
January 1, 1998 through April 30, 1998, Dr. Aldrich served as interim president
of the Company. Dr. Aldrich is the Chief Executive Officer and president of
Tailored Energy, an energy service corporation created to provide customized on-
site energy systems for industrial customers. From 1993 to 1995, Dr Aldrich
served as Vice President and Group Vice President of Electrical Power Research
Institute. From 1989 to 1992, he was President of Texel Corporation, a
subsidiary of Alcan Aluminum founded to commercialize Alcan's synthetic ceramics
technology. Dr. Aldrich received a Ph.D. in Solid State Science and Technology
from Syracuse University and received a Bachelor of Metallurgical Engineering
from Rensselaer Polytechnical Institute. Dr. Aldrich is responsible for
numerous patents and publications.
RONALD J. BURNS, 45, serves as a director of the Company. Mr. Burns is
Chairman of Burns Investments, an Omaha-based venture capital company which
focuses on growth opportunities in the energy and waste management industries.
Mr. Burns is a former President of Union Pacific Railroad, the world's largest
railroad with annual revenue of $10 billion, 53,000 employees and operations in
24 states. From 1993 to 1995, Mr. Burns served as President and Chief Executive
Officer of Enron Capital and Trade Resources, Enron Corporation's $6 billion
marketing, trading, and finance subsidiary. Mr. Burns received a Bachelor of
Arts degree in Business Administration from the University of Omaha in 1974.
MICHAEL G. FAHEY, 54, serves as a director of the Company. Mr. Fahey is
currently the chairman of ATI Holding Company, a Minnesota corporation and
subsidiary of Norwest Corporation, a national banking company headquartered in
Minneapolis. ATI Holding Company is involved in providing title insurance to
the real estate industry and is the successor to a firm that Mr. Fahey
established and sold to Norwest. Besides holding numerous other positions, Mr.
Fahey is responsible for the development and expansion of a national title
insurance agency network.
43
<PAGE>
DR. DONAD A. GALL, 63, serves as a director of the Company and of TTI
Exeter. Dr. Gall is the Chief Executive Officer of Omega Computer Systems, Inc.
and Omega Legal Systems, Inc., corporations specializing in the development of
business management information systems for medical, industrial, accounting and
law firm clients. Dr. Gall has held academic and industrial positions with
Carnegie-Mellon University, Pittsburgh School of Medicine, IBM Research
Laboratory, and Arizona Heart Institute. He received his Ph.D. from
Massachusetts Institute of Technology, is a member of the American Association
for the Advancement of Science and the American Association for the Advancement
of Science and the American Society of Mechanical Engineers. Dr. Gall is the
author of over 50 journal articles and professional presentations.
JAMES M. MCCLYMOND, 64, serves as a director of the Company. Mr. McClymond
is the former President of Peoples Natural Gas, a subsidiary of Utilcorp, a
regional public utility holding company headquartered in Kansas City, Missouri.
Peoples Natural Gas distributes natural gas to over 500,000 residential,
commercial and industrial customers in five states. Mr. McClymond served as
Vice President of Administration for Enron Corporation prior to his employment
with Peoples Natural Gas.
BERNARD W. REZNICEK, 61, serves as a director of the Company. From 1989
to 1994, Mr. Rezniek served as the Chairman, President and Chief Executive
Officer of Boston Edison, and from 1994 to 1996, he served as the Dean of the
School of Business at Creighton University. Mr. Reznicek is currently a
Managing Director of Utility Marketing Insurance at Central States Insurance
Company of Omaha, a subsidiary of Berkshire Hathaway, an investment company
controlled by Omaha investor Warren Buffet. Mr. Reznicek spent nearly 30 years
with the Omaha Public Power District and was President and Chief Executive
Officer for eight years.
JEFFREY A. BATCHMAN, 51, serves as a director of the Company. In 1978, Mr.
Batchman founded Exeter Engineering, Inc., specializing in the manufacture of
equipment for the processing of fresh citrus and decidious fruits. From 1978 to
its merger with TTIC, Mr. Batchman served as the president of Exeter
Engineering, Inc. Since the merger of Exeter Engineering, Inc. with TTIC,
resulting in the creation of TTI Exeter, Mr. Batchman has served as a director
and president of TTI Exeter. Mr. Batchman also serves as a director of AFM
Engineering, Inc., Santa Ana, California, a company specializing in ultrasonic
welding and pad printing equipment for the plastics industry founded by Mr.
Batchman and a partner in 1981. In 1965, Mr. Batchman received his Bachelor of
Science Degree in marketing from Chico State College, Chico, California.
REMUNERATION
The following table sets forth in summary form information concerning the
compensation awarded to, earned by or paid for services rendered to the Company
in all capacities for the year ending December 31, 1997. The table includes the
Company's Chief Executive Officer and all other officers whose salary exceeded
$100,000 for the most recent fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------------------------
OTHER LONG-TERM ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS COMPENSATION COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
Timothy J. McReynolds 1997 $150,000 $16,249
Chief Executive Officer
John Fitzgerald 1997 $110,000 $11,459
Executive Vice President
Chief Executive Officer of
TTI Exeter
</TABLE>
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Jeffrey Batchman on
June 4, 1998 expiring May 31, 2000, to serve as President of TTI Exeter at a
base salary of $120,000 for calendar year 1998 and $132,000 for
44
<PAGE>
calendar year 1999. The Company has also entered into an employment agreement
with Michael Wilkinson expiring May 31, 2000 to serve as Vice President of TTI
Exeter at a base salary of $95,000 for calendar year 1998 and $110,000 for
calendar year 1999. The Company entered into an employment agreements with
Robert S. Johnson to serve as Chief Financial Officer at a base salary of
$90,000, and with Joseph J. Rahal to serve as Vice President of Marketing and
Investor Relations at a base salary of $75,000 per year. The Company anticipates
that as it employees additional personnel it will enter into additional
employment agreements.
TTI Exeter assumed the existing consulting and license agreement between
Exeter Engineering, Inc. and George Mills dated January 1, 1992 which provides
for a royalty schedule to be paid to George Mills based on sales revenues
generated by sales of the Accu Vision Grader. See "BUSINESS". TTI Exeter
assumed the existing employment agreement of Barbara Howard with Exeter
Engineering, Inc. dated September 11, 1992 which sets a base salary of $50,000
per year with no less than a 5% increase per year.
EMPLOYEE BENEFIT PLANS
The Company provides a retirement 401(k) plans to employees who work more
than 1,000 hours per year and are over 21 years old. The Company provides
health insurance for which the Company pays 100% of the cost of the premiums for
managerial employees and their families and 90% of the cost of the premiums for
all other employees.
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
The Certificate of Incorporation and Bylaws of the Company provide that the
Company shall, to the fullest extent permitted by applicable law, as amended
from time to time, indemnify all directors of the Company, as well as any
officers or employees of the Company to whom the Company has agreed to grant
indemnification.
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
corporation to indemnify its directors and officers and to purchase insurance
with respect to liability arising out of their capacity or status as directors
and officers provided that this provision shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) arising under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of shareholders or otherwise.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that 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.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933, AS AMENDED, MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING
THE COMPANY PURSUANT TO THE FOREGOING PROVISIONS, IT IS THE OPINION OF THE
SECURITIES AND EXCHANGE COMMISSION THAT SUCH INDEMNIFICATION IS AGAINST PUBLIC
POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases property in Exeter, California from Jeffrey and Shirley
Batchman. Jeffrey Batchman is a director of the Company and President of TTI
Exeter. The Company rents property in Prosser, Washington from a limited
liability corporation of which Michael J. Fahey, a director of the Company, is a
shareholder. The Company believes that both the Exeter, California and Prosser,
Washington leases are commercially fair and reasonable.
45
<PAGE>
On March 19, 1997, Michael Fahey, a director of the Company, purchased
182,672 shares of Common Stock by execution of a non-interest bearing promissory
note due March 19, 2001 with principal to be paid in quarterly payments of
$18,484, which payments are current. Mr. Fahey subsequently consented to the
use by the Company of this note as collateral by the Company for Company
borrowings, including those with U.S. Bank.
On March 19, 1997, Ronald J. Burns, a director of the Company, purchased
182,672 shares of Common Stock by execution of a non-interest bearing promissory
note due March 19, 2001 with principal to be paid in quarterly payments of
$18,484, which payments are current. Mr. Burns subsequently consented to the
use by the Company of this note as collateral by the Company for Company
borrowings, including those with U.S. Bank.
On December 16, 1997, the Company borrowed $2,000,000 from U. S. Bank.
Timothy J. McReynolds, Michael Fahey, and Ronald J. Burns, directors of the
Company, guaranteed up to $1,000,000 of this debt. The loan was paid in full
from the proceeds of the $4,000,000 line of credit. The guarantees were
released and warrants were issued by the Board of Directors as compensation for
such guarantees.
On May 4, 1998, the Company established a $4,000,000 line of credit with
U.S. Bank. Timothy J. McReynolds, President and a director of the Company, and
Michael Fahey and Ronald J. Burns, directors of the Company, act as guarantors
for this line of credit. The Company has borrowed the $4,000,000 available on
its line of credit.
In May, 1996, the Company borrowed $500,000 from Spring Ridge Limited
Partnership, a Nebraska limited partnership, by execution of a promissory note
with 12% interest per annum, with principal and all accrued interest due on or
before January 2, 1999. The Company anticipates that it will repay this note
with funds from the proceeds of a new credit facility. Timothy McReynolds is
the president of Spring Ridge Corporation, the corporate general partner of
Spring Ridge Limited Partnership.
In August, 1996, the Company borrowed $603,125 from First Westroads Bank by
execution of a promissory note guaranteed by Jeanette M. McReynolds and Timothy
J. McReynolds, the President and a director of the Company, at 9.5% interest per
annum, with principal and all accrued interest due on or before October 30,
1998. The Company anticipates that it will repay this note with funds from the
proceeds of a new credit facility.
On March 1, 1998, the Company borrowed $500,000 from Ridges Limited
Partnership, a Nebraska limited partnership, by execution of a promissory note
with 12% interest per annum, with principal and all accrued interest due on or
before January 2, 1999. The Company anticipates that it will repay this note
with funds from the proceeds of a new credit facility. Timothy McReynolds is
the president of Ridges Corporation, the corporate general partner of Ridges
Limited Partnership.
In 1998, the Company has borrowed from Timothy McReynolds an aggregate of
$192,923 for working capital. The debt is evidenced by a demand note bearing an
annual interest rate of 12%.
RECENT TRANSACTIONS
In October, 1997, the Company raised $312,500 in a private bridge financing
of 12.5 units, each unit consisting of a $25,000 10% bearing promissory note,
4,000 shares of Common Stock and warrants to purchase 4,000 shares of Common
Stock. The promissory notes plus interest are due and payable October 31, 1998.
In December, 1997, the Company entered into an agreement and plan of merger
with Lanham Acquisitions, Inc. where all of the shares of the Company's stock
were converted into 4,375,000 shares of Lanham Common Stock and the Company was
renamed TTI Technologies, Inc. In June, 1998, (effective January 29, 1998 for
accounting purposes) the Company completed a plan and agreement of merger with
Exeter Engineering, Inc where all of the outstanding shares of Exeter
Engineering were converted into 800,000 shares of the Company's Common Stock and
$500,000 in cash.
46
<PAGE>
In December 1996, the Company raised $1,900,000 through the sale of 19
units, each unit consisting of a 30-month 12% $100,000 convertible promissory
note and warrants for the purchase of 25,000 shares of the Company's Common
Stock at a price of $4.00 per share. Pursuant to subsequent adjustments
resulting from the merger of the Company into Lanham Acquisitions, Inc., such
warrants were adjusted to provide for the purchase of 43,750 shares (an
aggregate of 831,251) at $2.29 per share. In December, 1997, $1,650,000 of the
outstanding notes, including accrued interest, were converted by the holders
thereto into an aggregate of 784,204 shares of Common Stock, at a conversion
ratio of $2.29 per share. Holders of warrants to purchase approximately 590,546
shares have agreed to exercise such warrants upon the Effective Date hereof or
immediately thereafter.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 30, 1998,
regarding the beneficial ownership of the Company's Common Stock, including
rights to any Common Stock exercisable within six months of the date hereof, by
each officer and director of the Company and by each person who owns in excess
of five percent of the Company's Common Stock.
<TABLE>
<CAPTION>
Percentage of Percentage of
Shares of Common Stock Class Before Class After
Name, Position and Address Beneficially Owned Offering(1) Offering(2)
- -------------------------- ---------------------- ------------- -------------
<S> <C> <C> <C>
Timothy J. McReynolds 1,890,614 (3) 27.4% 22.3%
Chairman, President
18401 Shadow Ridge Drive
Omaha, Nebraska 68130
John J. Fitzgerald 204,901 (4) 3.1% 1.8%
Director, Executive Vice President and
Director of Operations;
2223 South 186th Street
Omaha, Nebraska 68130
Robert S. Johnson 15,000 * 0%
Chief Financial Officer
Dr. Robert G. Aldrich 10,000 * 0%
Director
22335 Rancho Deep Cliff Drive
Cupertino, CA 95014
Ronald J. Burns 848,830 (5) 12.0% 8.4%
Director
12817 Decatur
Omaha, NE 68154
Michael G. Fahey 830,726 (6) 11.8% 7.5%
Director
4107 South 147th Plaza
Omaha, NE 68137
Dr. Donald A. Gall 59,407 (7) * *
Director
9833 East Cortez
Scottsdale, AZ 85260
</TABLE>
47
<PAGE>
<TABLE>
<S> <C> <C> <C>
James M. McClymond 189,856 (8) 2.9% 2.4%
Director
14093 Arbolitos Drive
Poway, CA 92064
Bernard W. Reznicek 56,156 (9) * *
Director
14341 Hamilton Street
Omaha, Nebraska 68154
Jeffrey Batchman 720,000 (10) 11% 5.1%
Director
4240 Cambridge
Visalia, California 93277
Ronald Roots Revocable Trust 866,686 13.2% 12.3%
Douglas D. Kluever, Trust
1314 So. 180th Street
Omaha, NE 68130
Douglas D. Kleuver, Trustee 445,872 6.8% 6.3%
Vt. Trust No. 1
4638 South 132/nd/ Street
Omaha, Nebraska 68137
Mech-Chem Associates 329,413 5.0% 4.6%
148 Main Street
Norfolk, Massachusetts 02056
All Officer and Directors
As a group (10 Persons) 4,825,490 60% 45.5%
</TABLE>
(1) Based on 6,545,008 shares of Common Stock outstanding.
(2) Based on 7,045,008 shares of Common Stock outstanding after the Offering,
assuming exercise of all the Warrants offered herein.
(3) Includes (i) 1,537,489 shares of Common Stock of which 837,109 are directly
owned by Mr. McReynolds and the remainder of which Mr. McReynolds is the
beneficial owner namely330,187 shares owned by the named securityholder's
spouse, 370,193 shares held in the VT Trust No. 2 of which Mr. McReynolds
is the sole trustee and (ii) 87,500 Series A Warrants, 65,625 Series B
Warrants and 200,000 Series C Warrants of which 176,562 are being
registered herein. The named securityholder is registering 100,000 shares
of Common Stock herein.
(4) Includes (i) 43,750 shares of Common Stock owned by the named
securityholder's spouse and (ii) 43,750 Series B Warrants of which 21,875
are being registered herein. The named securityholder is registering
50,000 shares of Common Stock herein.
(5) Includes 262,500 Series B Warrants and 200,000 Series C Warrants of which
231,250 are being registered herein.
(6) Includes (i) 240,535 shares of Common Stock owned directly by Mr. Fahey,
47,863 shares of Common Stock and 43,750 Series B Warrants owned by the
named securityholder's spouse of which 23,932 shares are being registered
herein and (ii) 131,250 Series B Warrants of which 65,625 are being
registered herein, 200,000 Series C Warrants of which 100,000 are being
registered herein, and 167,328 Fahey Warrants of which 83,664 are being
registered herein.
(7) Includes 21,875, Series B Warrants of which 10,938 are being registered
herein.
(8) Includes 43,750 Series A Warrants of which 21,875 are being registered
herein.
(9) Includes 21,875 Series B Warrants of which 10,938 are being registered
herein.
48
<PAGE>
(10) The named securityholder is registering 360,000 shares of Common Stock for
sale.
49
<PAGE>
CONCURRENT SALES BY SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
Shares of Percentage of Percentage of
Common Stock Number of Class Before Class After
Name, Position and Address Beneficially Owned Warrants Offering(1) Offering(2)
- -------------------------- ------------------ --------- ------------- -------------
<S> <C> <C> <C> <C>
Michael Amick(3) 10,938 10,938 * *
BH Capital 146,500 0 2.2% 0%
303 San Mateo NE
Suite 104A
Albuquerque, New Mexico 87108
Jeffrey Batchman(4)(5) 720,000 0 10.9% 5.1%
4240 Cambridge
Visalia, California 93277
Fred Beierle(3) 211,539 87,500 4.5% 3.6%
Ronald J. Burns(3)(5) 386,330 452,500 12.0% 8.4%
12817 Decatur
Omaha, NE 68154
Ron Carson, Jr.(3) 7,000 50,750 * *
John Churchill(3) 0 21,875 * *
Kevin Cloonan(3) 0 21,875 * *
Ralph Cook(3) 0 87,500 1.3% *
Robert and Ann Crawford(3) 7,000 7,000 * *
Maurine Deroin(3) 43,750 43,750 1.3% *
Kathleen Fahey(3) 47,863 43,750 1.4% *
4107 South 147th Plaza
Omaha, NE 68137
Michael Fahey(3)(5) 240,535 498,578 10.4% 6.7%
4107 South 147th Plaza
Omaha, NE 68137
John J. Fitzgerald(3)(5)(9) 161,151 43,750 3.1% 1.8%
2223 South 186th Street
Omaha, Nebraska 68130
Jordan Fox-Collis(3) 52,974 21,875 1.1% *
Jim Cripe(3) 24,245 21,875 * *
Donald Gall(3) 37,532 21,875 * *
Leroy and Gladys Graff(3) 4,375 4,375 * *
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Maurice and Stacy Gozlan(3) 3,500 3,500 * *
Robert Hancock(3) 10,938 10,938 * *
Herman M. Heinlein(3) 7,000 7,000 * *
Hematology Associates, Inc.(3) 21,875 21,875 * *
Jeff Kahler 12,000 0 * 0%
2407 S. 130 Circle
Omaha, Nebraska 68144
Frank & Sherry Lou Labedz(3) 32,813 32,813 1.0% *
Frank Labedz Trustee(3) 47,956 43,750 1.4% *
Stanley Magid(3) 7,000 7,000 * *
Mounir Mazzawi(3) 0 87,500 1.3% *
James McClymond(3)(5) 146,106 43,750 2.9% 2.4%
14093 Arbolitos Drive
Poway, California 92064
William McNeill, Jr.(3) 7,000 7,000 * *
Timothy McReynolds(3)(6) 837,109 353,125 17.2% 12.6%
18401 Shadow Ridge Drive
Omaha, Nebraska 68130
Azriel Nagar(3) 7,000 7,000 * *
Michael and Barbara O'Malley(3) 4,375 4,375 * *
Raymond D. Pape(3) 7,000 87,500 1.4% *
Robert A. Peterson(3) 22,998 109,375 2.0% 1.1%
Pierce Mill Associates, Inc.(7) 150,000 150,000 4.4% 0%
1504 R Street, NW
Washington, DC 20009
Victor Radzibada(3) 7,000 7,000 * *
Joseph Rahal(3) 36,875 21,875 * *
Bernard W. Reznicek(3)(5) 34,281 21,875 * *
14341 Hamilton Street
Omaha, Nebraska 68154
Charles Shields 7,500 0 * 0%
50 Hopestill Brown
Sudbury, Massachusetts 01776
Thomas E. Sieckmann Profit
</TABLE>
51
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Sharing Plan(3) 0 21,875 * *
Wayne Simmonds(3) 48,679 43,750 1.4% 1.0%
Arthur Steinberg IRA Rollover(3) 14,000 14,000 * *
Brigitte Uher(3) 6,563 6,563 * *
James W. Venezia(3) 7,000 7,000 * *
Don White 15,000 0 * 0%
8203 Willow Place South
Suite 605
Houston, Texas 77070
John and Elayne Wiskowski(3) 14,000 14,000 * *
Michael Wilkinson(8) 80,000 0 1.2% *
[add address]
Gilbert Wright 7,500 0 * 0%
50 Hopestill Brown
Sudbury, Massachusetts 01776
</TABLE>
____________________
* Less than 1%
(1) Based on 6,545,008 shares of Common Stock outstanding.
(2) Based on 7,045,008 shares of Common Stock outstanding after the Offering.
(3) The named securityholder is registering herein one-half of the number of
Warrants held by it.
(4) The named securityholder is registering herein 360,000 shares of its Common
Stock.
(5) The named securityholder is a director of the Company.
(6) The named securityholder is the President and a director of the Company and
is registering herein 100,000 shares of the Common Stock held by it. Does
not include shares 330,187 shares owned by the securityholder's spouse and
370,193 shares held in the Vt Trust No. 2 of which Mr. McReynolds is the
trustee.
(7) James M. Cassidy is the sole shareholder and director of Pierce Mill
Associates, Inc. James Cassidy is a principal in the law firm of Cassidy &
Associates, the law firm which prepared the Registration Statement of which
this Prospectus is a part.
(8) The named securityholder is registering herein 40,000 shares of its Common
Stock.
(9) Includes 43,750 shares of Common Stock owned by the named securityholder's
spouse and 43,750 Series B Warrants of which 21,875 are being registered
herein. The named securityholder is registering 50,000 shares of Common
Stock herein.
DESCRIPTION OF SECURITIES
AUTHORIZED CAPITAL
The total number of authorized shares of stock of the Company is one
hundred million (100,000,000) shares of Common Stock having a par value of
$.0001 per share and twenty million (20,000,000) shares of non-designated
preferred shares.
INCORPORATION
TTI Technologies, Inc. (the "Company") incorporated under the laws of
Delaware was formed through a merger between its predecessor TTI Technologies,
Inc. incorporated under the laws of Delaware and a pre-existing Delaware
corporation, Lanham Acquisitions, Inc. The Company's Certificate of
Incorporation, By-Laws and
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corporate governance, including matters involving the issuance, redemption and
conversion of securities, are subject to the provisions of the Delaware General
Corporation Law, as amended and interpreted from time to time.
COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of
100,000,000 shares of Common Stock, $.0001 value per share, of which 6,545,008
shares were outstanding as of the date hereof.
Holders of shares of Common Stock are entitled to one vote for each share
on all matters to be voted on by the stockholders. Holders of Common Stock do
not have cumulative voting rights. Holders of Common Stock are entitled to
share ratably in dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion from funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share pro rata all assets remaining
after payment in full of all liabilities. All of the outstanding shares of
Common Stock are, and the shares of Common Stock offered by the Company pursuant
to this Offering will be, when issued and delivered, fully paid and non-
assessable.
Holders of Common Stock have no preemptive rights to purchase the Company's
Common Stock. There are no conversion or redemption rights or sinking fund
provisions with respect to the Common Stock.
All outstanding shares of Common Stock are validly issued, fully paid and
nonassessable, and all Shares to be sold and issued as contemplated hereby will
be fully paid and nonassessable when sold in accordance with the terms hereof
and pursuant to a valid and current prospectus. The Board of Directors is
authorized to issue additional shares, on such terms and conditions and for such
consideration as the Board may deem appropriate without further stockholder
action.
LOCK UP AGREEMENT
Pursuant to the terms of the Merger Agreement of Exeter Engineering, Inc.
with and into TTIC, a wholly-owned subsidiary of the Company, the Company issued
an aggregate of 800,000 shares of the Company's Common Stock and $500,000 in
cash to the sole shareholders of Exeter Engineering, Jeffrey Batchman and
Michael Wilkinson, in exchange for all the issued and outstanding shares of
stock of Exeter Engineering. The Company agreed to register with the Securities
and Exchange Commission 400,000 of the 800,000 shares of the Company's Common
Stock issued pursuant to the merger. The Merger Agreement provides for lockup
periods governing the sale of the 400,000 shares being registered. The first
lockup period consists of the two months following the Effective Date of the
Registration Statement of which this Prospectus is a part. During the first
lockup period, Messrs. Batchman and Wilkinson may sell an aggregate of not more
than 50,000 registered shares per month. The second lockup period runs from
September 1, 1998 through November 30, 1998. During the second lock up period,
Messrs. Batchman and Wilkinson may sell an aggregate of not more than 50,000
registered shares per month. The third lockup period runs from January 1, 1999
through June 30, 1999. No sales of such shares may be made other than in the
periods designated prior to June 30, 1999. During the third lockup period,
Messrs. Batchman and Wilkinson may sell an aggregate of not more than 50,000
registered shares per month so long as no more than an aggregate of 150,000
registered shares are sold by Messrs. Batchman and Wilkinson during this six
month period.
VOTING TRUST AGREEMENTS
Certain of the shareholders of the Company are bound by the terms and
provisions of three voting trust agreements. "VT Agreement No. 1" was entered
into by Ronald B. Roots, his spouse, and Timothy J. McReynolds, the President
and a director of the Company. Mr. And Mrs. Roots placed an aggregate of
151,887 shares in the voting trust ("VT Trust No. 1") created by VT Agreement
No. 1. As of the date hereof there are 445,872 (as adjusted) shares of Common
Stock in VT Trust No. 1 comprising 31 holders of the voting trust certificates
thereunder. Douglas D. Kluver, the son-in-law of Mr. Roots, has been appointed
to serve as voting trustee of this trust.
VT Agreement No. 1 provides that trustee serve as the voting trustee with
sole voting power with respect to all shares in the VT Trust No. 1. All shares
in the trust will remain bound by the terms of (and transferees take such shares
subject to) the voting trust agreement until the voting trustee agrees to
release all or any portion of such
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<PAGE>
shares or until the voting trust agreement is terminated. VT Agreement No. 1
expires by its terms on December 31, 2001, but the trustee has agreed to
terminate the VT Trust No. 1 on the third anniversary of the Effective Date
hereof if such date is occurs prior to December 31, 2001.
VT Agreement No. 2 was entered into February 7, 1994 by Ronald B. Roots and
Frederick P. Beierle. Mr. Beierle placed the 281,431 shares of Common Stock
then held by him into the voting trust created (VT Trust No. 2) by the VT
Agreement No. 2 of which 9,412 were subsequently transferred out of the trust
with the consent of the trustee. Mr. Roots served as the initial voting trustee
with sole voting power with respect to all shares in the trust but resigned in
December, 1995. Mr. McReynolds was named successor voting trustee with
identical powers. All shares in the trust will remain bound by the terms of
(and transferees take such shares subject to) the voting trust agreement until
the voting trustee agrees to release all or any portion of such shares or until
the voting trust agreement is terminated. There are currently a total of
370,193 of Common Stock in this trust. VT Agreement No. 2 expires by its terms
on the earlier of December 31, 2001, or the Effective Date hereof.
PARTICIPATION AGREEMENT
In connection with a purchase of shares of Common Stock by Timothy
McReynolds, the President and a director of the Company, from Ronald B. Roots in
December, 1995, Messrs. McReynolds and Roots entered into an agreement which,
among other matters, provided that neither Mr. Roots nor Mr. McReynolds would
undertake a disposition of Common Stock owned by them without first providing
the other the opportunity to avail himself of such a disposition. Intra-family
transfers are exempt from the agreement as are transfers made by Mr. McReynolds
to employees of the Company or to persons providing funding for Mr. McReynolds'
purchase of the Common Stock from Mr. Roots.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
20,000,000 shares of Preferred Stock, $.0001 par value per share. As of the
date hereof, no preferred stock has been designated or issued. The designation
of such issued Preferred Stock provides that each such share of Preferred Stock
will have one vote on all matters on which shareholders are entitled to vote.
Preferred Stock provides for liquidation and dividend preference, if any
dividends were to be declared by the Board of Directors.
In the case of the voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of shares of Preferred Stock are entitled to
receive the liquidation preference before any payment or distribution is made to
the holders of Common Stock or any other series or class of the Company's stock
hereafter issued that ranks junior as to liquidation rights to the Preferred
Stock, but holders of the shares of the Preferred Stock will not be entitled to
receive the liquidation preference of such shares until the liquidation
preference of any other series or class of the Company's stock hereafter issued
that ranks senior as to liquidation rights to the Preferred Stock ("senior
liquidation stock") has been paid in full. The holders of Preferred Stock and
all series or classes of the Company's stock hereafter issued that rank on a
parity as to liquidation rights with the Preferred Stock are entitled to share
ratable, in accordance with the respective preferential amounts payable on such
stock, in any distribution (after payment of the liquidation preference of the
senior liquidation stock) which is not sufficient to pay in full the aggregate
of the amounts payable thereon. After payment in full of the liquidation
preference of the shares of the Preferred Stock, the holders of such shares will
not be entitled to any further participation in any distribution of assets by
the Company. Neither a consolidation or merger of the Company with another
corporation, nor a sale or transfer of all or part of the Company's assets for
cash, securities or other property will be considered a liquidation, dissolution
or winding up of the Company.
The Board of Directors is authorized to provide for the issuance of
additional shares of Preferred Stock in series and, by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof without any further
vote or action by the shareholders. Any shares of Preferred Stock so issued
would have priority over the Common Stock with respect to dividend or
liquidation rights. Any future issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company without
further action by the shareholders and may
54
<PAGE>
adversely affect the voting and other rights of the holders of Common Stock. At
present, the Company has no plans to issue any Preferred Stock nor adopt any
series, preferences or other classification of Preferred Stock.
ADDITIONAL INFORMATION DESCRIBING STOCK
The above descriptions concerning the Common and Preferred Stock of the
Company do not purport to be complete. Reference is made to the Company's
Certificate of Incorporation and By-Laws which are included in the Registration
Statement of which this Prospectus is a part and which are available for
inspection at the Company's offices. Reference is also made to the applicable
statutes of the State of Delaware for a more complete description concerning
rights and liabilities of shareholders.
The following is a summary of certain provisions of the Company's Warrants,
but such summary does not purport to be complete and is qualified in all
respects by reference to the Warrant Agreement filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
SERIES A WARRANTS
The Company has issued 393,750 Series A Warrants of which 196,875 are
offered hereby. The Series A Warrants registered hereby may be separately
transferred immediately upon the Effective Date hereof. Each Series A Warrant
entitles the holder thereof to purchase one share of Common Stock at an exercise
price of 100% of the public offering price per share of the Company's common
stock subject to adjustment from time to time, commencing on July 25, 1997 and
expiring on the third anniversary of the initial public offering provided that
at such time a current prospectus relating to the underlying Common Stock is in
effect and the underlying Common Stock is qualified for sale or exempt from
qualification under applicable state securities laws. The exercise price and
maturity date of the Series A Warrants are subject to adjustment at the
discretion of the Company. The Series A Warrants are subject to redemption by
the Company commencing at a price of $.05 per Warrant on 15 days' written
notice.
SERIES B WARRANTS
The Company has issued 1,185,627 Series B Warrants of which 592,813 are
offered hereby. The Series B Warrants registered hereby may be separately
transferred immediately upon the Effective Date hereof. Each Series B Warrant
entitles the holder thereof to purchase one share of Common Stock at an exercise
price of $2.29 per share, subject to adjustment from time to time, commencing
December 10, 1996 and expiring December 31, 1999 provided that at such time a
current prospectus relating to the underlying Common Stock is in effect and the
underlying Common Stock is qualified for sale or exempt from qualification under
applicable state securities laws. The exercise price and maturity date of the
Series B Warrants are subject to adjustment at the discretion of the Company.
The right of the Company to redeem the Series B Warrants may only be exercised
if and after the Company has consummated an underwritten initial public offering
of the Company's securities from which the Company has delivered gross proceeds
of at least $5,000,000. The Series B Warrants are subject to redemption by the
Company commencing at a price of $.05 per Series B Warrant on 15 days' written
notice.
SERIES C WARRANTS
The Company has issued 600,000 Series C Warrants of which 300,000 are
offered hereby. The Series C Warrants registered hereby may be separately
transferred immediately upon the Effective Date hereof. Each Series C Warrant
entitles the holder thereof to purchase one share of Common Stock at an exercise
price of $.10 per share, subject to adjustment from time to time, commencing
December 31, 1997 and expiring December 31, 2000 provided that at such time a
current prospectus relating to the underlying Common Stock is in effect and the
underlying Common Stock is qualified for sale or exempt from qualification under
applicable state securities laws. The exercise price and maturity date of the
Series C Warrants are subject to adjustment at the discretion of the Company.
SERIES D WARRANTS
The Company has issued 87,500 Series D Warrants of which 43,750 are offered
hereby. The Series D Warrants registered hereby may be separately transferred
immediately upon the Effective Date hereof. Each Series
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<PAGE>
D Warrant entitles the holder thereof to purchase one share of Common Stock at
an exercise price of 120% of the public offering price per share of the
Company's common stock subject to adjustment from time to time, commencing the
date of closing of an initial public offering and expiring March 31, 2000
provided that at such time a current prospectus relating to the underlying
Common Stock is in effect and the underlying Common Stock is qualified for sale
or exempt from qualification under applicable state securities laws. The
exercise price and maturity date of the Series C Warrants are subject to
adjustment at the discretion of the Company. The right of the Company to redeem
Series D Warrants may only be exercised if and after the Company has consummated
an underwritten initial public offering of the Company's securities and the bid
price of the Company's Common Stock, as quoted on NASDAQ is equal to or greater
than the exercise price of the Series D Warrant for a period of fifteen
consecutive trading days and the Company has filed a registration statement
registering the Shares underlying the Series D Warrant. The Series D Warrants
are subject to redemption by the Company commencing at a price of $.05 per
Warrant on 30 days' written notice.
FAHEY WARRANTS
The Company has issued to Michael G. Fahey, a director of the Company,
167,328 Fahey Warrants of which 83,664 are offered hereby. The Fahey Warrants
registered hereby may be separately transferred immediately upon the Effective
Date hereof. Each Fahey Warrant entitles the holder thereof to purchase one
share of Common Stock at an exercise price of $1.43, subject to adjustment,
exercisable by December 31, 1998 with the exercise price to be paid at least
$80,000 in cash and the remainder by promissory note.
PIERCE MILL WARRANTS
The Company has issued 150,000 Pierce Mill Warrants of which all are
offered hereby. The Pierce Mill Warrants registered hereby may be separately
transferred immediately upon the Effective Date hereof. Each Pierce Mill
Warrant entitles the holder thereof to purchase one share of Common Stock at an
exercise price of $2.00 per share of the Company's common stock subject to
adjustment from time to time, commencing on December 31, 1997 and expiring
December 31, 2000 provided that at such time a current prospectus relating to
the underlying Common Stock is in effect and the underlying Common Stock is
qualified for sale or exempt from qualification under applicable state
securities laws. The exercise price and maturity date of the Pierce Mill
Warrants are subject to adjustment at the discretion of the Company.
ADMISSION TO QUOTATION ON NASDAQ SMALLCAP MARKET OR NASD OTC BULLETIN BOARD
There is currently no established public trading market for the securities
and the Company does not have a market maker for such securities. A market
maker sponsoring a company's securities is required for listing of securities on
any of the public trading markets, including the NASD OTC Bulletin Board. If
the Company is able to obtain a market maker for its Securities, the Company
intends to apply for admission of its Securities on the NASD OTC Bulletin Board.
The Company anticipates that its securities will be quoted in the daily
quotation sheets of the National Quotation Bureau, Inc. (the "Pink Sheets")
until, if ever, the Company is able to locate a market maker and to meet other
listing requirements. It is possible that the Company will not be able to
locate a market maker that will agree to sponsor the Company's securities and
the Company's Securities will continue to be traded on the Pink Sheets. Even if
the Company does locate a market maker, there is no assurance that its
securities will be able to meet the requirements for such quotation or that the
securities will be accepted for listing on the NASD OTC Bulletin Board.
When possible, the Company intends to apply for listing of the Shares on
the NASD OTC Bulletin Board, but there can be no assurance that the Company will
be able to obtain such listing. The over-the-counter market ("OTC") differs
from national and regional stock exchanges in that it (1) is not cited in a
single location but operates through communication of bids, offers and
confirmations between broker-dealers and (2) securities admitted to quotation
are offered by one or more broker-dealers rather than the "specialist" common to
stock exchanges. To qualify for listing on the NASD OTC Bulletin Board, an
equity security must have one registered broker-dealer, known as the market
maker, willing to list bid or sale quotations and to sponsor such a Company
listing.
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At such time that it is qualified to do so, the Company plans to apply for
admission to quotation on the Nasdaq SmallCap Market. To qualify for listing on
the NASD SmallCap Market, an equity security must, in relevant summary, (1) be
registered under the Securities Exchange Act of 1934; (2) have at least three
registered and active market makers, one of which may be a market maker entering
a stabilizing bid; (3) for initial inclusion, be issued by a company with
$4,000,000 in net tangible assets, or $50,000,000 in market capitalization, or
$750,000 in net income in two of the last three years (if operating history is
less than one year than market capitalization must be at least $50,000,000); (4)
have a public float of at least 1,000,000 shares with a value of at least
$5,000,000; (5) have minimum a bid price of $4.00 per share; and (6) have at
least 300 beneficial shareholders. There is no assurance that the Company will
ever meet the requirements of the Nasdaq SmallCap Market.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company acts as the registrar and
transfer agent for the Company's Securities.
REPORTS TO SHAREHOLDERS
The Company will furnish to its shareholders annual reports containing
audited financial statements examined and reported upon, and with an opinion
expressed by, an independent certified public accountant. The Company may issue
other unaudited interim reports to its shareholders as it deems appropriate.
PLAN OF DISTRIBUTION
The Company may receive proceeds from the sale of the Company Shares
aggregating up to $2,500,000 and $3,054,055 from the exercise of all the
Warrants. However, there is no assurance that any Company Shares will be sold
or that any Warrants will be exercised. The Company has not located any
underwriter for the sale of the Company Shares and the Company Shares will be
offered through the Company's officers and directors. No sales commission will
be paid to any officer or director of the Company. The Company will reimburse
its officers and directors for expenses incurred in connection with the offer
and sale of the Securities. In order to comply with the applicable securities
laws of certain states, the securities will be offered or sold in such states
through registered or licensed brokers or dealers in those states.
The Company will not receive the proceeds of any sale of the securities by
the Selling Securityholders. The Selling Securityholder securities may be sold
to purchasers from time to time directly by and subject to the discretion of the
Selling Securityholders. The Selling Securityholders may from time to time
offer their securities for sale through underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Securityholders and/or the purchasers of the
securities for whom they may act as agents. Any underwriters, dealers or agents
who participate in the distribution of the securities may be deemed to be
"underwriters" under the 1933 Act and any discounts, commissions or concessions
received by any such underwriters, dealers or agents may be deemed to be
underwriting discounts and commissions under the 1933 Act.
At the time a particular offer is made by or on the behalf of the Selling
Securityholders, a Prospectus, including any necessary supplement thereto, will
be distributed which will set forth the number of shares of Common Stock and
other securities being offered and the terms of the offering, including the name
or names of any underwriters, dealers or agents, the purchase price paid by any
underwriter for the Securities purchased from the Selling Securityholders, any
discounts, commissions and other items constituting compensation from the
Selling Securityholders, any discounts, commissions or concessions allowed,
reallowed or paid to dealers, and the proposed selling price to the public.
The securities sold by the Selling Securityholders may be sold from time to
time in one or more transactions at an offering price that is fixed or that may
vary from transaction to transaction depending upon the time of sale or at
prices otherwise negotiated at the time of sale. Such prices will be determined
by the Selling Securityholders or by agreement between the Selling
Securityholders and any underwriters.
57
<PAGE>
In order to comply with the applicable securities laws, if any, of certain
states, the securities will be offered or sold in such states through registered
or licensed brokers or dealers in those states. In addition, in certain states,
the securities may not be offered or sold unless they have been registered or
qualified for sale in such states or an exemption from such registration or
qualification requirement is available and with which the Company has complied.
The Company will pay all of the expenses incident to the registration of
the Securities (including registration pursuant to the securities laws of
certain states) other than commissions, expenses, reimbursements and discounts
of underwriters, dealers or agents, if any.
LEGAL MATTERS
LEGAL PROCEEDINGS
The Company is not a party to any litigation and management has no
knowledge of any threatened or pending litigation against the Company.
LEGAL OPINION
Cassidy & Associates, Washington, D.C. has given its opinion as attorneys-
at-law that the Shares, when sold pursuant to the terms hereof will be fully
paid and non-assessable. James M. Cassidy, a principal of Cassidy & Associates,
is an officer and director of Pierce Mill Associates, Inc., a Selling
Securityholder herein of 150,000 shares of Common Stock and the Pierce Mill
Warrants held by it for sale.
EXPERTS
The consolidated financial statements of TTI Technologies, Inc. and
subsidiary as of December 31, 1997, and 1996 and for each of the years in the
three year period ended December 1997, and the financial statements of Exeter
Engineering, Inc. as of October 31, 1997 and 1996, and for each of the years in
the three year period ended October 31, 1997, have been included herein and in
the registration statement of which this Prospectus is a part in reliance upon
the report of KPMG Peat Marwick, LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP concerning the
December 31, 1997 financial statements of TTI Technologies, Inc. contains an
explanatory paragraph that states that the Company's recurring losses from
operations and net working capital and stockholders' deficit raise substantial
doubt about the entity's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty. The report of KPMG Peat Marwick
LLP concerning the October 31, 1997 financial statements of Exeter Engineering,
Inc., contains an explanatory paragraph that states that Company's recurring
losses from operations and net working capital and stockholders' deficit raise
substantial doubt about the entity's ability to continue as a going concern.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement") under the Securities Act of 1933, as amended with respect to the
securities offered hereby. This Prospectus does not contain all the information
contained in the Registration Statement. For further information regarding the
Company and the securities offered hereby, reference is made to the Registration
Statement, including all exhibits and schedules thereto, which may be inspected
without charge at the public reference facilities of the Commission's
Washington, D.C. office, 450 Fifth Street, N.W., Washington, D.C. 20549. Each
statement contained in this Prospectus with respect to a document filed as an
exhibit to the Registration Statement is qualified by reference to the exhibit
for its complete terms and conditions.
The Company will be subject to the informational requirements of the
Securities Exchange Act of 1934 ("Exchange Act") and in accordance therewith
will file reports and other information with the Commission. Reports, proxy
statements and other information filed by the Company can be inspected and
copied on the Commission's home
58
<PAGE>
page on the World Wide Web at http://www.sec.gov or at the public reference
facilities of the Commission, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as the following Regional Offices: 7 World Trade
Center, Suite 1300, New York, N.Y. 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois. 60661-2511. Such material can also be
inspected at the New York, Boston, Midwest, Pacific and Philadelphia Stock
Exchanges. Copies can be obtained from the Commission by mail at prescribed
rates. Request should be directed to the Commission's Public Reference Section,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other reports as may be
required by law.
59
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Financial Statements
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.................................................................................. 1
Consolidated Balance Sheets - December 31, 1997 and 1996...................................................... 2
Consolidated Statements of Operations - Three-year Period Ended December 31, 1997............................. 3
Consolidated Statements of Stockholders' Equity (Deficit) - Three-year Period Ended
December 31, 1997........................................................................................ 4
Consolidated Statements of Cash Flows - Three-year Period Ended December 31, 1997............................. 5
Notes to Consolidated Financial Statements.................................................................... 6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
TTI Technologies, Inc.:
We have audited the accompanying consolidated financial statements of TTI
Technologies, Inc. and subsidiary, as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TTI Technologies,
Inc. and subsidiary as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 11 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has working capital and stockholder's deficit that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this are also described in Note 11. The
consolidated financial statements do not include any adjustments that might
result from the outcome of the uncertainty.
KPMG PEAT MARRICK LLP
March 20, 1998, except
as to the second paragraph of
Note 4 and the third and fifth
paragraphs of Note 11, which
are as of as of May 4, 1998
1
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 10,194 4,603
Employee advances 35,185 72,857
Trade accounts receivable, less allowance for doubtful
accounts of $20,658 in 1997 474,655 364,854
Note receivable 75,813 -
Inventories 54,345 47,174
Costs and estimated profits/losses in excess of billings on uncompleted contracts 238,761 155,520
Prepaid expenses 3,326 5,290
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 892,279 650,298
Property, plant and equipment, net 237,536 160,315
Construction in progress on plant held for sale 223,010 299,409
Other assets 718,063 -
Intangible assets, net of accumulated amortization of $121,846 in 1997 and $103,309 in 1996 123,136 47,673
- ------------------------------------------------------------------------------------------------------------------------------------
$ 2,194,024 1,157,695
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ------------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,166,994 1,153,047
Notes payable 2,031,759 197,472
Notes payable to related parties 1,133,616 1,555,252
Current portion of long-term debt 246,388 4,300
Billings in excess of costs on uncompleted contracts 654,957 634,245
Other current liabilities 439,364 600,768
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,673,078 4,145,084
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding current portion 286,140 13,178
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (deficit):
Preferred stock (nondesignated as to dividends and preferences), par value
of $.0001. Authorized 20,000,000 shares; none issued or outstanding - -
Common stock, par value of $.0001. Authorized 100,000,000 shares; issued
and outstanding 5,346,069 shares in 1997 and 3,908,867 shares in 1996 535 391
Additional paid-in capital 5,086,735 2,686,915
Notes receivable - common stock subscription (532,724)
Accumulated deficit (8,319,740) (5,687,873)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (3,765,194) (3,000,567)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 2,194,024 1,157,695
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three-year period ended December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales:
Construction $ 84,501 863,164 -
Fabrication 5,433,936 1,554,848 48,840
- ------------------------------------------------------------------------------------------------------------------------------------
5,518,437 2,418,012 48,840
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold:
Construction 76,398 1,924,594 -
Loss on writedown of construction in progress on plant
held for sale - 523,620 -
Fabrication 5,218,831 1,315,102 43,317
- ------------------------------------------------------------------------------------------------------------------------------------
5,295,229 3,763,316 43,317
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit (loss) 223,208 (1,345,304) 5,523
Selling, general and administrative expenses 2,390,122 1,738,419 981,394
- ------------------------------------------------------------------------------------------------------------------------------------
Operating loss (2,166,914) (3,083,723) (975,871)
- ------------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 629 595 1,518
Interest expense (502,658) (168,644) -
Miscellaneous income 37,076 - -
- ------------------------------------------------------------------------------------------------------------------------------------
(464,953) (168,049) 1,518
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (2,631,867) (3,251,772) (974,353)
Income taxes - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (2,631,867) (3,251,772) (974,353)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per share:
Basic $ (0.62) (0.83) (0.27)
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted $ (0.62) (0.83) (0.27)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 4,246,959 3,901,998 3,671,240
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted 4,246,959 3,901,998 3,671,240
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Stockholders' Equity (Deficit)
Three-year period ended December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Total
Additional Notes stockholders'
Common paid - in receivable Accumulated equity
Shares stock capital stockholder deficit (deficit)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance (deficit), December 31, 1994 3,526,748 $ 353 1,970,447 - (1,461,748) 509,052
Issuance of common stock for:
Note payable conversion (including
accrued interest) 164,540 16 299,675 - - 299,691
Cash 21,473 2 39,098 - - 39,100
Services performed 4,118 1 7,499 - - 7,500
Net loss - - - - (974,353) (974,353)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance (deficit), December 31, 1995 3,716,879 372 2,316,719 - (2,436,101) (119,010)
Issuance of common stock for:
Business combination 123,531 13 225,166 - - 225,179
Services performed 24,707 2 45,034 - - 45,036
Cash 43,750 4 99,996 - - 100,000
Net loss - - - - (3,251,772) (3,251,772)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance (deficit), December 31, 1996 3,908,867 391 2,686,915 - (5,687,873) (3,000,567)
Issuance of common stock for:
Notes receivable - stockholder 452,844 45 643,587 (643,632) - -
Payments on notes receivable -
stockholder - - - 110,908 - 110,908
Cash 43,750 4 53,121 - - 53,125
Cash in conjunction with Bridge
Notes 87,500 9 106,241 - - 106,250
Notes payable conversion
(including accrued interest) 744,944 75 1,602,769 - - 1,602,844
Business combinations 150,000 15 985 - - 1,000
Services performed 11,084 1 23,352 - - 23,353
Repurchase and retirement of
common stock (52,920) (5) (96,385) - - (96,390)
Issuance of stock warrants - - 66,150 - - 66,150
Net loss - - - - (2,631,867) (2,631,867)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance (deficit), December 31, 1997 5,346,069 $ 535 5,086,735 (532,724) (8,319,740) (3,765,194)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three-year period ended December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,631,867) (3,251,772) (974,353)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 78,110 154,626 45,577
Loss on sale of property, plant and equipment 460 7,300 -
Noncash charges 89,503 45,036 7,500
Changes in assets and liabilities:
Trade accounts receivable (109,801) (311,661) -
Inventories (7,171) 8,716 -
Cost and estimated profit/losses in excess of billings on uncompleted contracts (83,241) (155,520) -
Prepaid expenses 1,964 53,814 (18,689)
Construction in progress on plant held for sale 76,399 530,891 (116,086)
Accounts payable 13,947 814,248 199,904
Billings in excess of costs of uncompleted contracts 20,712 412,480 306,967
Other current liabilities (7,560) 513,568 54,497
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (2,558,545) (1,178,274) (494,683)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to employee advances, net (38,141) (50,057) (19,000)
Additions to other assets (718,063) - -
Additions to intangible assets (105,000) - -
Additions to property, plant and equipment (136,294) (46,404) (82,001)
Proceeds from sale of property, plant and equipment 10,040 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (987,458) (96,461) (101,001)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds (repayments) from issuance of notes payable, net 1,834,287 (252,028) 400,000
Proceeds from issuance of notes payable to related parties 30,492 1,413,252 142,000
Repayments of notes payable to related parties (452,128) - -
Proceeds from issuance of long-term debt 1,979,172 12,860 -
Repayments of long-term debt (14,122) (5,925) (3,384)
Proceeds from issuance of common stock 159,375 100,000 39,100
Payments on notes receivable - common stock subscription 110,908 - -
Payment to repurchase common stock (96,390) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,551,594 1,268,159 577,716
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 5,591 (6,576) (17,968)
Cash at beginning of year 4,603 11,179 29,147
- ------------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 10,194 4,603 11,179
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
TTI Technologies, Inc. was incorporated under the name of Waste
Conversion, Inc. on May 21, 1992. On August 8, 1992, the original
articles of incorporation were amended to change the name to Waste-Mart,
Inc. and on July 21, 1994 another amendment was made to change the name
to Thermal Technologies, Inc. On November 6, 1995, Thermal Technologies,
Inc. reincorporated under the laws of the state of Delaware (previously
Nevada) and, among other things, changed its name to TTI Technologies,
Inc. Effective December 30, 1997, TTI Technologies, Inc. merged with
Lanham Acquisitions, Inc. (Lanham). Lanham, a Delaware shell
corporation, was the surviving corporation and changed its name to "TTI
Technologies, Inc." (the Company).
The Company purchased certain patents in 1992 for the design of an
apparatus that converts organic material into fuel. The Company further
developed the apparatus into a de-gasification technology and system
which can be used to volume reduce selected materials. The technology
and systems can also be modified to produce fuel gas from organic
material that is capable of self-sustaining operations. The result of
these developments is a proprietary waste processing and energy
production technology embodied in the Company's "Pyrolysis of
Waste/Energy Recapture" system (the POWER System). The Company is
engaged in the development and commercialization of that POWER System.
Prior to January 1, 1996, the Company was in the development stage. As
discussed in note 11, there can be no assurance that the Company will
ever be successful in licensing, constructing or operating a POWER
System for commercial use or that the POWER System will be technically
or commercially viable.
The Company also engages through its subsidiary, TTI Control
Technologies, Inc., ("TTIC") in the fabrication and installation of food
processing lines.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of the Company and its wholly-owned subsidiary, TTI Control
Technologies, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company expects to sell POWER Systems and fabricated food processing
lines, supervise the construction and installation of the equipment, and
account for its revenue and expenses on a contract basis using the
percentage-of-completion method for the recognition of revenue. Under
this method, income is recognized as work on a contract progresses. The
recognized income is that percentage of estimated total income that
incurred costs to date bear to estimated total costs to complete the
contract. Revisions in cost and profit estimates are made when
conditions requiring such revisions become known. Anticipated losses on
contracts are recognized in earnings as soon as such losses are
determined to be probable and reasonably estimable.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and
development costs included in selling, general and administrative
expenses were $85,298, $132,526 and $41,764 for the years ended December
31, 1997, 1996 and 1995, respectively. In 1996, the company entered into
a project at Camp LeJeune, North Carolina under subcontract with the
U.S. Environmental Protection Agency.
(Continued)
6
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
INVENTORIES
Inventories are stated at cost using the first-in, first-out (FIFO)
method, which is not in excess of market and is comprised of finished
goods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is
provided over the estimated useful life of the respective assets using
accelerated methods. Leasehold improvements are amortized over the
shorter of the lease term or estimated useful life of the asset.
CONSTRUCTION IN PROGRESS ON PLANT HELD FOR SALE
The costs of construction in progress on plant held for sale are stated
at cost which is not in excess of market less cost of disposal. Costs of
construction in progress on plant held for sale are comprised of
construction costs, including equipment and component costs. During
1996, the POWER System that represents "construction in progress on
plant held for sale" was disassembled and placed in storage. As a result
of the disassembly, an analysis of the recoverable costs of the POWER
System was performed. It was determined that the expected sales price
less costs to reassemble and sell the POWER System was $523,620 less
than the then current carrying cost and a writedown was recognized.
OTHER ASSETS
Other assets include primarily advances to Exeter Engineering Inc.
(Exeter), as discussed in note 2. Also included in other assets is a 1%
ownership interest in a nonpublic company. The investment is accounted
at cost.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996.
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount
which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of SFAS No.
121 did not have a material impact on the Company's financial position,
results of operations or liquidity.
WARRANTY AND PRODUCT LIABILITY
The Company offers its customers a limited one-year warranty. Estimated
warranty costs are accrued and expensed at the time the revenue is
recognized. Warranty costs have been immaterial to date. The Company
carries product liability insurance in amounts considered sufficient by
management.
(Continued)
7
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share, which revised the calculation and
presentation provisions of Accounting Principles Board (APB) Opinion 15
and related interpretations. SFAS No. 128, which was effective for
periods ending after December 15, 1997, requires companies to present,
both currently and retroactively, basic earnings per share and diluted
earnings per share instead of primary and fully-diluted earnings per
share which was previously required under APB Opinion 15. Accordingly,
earnings per share for all periods presented have been restated to apply
the provisions of SFAS No. 128. Basic loss per share is computed by
dividing net loss by the weighted average number of shares of common
stock outstanding. Diluted loss per share is computed by dividing net
loss by weighted average number of shares of common shares outstanding
after giving effect to equivalent common shares from dilutive stock
warrants outstanding and convertible debt. As the Company incurred net
losses for all periods presented, stock warrants and convertible debt
outstanding were not dilutive and, therefore, basic and diluted loss per
share are the same.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(2) BUSINESS COMBINATION
Effective December 30, 1997, the Company entered into a merger agreement
with Lanham, as described in note 1. As a result of this merger, each
outstanding share of common stock of TTI Technologies, Inc. was
converted to 1.75 shares of Lanham's common stock. At the time of the
merger, Lanham had 150,000 shares of its common stock outstanding. As
Lanham was the surviving corporation, the authorized shares and par
value of that entity's stock were adopted. The above changes have been
given retroactive effect in the accompanying consolidated financial
statements. The transaction was accounted for as a capital transaction
in which TTI Technologies, Inc. issued stock for the net monetary assets
of Lanham.
Effective as of January 2, 1996, the Company acquired all of the assets
of Hi-Tech, Inc., a Washington corporation (Hi-Tech), in exchange for a
total of 123,531 shares of common stock. In addition, 24,707 shares of
common stock were issued to individuals associated with Hi-Tech to
ensure their services. Compensation expense of $45,036 was recorded in
conjunction with this issuance. The transaction was accounted for as a
purchase. The purchase price of $225,179 was in excess of the fair value
of assets acquired of $318,661, net of liabilities assumed of $172,180
by $78,698. This amount was considered acquired research and development
and was recognized as an expense during 1996.
(Continued)
8
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
The allocation of the purchase price of the above combinations are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 1,000 -
Trade accounts receivable - 53,193
Inventory - 55,890
Cost in excess of billings on uncompleted contracts - 85,202
Prepaid expenses - 25,415
Property, plant and equipment - 98,961
Intangible assets - 78,698
Accounts payable - (65,229)
Notes payable to related parties - (49,500)
Other current liabilities - (49,866)
Long-term debt - (7,585)
Stockholder's deficit (1,000) (225,179)
- -------------------------------------------------------------------------------------
Cash paid $ - -
- -------------------------------------------------------------------------------------
</TABLE>
Effective January 29, 1998, the Company entered into a merger agreement
with Exeter Engineering, Inc. ("Exeter"). The Company has merged TTIC
and Exeter and the surviving company was named TTI Exeter, Inc. All of
the outstanding stock of Exeter was acquired for $500,000 cash and
800,000 shares of common stock. The shares issued in conjunction with
this merger will be valued based on the fact that the former
stockholders of Exeter may elect to sell all or a portion of the
Company's shares received. If these shares sell for a gross price of
less than $5.00 per share, the Company is obligated to issue additional
shares or cash, at the seller's option, for the difference. The Company
has structured this guarantee by agreeing to pay the difference between
$5.00 and the sales price received by the former stockholders of Exeter
for each share sold with such deficiencies, if any, due at scheduled
settlement dates. Pursuant to the terms of the merger agreement, the
company agreed to register with the United States Securities and
Exchange Commission 400,000 of the 800,000 shares of the Company stock
issued pursuant to the merger. The merger agreement provides for lockup
periods governing the sale of the 400,000 shares being registered. If
the Company is unable to create a market for its securities, the Company
may be obligated to pay the former shareholders of Exeter up to an
aggregate of $4,000,000 in cash or stock over the next two years. The
Company has also agreed to provide TTI Exeter, Inc. with capital and
operating budgets which include providing to TTI Exeter, Inc., by
January 28, 1999, a $500,000 line of credit for operations, $100,000 in
research and development monies, $500,000 for improvement of equipment
and facilities, approximately $150,000 in marketing funding, and
$150,000 for application against TTIC's accounts payable. The Company
has pledged 100% of its stock ownership in TTI Exeter, Inc. as a
security interest to the selling shareholders of Exeter in case the
Company does not honor all of its obligations contained in the merger
agreement. The Company will be in default on its obligations if it (1)
fails to perform on its obligation to assure a minimum $5.00 per share
sales price for the shares (2) fails to make funding available to TTI
Exeter, Inc. by January 28, 1999 (3) had made any warranty in the pledge
agreement that proves to be false in any material respect when made or
furnished or (4) transfers all or substantially all of TTI Exeter,
Inc.'s assets in a single or series of transactions without the consent
of the former shareholders of Exeter.
This transaction will be accounted for as a purchase. Prior to December
31, 1997, the Company advanced Exeter $618,063. This amount is included
in other assets in the accompanying consolidated balance sheets as of
December 31, 1997. Upon consummation of the merger, $500,000 of the
advance was applied to the purchase and the remaining $118,063 was
repaid to the Company. Exeter engages in the design, fabrication and
installation of entire fresh produce packing plants and portions of food
processing lines.
(Continued)
9
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
The following unaudited pro forma summary presents the consolidated
results of operations of the Company as if the above business
combinations had occurred as on January 1, 1996:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Sales $ 9,241,188 5,788,997
Net loss (3,327,548) (4,660,808)
Loss per share - basic (0.66) (0.96)
Loss per share - diluted (0.66) (0.96)
- --------------------------------------------------------------------------------
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
- --------------------------------------------------------------------------------
Useful lives 1997 1996
- --------------------------------------------------------------------------------
Furniture and fixtures 7 years $ 121,333 79,893
Automobiles 5 years 68,077 48,300
Equipment 5 years 131,985 71,909
Leasehold improvements 5 years 21,164 21,164
------- -------
342,559 221,266
Less accumulated depreciation and amortization 105,023 60,951
------- -------
$ 237,536 160,315
======= =======
(4) NOTE PAYABLE TO BANK AND LONG-TERM DEBT
At December 31, 1997, the Company has available lines of credit in the
amounts of $2,000,000, $250,000 and $50,000. At December 31, 1997 and
1996, the Company has $2,031,759 and $197,472 outstanding on these lines
of credit. The maturity dates of these lines are December 15, 1998
($2,000,000) and March 31, 1998 ($250,000 and $50,000), respectively.
These lines carry interest rates of 2.5% over the regional prime
($2,000,000) and a fixed 10.5% ($250,000 and $50,000), respectively, and
are secured by a lien on all current and hereafter acquired assets of
the Company and are guaranteed by certain members of the Board of
Directors.
During May 1998, the Company closed an unsecured $4,000,000 line of
credit facility with a bank to replace the above lines. The line of
credit is due May 1, 2000 and bears interest at 2% over the Bank's
reference rate with interest payable quarterly. The note is guaranteed
by certain stockholders and directors of the Company. Events of default
under the line of credit include, among other items, if any guarantor
dies, any material adverse changes in the Company's financial condition
occurs or the bank believes the prospect of payment or performance of
the indebtedness is impaired; or the bank in good faith deems itself
insecure. In the event of default, the bank may declare the entire
unpaid principal balance on the line of credit and all accrued unpaid
interest immediately due and payable, without notice.
(Continued)
10
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
Long-term debt at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10% promissory notes issued as part of Bridge Notes, net of value assigned to
detachable equity (a) $ 233,013 -
12% convertible notes payable, due June 30, 1999 (b) 250,000 -
Various capital leases with interest ranging from 5.7% to 17%, including
monthly payments of principal and interest of $1,502, due ranging from
April 1999 to May 2002 49,515 17,478
- -------------------------------------------------------------------------------------------------------------------------
Total long-term debt 532,528 17,478
Less current installments 246,388 4,300
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding current installments $ 286,140 13,178
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Company issued as part of the Bridge Notes, 48 units
consisting of $25,000, 10% promissory notes, 4,000 shares of
common stock and warrants to purchase 4,000 shares of common
stock.
(b) The Company has convertible notes outstanding which can be
converted at the holders option into 65,625 shares of common stock
at a conversion rate of $2.29 per common share. Accrued interest
on the notes payable can also be converted into common stock at
this rate.
Maturities of these obligations for the years following December 31,
1997 are as follows: 1998, $246,388; 1999, $162,628; 2000, $13,010;
2001, $9,005; and 2002, $1,497.
(5) COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost incurred and estimated profit/losses on uncompleted contracts $ 2,638,253 1,240,639
Billings on uncompleted contracts 3,054,449 1,719,364
- ---------------------------------------------------------------------------------------------------------
$ (416,196) (478,725)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Included in the accompanying consolidated balance sheets under the
following captions:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Costs and estimated profit/losses in excess of billings
on uncompleted contracts $ 238,761 155,520
Billings in excess of costs on uncompleted contracts 654,957 634,245
- ---------------------------------------------------------------------------------------------------------
$ (416,196) (478,725)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
11
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
- --------------------------------------------------------------------------------
(6) RELATED PARTY TRANSACTIONS
During 1995, the Company rented certain office space from a related
party. Rents paid totaled $6,850 in 1995. The Company has outstanding
loans from related parties for $1,133,616 and $1,555,252 at December 31,
1997 and 1996, respectively. These unsecured notes payable are due in
1998 and carry an interest rate of 12%. Subsequent to year end, these
notes were replaced with an unsecured note due July 1, 1999 as discussed
in note 11.
(7) STOCK WARRANTS
The Company has periodically issued stock warrants as incentives for
investors, as part of business combinations and as compensation for loan
guarantees and rent incentives. The Company has also issued stock
warrants in conjunction with the issuance of Bridge Notes and the
conversion of convertible notes payable as discussed in note 5.
Information as to shares subject to stock warrants is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Weighted average
exercise price
(excluding warrants
Number Exercise based on initial
of shares price public offering
under warrant per warrant [IPO] price)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Warrants outstanding at December 31, 1994 350,000 $ (a) -
Granted - - -
- --------------------------------------------------------------------------------------------------------------------------
Warrants outstanding at December 31, 1995 350,000 (a)
Granted - - -
- --------------------------------------------------------------------------------------------------------------------------
Warrants outstanding at December 31, 1996 350,000 (a)
Granted 2,190,155 2.00 - 5.00(a)(b) 2.96
- --------------------------------------------------------------------------------------------------------------------------
Warrants outstanding at December 31, 1997 2,540,155 $ 2.00 - 5.00(a)(b) 2.96
- --------------------------------------------------------------------------------------------------------------------------
Exercisable warrants at December 31, 1997 2,128,155 $ 2.00 - 5.00 2.96
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Included in these grants are stock warrants with an exercise price
equal to 100% of the IPO price if the stock of the Company is
offered publicly. These stock warrants would be exercisable for a
three-year period after an IPO.
(b) Included in these grants are stock warrants with an exercise price
equal to 120% of the IPO price if the stock of the Company is
offered publicly. These stock warrants would be exercisable after
an IPO until March 31, 2000.
The weighted average remaining contractual life of the outstanding stock
warrants, excluding warrants based on an IPO, is 2.54 years.
(Continued)
12
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
- --------------------------------------------------------------------------------
For stock warrants that are issued to individuals other than employees,
the Company has determined the fair value of stock warrants based on the
fair value of services received. The expense recorded for the year ended
December 31, 1997 was $66,150. For stock warrants issued to employees,
the Company accounts for these warrants in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees and Related Interpretations. As
such, compensation expense would be recorded on the date of grant only
if the current market price of the underlying stock exceeded the
exercise price. Accordingly, the Company has not recognized compensation
expense for its warrants granted to employees in 1997. In 1996, the
Company adopted FASB Statement No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the
vesting period the fair value of stock-based awards to employees on the
date of grant. FASB Statement No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net
earnings and earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method
defined in FASB Statement No. 123 for warrants issued to employees. Had
the Company accounted for the employee stock warrants under FASB
Statement No. 123, the results of operations would not have been
different than those reported.
(8) Information by Industry Segment
As described in note 1, the Company is engaged in the development and
commercialization of the POWER System, and in the fabrication and
installation of food processing lines. The Company has elected to adopt
the provisions of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. The Company has chosen to
differentiate segments by products and services provided. The following
represents the segment information for the POWER System construction,
controls fabrication and sorting fabrication segments:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from external customers:
Construction $ 84,501 863,164 -
Fabrication 5,433,936 1,554,848 48,840
- --------------------------------------------------------------------------------------------------------------------
Intersegment revenues:
Construction $ - - -
Fabrication - 75,395 -
- --------------------------------------------------------------------------------------------------------------------
Interest expense, net of interest income:
Construction $ 450,531 158,120 -
Fabrication 51,498 10,524 -
- --------------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Construction $ 45,418 52,643 45,577
Fabrication 32,692 101,983 -
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
13
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Segment profit (loss):
Construction $ (2,165,978) (3,175,915) (974,353)
Fabrication (465,889) (75,857) -
- --------------------------------------------------------------------------------------------------------------------------------
Other significant noncash items:
Cost in excess of billings on uncompleted contracts:
Construction $ - - -
Fabrication 238,761 155,520 -
- --------------------------------------------------------------------------------------------------------------------------------
Billings in excess of cost on uncompleted contracts:
Construction $ - 589,453 -
Fabrication 654,957 44,792 -
- --------------------------------------------------------------------------------------------------------------------------------
Segment assets:
Construction $ 1,229,044 716,220 1,043,819
Fabrication 964,980 441,475 -
- --------------------------------------------------------------------------------------------------------------------------------
Expenditures for segment assets:
Construction $ 2,171 3,992 82,001
Fabrication 134,124 42,412 -
- --------------------------------------------------------------------------------------------------------------------------------
(9) SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 793,102 56,258 46,313
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1995, the Company issued 164,540 shares of common stock for the
conversion of notes payable and related accrued interest and 4,118
shares of common stock for services performed. During 1996, the Company
consummated a business combination for 123,531 shares of common stock
and issued 24,707 shares of common stock for services performed as more
fully described in note 2.
During 1997, the Company consummated a business combination for 150,000
shares of common stock, as more fully described in note 2. The Company
also issued 452,844, 744,944 and 11,084 shares of common stock for notes
receivable-common stock subscription, conversion of notes payable and
related accrued interest, and services performed, respectively. In
addition, the Company issued stock warrants which were recorded as
noncash expense.
(Continued)
14
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Common stock issued for services performed are valued at market price of
the Company's stock at the time of grant. Management typically uses a
recent cash stock sale as the basis for the market price. Common stock
issued for business combinations are valued at market price of the
Company's stock at the time of grant. Common stock sold for notes
receivable-common stock subscription are valued at market and are
accounted for as a contra equity account that is reduced at the time
payment on the note is received. Common stock issued for the conversion
of notes payable and related accrued interest are valued per the terms
of the convertible note agreement.
Components of cash used for purchase of net assets, net of cash
received, as reflected in the consolidated statements of cash flows are
summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fair value of assets acquired, including goodwill $ 1,000 397,359
Fair value of liabilities assumed - (172,180)
Fair value of common stock issued (1,000) (225,179)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used for purchase of net assets $ - -
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(10) INCOME TAXES
The actual tax benefit for the three-year period ended December 31, 1997
differs from the "expected" tax benefit (computed by applying the U. S.
federal corporate tax rate of 34% to loss before income taxes) as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax benefit $ 894,841 1,105,602 331,280
State tax benefit, net of federal income tax benefit 136,953 101,085 43,390
Tax benefits relating to net operating losses not recognized (1,031,794) (1,197,678) (367,225)
Other - (9,009) (7,445)
- --------------------------------------------------------------------------------------------------------------------------------
$ - - -
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets as of December 31, 1997 and 1996 are
presented below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,611,694 1,579,900
Less valuation allowance 2,611,694 1,579,900
- --------------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ - -
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
15
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
The net change in the total valuation allowance for the years ended
December 31, 1997, 1996 and 1995 was increases of $1,031,794, $1,197,678
and $367,225, respectively. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. In order
to fully realize the deferred tax assets, the Company will need to
generate future taxable income of approximately $6,873,000 prior to the
expiration of the net operating loss carryforwards in 2008 through 2012.
Based upon the level of historical taxable losses, management believes
it is more likely than not the Company will not realize the benefits of
these deductible differences and has established a valuation allowance
to fully offset deferred tax assets.
At December 31, 1997, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $6,873,000 which are
available to offset future federal taxable income, if any, through 2008
to 2012.
(11) CONTINGENCIES
As shown in the accompanying consolidated financial statements, the
Company has incurred net losses of $2,631,867, $3,251,772 and $974,353,
and has used cash in operating activities of $2,558,545, $1,178,274 and
$494,683 for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company has a working capital deficiency of $4,780,799
and a stockholders' deficit of $3,765,194 at December 31, 1997. These
losses have been financed to date primarily through borrowings from
related parties. Losses are due primarily to the fact that the Company's
POWER System is pending final developmental refinements and has not yet
become commercially viable. There can be no assurance that the Company
will ever be successful in licensing, constructing or operating a POWER
System for commercial use or that the POWER System will be technically
or commercially viable.
As discussed in note 2, the Company merged TTIC and Exeter in January
1998 to create TTI Exeter, Inc. Exeter has suffered recurring losses
from operations and has working capital and stockholders' deficits.
Exeter has incurred net losses of $44,536, $757,891 and $429,380 for the
years ended October 31, 1997, 1996 and 1995, respectively. There can be
no assurances that TTI Exeter, Inc. will not continue to operate at a
net loss in the future.
The Company believes that the capital raised from earlier sales of the
Company's securities, operating revenues, and the $4,000,000 line of
credit discussed in note 4 will not be sufficient to meet the Company's
capital requirements for the next twelve months. The Company's capital
requirements depend on numerous factors, including its ability to have
its securities listed and trading at a certain price, rate of market
acceptance of the Company's products, the Company's ability to maintain
and expand its customer base, the level of resources required to expand
the Company's marketing and sales organization and research and
development activities, and other factors. The Company believes that in
order to meet operating expenses and capital requirements for the next
twelve months, that it will have to secure additional financing. There
is no assurance that the Company will be able to obtain such financing
on terms acceptable to it, if at all.
As described in note 2, the Company may be obligated to pay the former
shareholders of Exeter up to an aggregate of $4,000,000 in cash or stock
over the next two years. Therefore, the timing and amount of such
capital requirements cannot be accurately predicted. If capital
requirements vary materially from those currently planned, the Company
may require financing sooner than anticipated. The Company is currently
seeking additional financing; however, there can be no assurance that
any such commitments can be obtained on favorable terms, if at all. If
the Company is unable to obtain financing as needed, the Company may
default on its obligations to its creditors who would have the right to
foreclose on TTI Exeter, Inc. which currently generates nearly all of
the Company's revenues.
(Continued)
16
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
Management's plan for achieving profitable operations include
capitalizing on its strategy of diversification into the produce
grading, sorting, sizing equipment and packaging industry through the
acquisition of Exeter as supplemental to its core business - the POWER
system. The Company is developing a proactive sales and marketing
program, along with on-going product developments with the objective of
generating revenues, profits and market share. Management's plans for
financing the working capital needs of the Company include raising
additional equity and debt as well as restructuring existing debt. As
described in note 4, during May 1998, the Company secured additional
financing with a bank. In addition, the note payable and accrued
interest to related parties in the amount of $1,628,812 at December 31,
1997 was restructured to be due July 1, 1999. Also, the Chairman of the
Board of Directors has agreed to invest an additional $450,000 if
necessary to meet cash needs of the Company during 1998-1999 and other
directors have agreed to guarantee additional debt of $2,000,000 to meet
the Company's cash flow requirements.
Should the Company be unable to achieve profitable operations and obtain
additional financing, the ability of the Company to continue as a going
concern is in substantial doubt.
(12) COMMITMENTS
The Company has entered into various noncancelable operating leases for
office space and vehicles. Future minimum lease payments under
noncancelable operating leases (with initial or remaining lease terms in
excess of one year) as of December 31, 1997 are:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ending
December 31,
- --------------------------------------------------------------------------------
<S> <C>
1998 $168,401
1999 163,341
2000 137,821
2001 112,267
2002 106,800
- --------------------------------------------------------------------------------
</TABLE>
Rental expense was $112,821, $60,059 and $59,740 for the years ended
December 31, 1997, 1996 and 1995, respectively. The Company expects to
renew or replace operating leases in the normal course of business.
One branch office is rented from a limited liability corporation in
which a director is a shareholder. The rental expense on the office is
immaterial.
The Company adopted a 401(k) plan in 1997 which covers all employees who
work more than 1,000 hours a year and have attained the age of 21.
Participants may contribute up to 15% of their pay and their
contributions are 100% vested at all times. The Company contributed
$9,916 to the plan in 1997. Company contributions are 100% vested after
5 years.
17
<PAGE>
EXETER ENGINEERING, INC.
Financial Statements
October 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
EXETER ENGINEERING, INC.
Financial Statements
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report....................................................................................... 1
Balance Sheets - October 31, 1997 and 1996......................................................................... 2
Statements of Operations - Three-year Period Ended October 31, 1997................................................ 3
Statements of Stockholders' Equity (Deficit) - Three-year Period Ended October 31, 1997............................ 4
Statements of Cash Flows - Three-year Period Ended October 31, 1997................................................ 5
Notes to Financial Statements...................................................................................... 6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Exeter Engineering, Inc.:
We have audited the accompanying financial statements of Exeter Engineering,
Inc., as listed in the accompanying index. 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 Exeter Engineering, Inc. as
of October 31, 1997 and 1996 and the results of its operations and cash flows
for each of the years in the three-year period ended October 31, 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 9 to the financial
statements, the Company has suffered recurring losses from operations and has
both a working capital and stockholders' deficit that raise substantial doubt
about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 9. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
KPMG PEAT MARRICK LLP
March 20, 1998
1
<PAGE>
EXETER ENGINEERING, INC.
Balance Sheets
October 31, 1997 and 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 78,982 21,478
Employee advances 2,338 -
Current portion of notes receivable, trade 160,903 12,000
Trade accounts receivable 812,293 403,707
Inventories 83,742 629,254
Costs and earnings in excess of billings 20,932 40,421
Prepaid expenses and other assets 17,113 20,114
- --------------------------------------------------------------------------------------------------------------------
Total current assets 1,176,303 1,126,974
Property, plant and equipment, net 121,107 160,976
Note receivable, trade, less current portion 97,769 45,307
Note receivable, related parties 71,346 46,054
- --------------------------------------------------------------------------------------------------------------------
$ 1,466,525 1,379,311
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------------------------------------------
Current liabilities:
Book overdraft $ 68,820 58,050
Accounts payable 285,596 564,975
Current portion of notes payable 602,708 118,744
Billings in excess of costs on uncompleted contracts 693,818 661,199
Accrued withholdings 370,587 159,328
Other accrued liabilities 87,899 115,369
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,109,428 1,677,665
- --------------------------------------------------------------------------------------------------------------------
Notes payable, less current portion 204,784 504,797
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity (deficit):
Capital stock, par $1; authorized 500,000 shares; issued and
outstanding 90,000 shares in 1997 and 1996 90,000 90,000
Deficit (937,687) (893,151)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (847,687) (803,151)
- --------------------------------------------------------------------------------------------------------------------
$ 1,466,525 1,379,311
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
EXETER ENGINEERING, INC.
Statements of Operations
Years ended October 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
====================================================================================================================
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 3,722,751 3,370,985 4,083,188
Cost of goods sold 2,232,948 2,515,616 3,032,605
- --------------------------------------------------------------------------------------------------------------------
Gross profit 1,489,803 855,369 1,050,583
- --------------------------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative expenses 766,650 781,582 788,220
Technical support expense 308,201 418,502 219,894
Manufacturing expense 208,238 214,688 302,841
Engineering and development 155,375 209,958 145,616
- --------------------------------------------------------------------------------------------------------------------
Total expenses 1,438,464 1,624,730 1,456,571
- --------------------------------------------------------------------------------------------------------------------
Operating income (loss) 51,339 (769,361) (405,988)
- --------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 24,232 8,733 9,657
Interest expense (125,886) (61,800) (96,490)
Miscellaneous income 5,779 64,537 63,441
- --------------------------------------------------------------------------------------------------------------------
(95,875) 11,470 (23,392)
- --------------------------------------------------------------------------------------------------------------------
Loss before income taxes (44,536) (757,891) (429,380)
Income taxes - - -
- --------------------------------------------------------------------------------------------------------------------
Net loss $ (44,536) (757,891) (429,380)
====================================================================================================================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
EXETER ENGINEERING, INC.
Statements of Stockholders' Equity (Deficit)
Years ended October 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
===============================================================================================================================
Total
Retained stockholders'
Common earnings equity
Shares stock (deficit) (deficit)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, October 31, 1994 90,000 $ 90,000 294,120 384,120
Net loss - - (429,380) (429,380)
- -----------------------------------------------------------------------------------------------------------------------------
Balance (deficit), October 31, 1995 90,000 90,000 (135,260) (45,260)
Net loss - - (757,891) (757,891)
- -----------------------------------------------------------------------------------------------------------------------------
Balance (deficit), October 31, 1996 90,000 90,000 (893,151) (803,151)
Net loss - - (44,536) (44,536)
- -----------------------------------------------------------------------------------------------------------------------------
Balance (deficit), October 31, 1997 90,000 $ 90,000 (937,687) (847,687)
=============================================================================================================================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EXETER ENGINEERING, INC.
Statements of Cash Flows
Years ended October 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (44,536) (757,891) (429,380)
Adjustments to reconcile net loss to net cash provided by
(used in) by operating activities:
Depreciation and amortization 47,229 47,500 56,837
(Gain) loss on sale of property, plant and equipment 23,269 518 (3,916)
Changes in assets and liabilities:
Trade accounts receivable (408,586) (61,830) (109,982)
Inventories 545,512 (301,536) 432,702
Costs and earnings in excess of billings 19,489 (40,421) 37,213
Prepaid expenses and other assets 3,001 (2,344) (17,770)
Accounts payable (279,379) 249,614 18,366
Billings in excess of costs on uncompleted contracts 32,619 648,236 12,963
Accrued withholdings 211,257 86,921 8,131
Other accrued liabilities (27,470) (8,489) 37,679
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 122,405 (139,722) 42,843
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from (increases in) employee advances and notes receivable (228,995) 88,568 549
Proceeds from sale of property, plant and equipment 51,900 - 4,000
Additions to property, plant and equipment (82,529) (22,234) (36,238)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (259,624) 66,334 (31,689)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayments of notes payable (9,903) (34,095) -
Proceeds from issuance of notes payable 193,856 51,730 20,433
Change in book overdraft 10,770 11,443 46,607
Repayments of long-term debt - - (62,442)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 194,723 29,078 4,598
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 57,504 (44,310) 15,752
Cash at beginning of year 21,478 65,788 50,036
- -------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 78,982 21,478 65,788
- -------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Cash paid for:
Interest $ 112,945 61,800 96,489
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
EXETER ENGINEERING, INC.
Notes to Financial Statements
October 31, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Exeter Engineering, Inc. (the "Company") is a California corporation
that manufactures and sells mechanized material handling products,
computerized process controls and electronic optical recognition
systems. The Company operates in a market selling graders, sizers and
other machinery and systems primarily in the citrus and potato
processing industries.
REVENUE RECOGNITION
The Company accounts for its revenue and expenses on a contract basis
using the percentage-of-completion method for the recognition of
revenue. Under this method, income is recognized as a contract
progresses. The recognized income is that percentage of estimated total
income that incurred costs to date bear to estimated total costs to
complete the contract. Revisions in cost and profit estimates are made
when conditions requiring such revisions become known. Anticipated
losses on contracts are recognized in earnings as soon as such losses
are determined to be probable and reasonably estimable.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost of inventory
is determined by the accumulation of the costs of materials, labor and
direct overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is
provided over the estimated useful life of the respective assets using
the straight-line and accelerated methods. Leasehold improvements are
amortized over the shorter of the lease term or estimated useful life of
the asset.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, on November 1, 1996.
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount
which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of SFAS No.
121 did not have a material impact on the Company's financial position,
results of operations or liquidity.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and
development costs included in selling, general and administrative
expenses were $637, $6,999 and $4,561 in 1997, 1996 and 1995,
respectively.
(Continued)
6
<PAGE>
EXETER ENGINEERING, INC.
Notes to Financial Statements
WARRANTY AND PRODUCT LIABILITY
The Company offers a limited one-year warranty. Estimated warranty costs
are accrued and expensed at the time revenue is recognized. Warranty
costs to date have been immaterial. The Company carries product
liability insurance in amounts considered sufficient by management.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(2) CONTRACT BILLING STATUS
Information with respect to the billing status of uncompleted contracts
was as follows at October 31:
<TABLE>
<CAPTION>
==========================================================================================================================
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 2,992,593 2,203,901
Estimated earnings 144,720 85,574
- --------------------------------------------------------------------------------------------------------------------------
3,137,313 2,289,475
Less billings to date 3,810,199 2,910,253
- --------------------------------------------------------------------------------------------------------------------------
$ (672,886) (620,778)
==========================================================================================================================
Included in accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 20,932 40,421
Billings in excess of costs and estimated earnings on
uncompleted contracts (693,818) (661,199)
- --------------------------------------------------------------------------------------------------------------------------
$ (672,886) (620,778)
==========================================================================================================================
</TABLE>
(Continued)
7
<PAGE>
EXETER ENGINEERING, INC.
Notes to Financial Statements
<TABLE>
<CAPTION>
===========================================================================================================================
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
===========================================================================================================================
Useful lives 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and fixtures 7 years $ 152,762 149,704
Automobiles 5 years 156,318 225,404
Equipment 5 years 190,257 187,521
Leasehold improvements 5 years 93,060 93,061
--------------------------------
592,397 655,690
Less accumulated depreciation and amortization 471,290 494,714
--------------------------------
$ 121,107 160,976
================================
</TABLE>
(Continued)
8
<PAGE>
EXETER ENGINEERING, INC.
Notes to Financial Statements
<TABLE>
<CAPTION>
__________________________________________________________________________________________________________________
(4) Long-term Debt
Long-term debt at October 31, 1997 and 1996 consists of the following:
1997 1996
- ------------------------------------------------------------------------------------------------------------------
__________________________________________________________________________________________________________________
<S> <C> <C>
Note payable in monthly installments of $409 including interest at 11.90%,
paid February 1997, secured by vehicle $ - 6,018
Note payable in monthly installments of $584 including interest at 9.95%,
paid March 1997, secured by vehicle - 9,106
Note payable in monthly installments of $626 including interest at 8.25%,
paid May 1997, secured by vehicle - 11,118
Note payable in monthly installments of $320 including interest at 7.00%,
final payment is due October 1998, secured by vehicle 1,263 4,565
Note payable in monthly installments of $493 including interest at 8.99%,
final payment is due February 1999, secured by vehicle 5,991 11,523
Note payable in monthly installments of $410 including interest at 10.90%,
final payment is due October 2000, secured by vehicle 11,940 15,081
Note payable in monthly installments of $879 including interest at 9.99%,
final payment is due January 2001, secured by vehicle 29,165 -
Note payable in monthly installments of $639 including interest at 8.00%,
final payment is due June 2002, secured by vehicle 29,779 -
Note payable with no monthly principal due and interest paid monthly at
prime plus 1.5% on outstanding principal, principal due May 1999,
unsecured 188,152 96,887
Note payable with no monthly principal due and interest paid monthly at
9.00% on outstanding principal, entire principal due January 1998,
unsecured 168,500 185,000
Note payable in monthly installments of $4,614 including interest at
10.00%, final payment is due April 1999, secured by UCCL 68,854 -
Note payable in monthly installments of $3,249 including interest at 8.00%,
final payment is due July 2001, secured by accounts receivable and
machinery and equipment 165,209 195,838
Note payable, with an interest rate of 8.5%, due on demand, unsecured 14,477 13,405
Note payable, with an interest rate of 8.25%, due on demand, unsecured 41,601 75,000
Note payable, with an interest rate of 8.0%, due on demand, unsecured 26,561 -
Note payable, with an interest rate of 8.5%, due on demand, unsecured 6,000 -
Note payable, with an interest rate of 8.5%, due on demand, unsecured 50,000 -
- ------------------------------------------------------------------------------------------------------------------
Total long-term debt 807,492 623,541
Less current installments 602,708 118,744
- ------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding current installments $ 204,784 504,797
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Maturities of these obligations for the years following October 31, 1997
are as follows: 1998, $602,708; 1999, $72,283; 2000, $55,809; 2001,
$46,726; and 2002, $29,966.
9
<PAGE>
EXETER ENGINEERING, INC.
Notes to Financial Statements
(5) Income Taxes
The actual tax benefit for the three-year period ended October 31, 1997
differs from the "expected" tax benefit (computed by applying the U. S.
federal corporate tax rate of 34% to loss before income taxes) as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax benefit $ (15,100) (257,700) (146,000)
State tax expense (benefit), net of federal income
tax benefit 7,600 (45,000) (28,500)
Change in the valuation allowance for deferred tax
assets (75,100) 217,800 200,500
Penalties 33,300 7,300 -
Other 49,300 77,600 (26,000)
- ----------------------------------------------------------------------------------------------------------------
$ - - -
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
October 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Timing differences on percentage of completion $ 166,000 225,000 75,000
Accounts receivable principally due to allowance
for doubtful accounts 69,700 136,800 125,500
Net operating loss carryforwards 58,900 56,500 -
Other 48,600 - -
- ----------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 343,200 418,300 200,500
Less valuation allowance (343,200) (418,300) (200,500)
- ----------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ - - -
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(6) Commitments
The Company has entered into various noncancelable operating leases for
office space. Future minimum lease payments under noncancelable
operating leases (with initial or remaining lease terms in excess of one
year) as of October 31, 1997 are:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Year ending October 31:
1998 $ 72,000
1999 72,000
2000 72,000
2001 72,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
10
<PAGE>
ENTER ENGINEERING, INC.
Notes to Financial Statements
________________________________________________________________________________
Rental expense was $91,060, $83,756 and $76,939 for the years ended
October 31, 1997, 1996 and 1995, respectively. The Company expects to
renew or replace operating leases in the normal course of business.
(7) MAJOR CUSTOMERS
Sales to one major customer amounted to approximately $740,000 in 1996.
No other customer represented 10% or more of sales in 1997, 1996 or
1995.
(8) SUBSEQUENT EVENTS
Effective January 31, 1998, the Company entered into a merger agreement
with TTI Technologies, Inc. ("TTI"). All of the outstanding stock of the
Company was acquired for $500,000 and 800,000 shares of TTI common
stock. The shares issued in conjunction with this merger will be valued
based on the fact that the former stockholder of the Company may elect
to sell all or a portion of TTI's shares received. If these shares sell
for a gross price less than $5.00 per share, TTI is obligated to issue
additional shares or cash, at the sellers' option, for the difference.
(9) CONTINGENCY
As shown in the accompanying financial statements, the Company has
incurred net losses of $44,536, $757,891 and $429,380 for the years
ended October 31, 1997, 1996 and 1995, respectively, and has both a
working capital and stockholders' deficit of $933,125 and $847,687,
respectively at December 31, 1997. Should the Company be unable to
achieve profitable operations and obtain additional financing, the
ability of the Company to continue as a going concern is in substantial
doubt.
Management of TTI is attempting to raise additional equity and
negotiating a new debt agreement.
(10) MANUFACTURING AGREEMENTS
In 1986, the Company entered into a manufacturing agreement with
International Accu Pack Systems, Inc. ("Accu Pack Systems"), a closely
held Californian company. Accu Pack Systems developed and owned the
infrared technology of the Accu Pack Sizer. Under the terms of the
agreement, the Company will produce, install, service and maintain Accu
Pack Sizers in accordance with the plans and specifications provided by
Accu Pack Systems. Under the terms of the agreement, Accu Pack Systems
retains ownership of its proprietary technology and the Company has the
exclusive right to sell the Accu Pack Sizer. Accu Pack Systems receives
10% of the net revenues from sales of the Accu Pack Sizer. Accu Pack
Systems co-developed the transport system for the potato graders and as
a result received 2% of the net sales from revenues of the Accu Vision
potato grader.
Upon effectiveness of the merger described in Note 8, TTI assumed the
existing exclusive consulting and license agreement between the Company
and George Mills dated January 1, 1992. As a consultant, Mr. Mills is
paid an annual sum of $60,000, payable monthly, with 5% annual
increases. The Company exclusively licenses the rights to the Accu
Vision Grader from Mr. Mills and pays a royalty fee on various
applications of the Accu Vision Grader. The Company pays Mr. Mills 3% of
net revenues from sales of the citrus grader and citrus puff detection
systems, 3% of net revenues from sales of the Accu Vision Potato Grader,
and 1.5% of net revenues from sales of the combined potato
grader/sizers.
11
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Financial Statements
June 30, 1998
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Financial Statements
INDEX
________________________________________________________________________________
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets - June 30, 1998 and December 31, 1997.......................... 1
Condensed Consolidated Statements of Operations - Six Months Ended June 30, 1998 and 1997............ 2
Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997............ 3
Notes to Condensed Consolidated Financial Statements................................................. 4
</TABLE>
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
============================================================================================================================
June 30, December 31,
ASSETS 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 194,694 10,194
Employee advances and notes receivable 94,260 110,998
Trade accounts receivable, net 526,521 474,655
Inventories 1,186,648 54,345
Costs and estimated profits/losses in excess of billings on uncompleted contracts 512,098 238,761
Prepaid expenses 21,859 3,326
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 2,536,080 892,279
Property, plant and equipment, net 623,515 237,536
Construction in progress on plant held for sale 223,010 223,010
Other assets 100,000 718,063
Intangible assets, net 4,384,657 123,136
- ----------------------------------------------------------------------------------------------------------------------------
$ 7,867,262 2,194,024
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 684,162 1,166,994
Notes payable 4,946,862 2,278,147
Notes payable to related parties 283,195 1,133,616
Billings in excess of costs on uncompleted contracts 1,054,059 654,957
Other current liabilities 240,784 439,364
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,209,062 5,673,078
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding current portion 2,169,462 286,140
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (deficit):
Preferred stock, par value of $.0001 - -
Common stock, par value of $.0001 597 535
Additional paid-in capital 10,084,643 5,086,735
Notes receivable - common stock subscription (425,147) (532,724)
Accumulated deficit (11,171,355) (8,319,740)
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (1,511,262) (3,765,194)
- ----------------------------------------------------------------------------------------------------------------------------
$ 7,867,262 2,194,024
============================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
Six months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Construction $ - -
Fabrication 2,128,729 2,064,087
- -----------------------------------------------------------------------------------------------------------------------
2,128,729 2,064,087
- -----------------------------------------------------------------------------------------------------------------------
Cost of goods sold:
Construction - -
Fabrication 2,110,864 1,652,507
- -----------------------------------------------------------------------------------------------------------------------
2,110,864 1,652,507
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 17,865 411,580
Selling, general and administrative expenses 2,508,057 963,663
- -----------------------------------------------------------------------------------------------------------------------
Operating loss (2,490,192) (552,083)
- -----------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (376,471) (164,506)
Miscellaneous income (expense) 15,049 (1,553)
- -----------------------------------------------------------------------------------------------------------------------
(361,422) (166,059)
- -----------------------------------------------------------------------------------------------------------------------
Loss before income taxes (2,851,614) (718,142)
Income taxes - -
- -----------------------------------------------------------------------------------------------------------------------
Net loss $ (2,851,614) (718,142)
- -----------------------------------------------------------------------------------------------------------------------
Loss per share:
Basic $ (0.52) (0.17)
- -----------------------------------------------------------------------------------------------------------------------
Diluted $ (0.52) (0.17)
- -----------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 5,488,155 4,183,999
- -----------------------------------------------------------------------------------------------------------------------
Diluted 5,488,155 4,183,999
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net cash used by operating activities $ (2,370,114) (1,580,166)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payment to Exeter Engineering, Inc., net of cash received (441,719) -
Additions to employee advances and notes receivable, net (102,407) (544,571)
Additions to intangible assets - (143,996)
Additions to property, plant and equipment - (27,114)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (544,126) (715,681)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable, net 4,090,986 386,729
Proceeds from issuance of notes payable to related parties 500,000 (4,711)
Repayments of notes payable to related parties (1,657,746) -
Proceeds from issuance of long-term debt - 1,893,665
Proceeds from issuance of common stock 165,500 53,121
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,098,740 2,328,804
- --------------------------------------------------------------------------------------------------------------------------
Net increase in cash 184,500 32,957
Cash at beginning of year 10,194 4,603
- --------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 194,694 37,560
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(1) PRESENTATION
The condensed consolidated financial statements include the accounts of TTI
Technologies, Inc. and its wholly-owned subsidiary TTI Exeter, Inc. (See
note 2) (the "Company"). All significant inter-company transactions have
been eliminated in consolidation.
The condensed consolidated financial statements are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position, operating results and cash flows for the interim
periods. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained elsewhere in the Prospectus for the year ended December 31, 1997.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results for the entire fiscal year ending
December 31, 1998.
(2) BUSINESS COMBINATION
Effective January 29, 1998, the Company entered into a merger agreement
with Exeter Engineering, Inc. ("Exeter"). The Company has merged TTIC and
Exeter and the surviving company was named TTI Exeter, Inc. All of the
outstanding stock of Exeter was acquired for $500,000 cash and 800,000
shares of common stock. The shares issued in conjunction with this merger
will be valued based on the fact that the former stockholders of Exeter may
elect to sell all or a portion of the Company's shares received. If these
shares sell for a gross price of less than $5.00 per share, the Company is
obligated to issue additional shares or cash, at the seller's option, for
the difference. The Company has structured this guarantee by agreeing to
pay the difference between $5.00 and the sales price received by the former
stockholders of Exeter for each share sold with such deficiencies, if any,
due at schedules settlement dates. Pursuant to the terms of the merger
agreement, the company agreed to register with the United States Securities
and Exchange Commission 400,000 of the 800,000 shares of the Company stock
issued pursuant to the merger. The merger agreement provides for lockup
periods governing the sale of the 400,000 shares being registered. If the
Company is unable to create a market for its securities, the Company may be
obligated to pay the former shareholders of Exeter up to an aggregate of
$4,000,000 in cash or stock over the next two years. The Company has also
agreed to provide TTI Exeter, Inc. with capital and operating budgets which
include providing to TTI Exeter, Inc., by January 28, 1999, a $500,000 line
of credit for operations, $100,000 in research and development monies,
$500,000 for improvement of equipment and facilities, approximately
$150,000 in marketing funding, and $150,000 for application against TTIC's
accounts payable. The Company has pledged 100% of its stock ownership in
TTI Exeter, Inc. as a security interest to the selling shareholders of
Exeter in case the Company does not honor all of its obligations contained
in the merger agreement. The Company will be in default on its obligations
if it (1) fails to perform on its obligation to assure a minimum $5.00 per
share sales price for the shares (2) fails to make funding available to TTI
Exeter, Inc. by January 28, 1999 (3) had made any warranty in the pledge
agreement that proves to be false in any material respect when made or
furnished or (4) transfers all or substantially all of TTI Exeter, Inc.'s
assets in a single or series of transactions without the consent of the
former shareholders of Exeter.
This transaction was accounted for as a purchase. Accordingly the result of
operations of Exeter have been included in the accompanying condensed
consolidated financial statements since the effective date of the merger.
Exeter engages in the design, fabrication and installation of entire fresh
produce packing plants and portions of food processing lines.
(Continued)
4
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
The allocation of the purchase price of the above combination are as
follows:
<TABLE>
<S> <C>
Employee advances and notes receivable $ 306,002
Trade accounts receivable 686,662
Inventory 1,894,264
Prepaid expenses 18,001
Property, plant and equipment 421,615
Intangible assets 4,558,014
Accounts payable (288,217)
Notes payable (461,051)
Notes payable to related parties (807,325)
Billings in excess of costs on uncompleted contracts (1,693,695)
Other current liabilities (192,551)
Stockholder's deficit (4,000,000)
- --------------------------------------------------------------------------------
Cash paid, net of cash received $ 441,719
- --------------------------------------------------------------------------------
</TABLE>
The following sets forth the pro forma results of operations as if the
merger with Exeter Engineering, Inc. had occurred as of January 1,
1996. This pro forma information may not necessarily be indicative of
actual results had the merger occurred on January 1, 1996.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Six months ended Six months ended
June 30, 1998 June 30, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $2,302,292 $3,075,420
Net loss $(2,961,378) $(773,711)
Loss per share - Basic $(0.48) $(0.47)
Loss per share - Diluted $(0.48) $(0.47)
- --------------------------------------------------------------------------------
</TABLE>
(3) LONG-TERM DEBT
On May 4, 1998, the Company borrowed $4,000,000 from U.S. Bank National
Association. The Company entered into a promissory note for repayment of
the loan in one principal payment of $4,000,000 due on May 1, 2000 plus
interest set at the Bank's national reference rate plus two percent. On May
4, 1998, the applicable interest rate was 10.5% per annum but is subject to
change during the term of the loan. The loan is unsecured by the Company
but personally guaranteed by certain stockholders and directors of the
Company. Events of default under the promissory note include, among other
items, if any guarantor dies, any material adverse changes in the Company's
financial condition occurs or the bank believes the prospect of payment or
performance of the indebtedness is impaired; or the bank in good faith
deems itself insecure. In the event of default, the bank may declare the
entire unpaid principal balance on the line of credit and all accrued
unpaid interest immediately due and payable, without notice. As a result of
the Bank's acceleration rights under the note, the outstanding balance of
the note is classified as a current liability at June 30, 1998.
On March 1, 1998, the Company borrowed $500,000 from Ridges, a Nebraska
Limited Partnership and related party, by execution of a promissory note
with 12% interest per annum, with principal and all accrued interest due on
or before January 2, 1999.
(Continued)
5
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(4) LOSS PER SHARE
Loss per share of common stock has been computed on the basis of Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share,"
which revised the calculation and presentation provisions of Accounting
Principals Board (APB) Opinion 15 and related interpretations. SFAS No.
128, which is effective for periods ending after December 15, 1997,
requires companies to present, both currently and retroactively, basic
earnings per share and diluted earnings per share instead of primary and
fully-diluted earnings per share which was previously required under APB
Opinion 15. Accordingly, earnings per share for all periods presented have
been restated to apply the provisions of SFAS No. 128.
(5) CONTINGENCIES
The Company has incurred net losses of $2,631,867, $3,251,772 and $974,353,
and has used cash in operating activities of $2,558,545, $1,178,274 and
$494,683 for the years ended December 31, 1997, 1996 and 1995,
respectively. For the six months ended June 30, 1998, the Company incurred
a net loss of $2,851,614 and used cash in operations of $2,370,114. The
Company has a working capital deficiency of $4,672,982 and a stockholders'
deficit of $1,511,262 at June 30, 1998. Losses are due primarily to the
fact that the Company's POWER System is pending final developmental
refinements and has not yet become commercially viable. There can be no
assurance that the Company will ever be successful in licensing,
constructing or operating a POWER System for commercial use or that the
POWER System will be technically or commercially viable.
As discussed in note 2, the Company merged TTIC and Exeter in January 1998
to create TTI Exeter, Inc. Exeter has incurred net losses of $44,536,
$757,891 and $429,380 for the years ended October 31, 1997, 1996 and 1995,
respectively. The net loss of Exeter since January 29, 1998 is included in
the loss for the six months ended June 30, 1998 discussed above. There can
be no assurances that TTI Exeter, Inc. will not continue to operate at a
net loss in the future.
The Company believes that the capital raised from earlier sales of the
Company's securities, operating revenues, and the $4,000,000 note payable
discussed in note 3 will not be sufficient to meet the Company's capital
requirements for the next twelve months. The Company's capital requirements
depend on numerous factors, including its ability to have its securities
listed and trading at a certain price, rate of market acceptance of the
Company's products, the Company's ability to maintain and expand its
customer base, the level of resources required to expand the Company's
marketing and sales organization and research and development activities,
and other factors. The Company believes that in order to meet operating
expenses and capital requirements for the next twelve months, that it will
have to secure additional financing. There is no assurance that the Company
will be able to obtain such financing on terms acceptable to it, if at all.
As described in note 2, the Company may be obligated to pay the former
shareholders of Exeter up to an aggregate of $4,000,000 in cash or stock
over the next two years. Therefore, the timing and amount of such capital
requirements cannot be accurately predicted. If capital requirements vary
materially from those currently planned, the Company may require financing
sooner than anticipated. The Company is currently seeking additional
financing; however, there can be no assurance that any such commitments can
be obtained on favorable terms, if at all. If the Company is unable to
obtain financing as needed, the Company may default on its obligations to
its creditors who would have the right to foreclose on TTI Exeter, Inc.
which currently generates nearly all of the Company's revenues.
(Continued)
6
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Management's plan for achieving profitable operations include capitalizing
on its strategy of diversification into the produce grading, sorting,
sizing equipment and packaging industry through the acquisition of Exeter
as supplemental to its core business - the POWER system. The Company is
developing a proactive sales and marketing program, along with on-going
product developments with the objective of generating revenues, profits and
market share. Management's plans for financing the working capital needs of
the Company include raising additional equity and debt as well as
restructuring existing debt. As described in note 3, during May 1998, the
Company has secured additional financing. In addition, the note payable and
accrued interest to related parties in the amount of $283,195 at June 30,
1998 was restructured to be due July 1, 1999. Also, the Chairman of the
Board of Directors has agreed to invest an additional $450,000 if necessary
to meet cash needs of the Company during 199 1999 and other directors have
agreed to guarantee additional debt of $2,000,000 to meet the Company's
cash flow requirements.
Should the Company be unable to achieve profitable operations and obtain
additional financing, the ability of the Company to continue as a going
concern is in substantial doubt.
7
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Pro Forma Condensed Consolidated Financial Statements
Basis of Presentation
The following unaudited pro forma condensed consolidated financial statements
give effect to TTI Technologies, Inc. and Subsidiary ("TTI") merging with Exeter
Engineering, Inc. ("Exeter") as if that merger occurred on January 1, 1997 using
the purchase method of accounting. Exeter merged with TTI's subsidiary, TTI
Control Technologies, effective January 29, 1998. The surviving Corporation was
named TTI Exeter, Inc. Consequently, the historical financial statements of TTI
include the results of operations for Exeter since the effective date.
The unaudited pro forma condensed consolidated financial statements are based
upon the historical financial statements of TTI for the year ended December 31,
1997 and for the six months ended June 30, 1998 and of Exeter for the year ended
October 31, 1997 and for the one month ended January 1998 and should be read in
conjunction with those financial statements and notes thereto.
The unaudited pro forma condensed consolidated financial statements do not
necessarily indicate the results that would have actually occurred if the
acquisitions had been in effect on the date indicated or that may occur in the
future.
1
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Pro Forma Condensed Consolidated Statement of Operations
Year ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
TTI Exeter Pro forma Pro forma
adjustments TTI
<S> <C> <C> <C> <C>
Net sales $ 5,518,437 3,722,751 9,241,188
Cost of goods sold 5,295,229 2,232,948 7,528,177
------------ --------- -----------
Gross profit 223,208 1,489,803 1,713,011
Operating expenses 2,390,122 1,438,464 (a) 651,145 4,479,731
Other expenses, net 464,953 95,875 560,828
-------------- ------------ -----------
Net loss $ (2,631,867) (44,536) (3,327,548)
============== ============ ===========
Loss per share - Basic $ (0.62) (0.66)
===== =====
Loss per share - Diluted $ (0.62) (0.66)
===== =====
Weighted average common
shares outstanding - Basic 4,246,959 (b) 800,000 5,046,959
========= =========
- Diluted 4,246,959 (b) 800,000 5,046,959
========= =========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
2
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Pro Forma Condensed Consolidated Statement of Operations
Six months ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
TTI Exeter Pro forma Pro forma
adjustments TTI
<S> <C> <C> <C> <C>
Net sales $ 2,128,729 173,563 2,302,292
Cost of goods sold 2,110,864 35,343 2,075,521
--------------------------- ---------
Gross profit 17,865 208,906 226,771
Operating expenses 2,508,057 258,681 (a) 54,262 2,821,000
Other expenses, net 361,422 5,727 367,149
-------------- ------------- ------------
Net loss $ (2,851,614) (55,502) (2,961,378)
============== ============= ============
Loss per share - Basic $ (0.52) (0.48)
====== ======
Loss per share - Diluted $ (0.52) (0.48)
====== ======
Weighted average common
shares outstanding - Basic 5,488,155 (b) 685,053 6,173,238
========= =========
- Diluted 5,488,155 (b) 685,083 6,173,238
========= =========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
3
<PAGE>
TTI TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
(1) BUSINESS COMBINATION
Effective January 29, 1998, the Company entered into a merger agreement
with Exeter Engineering, Inc. ("Exeter"). Exeter was merged with the
Company's wholly owned subsidiary, TTI Control Technologies, Inc. The
surviving corporations was named TTI Exeter, Inc. All of the
outstanding stock of Exeter was acquired for $500,000 cash and 800,000
shares of common stock. The shares issued in conjunction with this
merger were valued based on the fact that the former stockholders of
Exeter may elect to sell all or a portion of the Company's shares
received. If these shares sell for a gross price of less than $5.00 per
share, the Company is obligated to issue additional shares or cash, at
the seller's option, for the difference. This transaction was accounted
for as a purchase. Accordingly the result of operations of Exeter have
been included in the historical condensed consolidated financial
statements since the effective date of the merger. Exeter engages in
the design, fabrication and installation of entire fresh produce
packing plants and portions of food processing lines.
(a) Excess Purchase Price Over Fair Value of Net Assets Acquired
For purposes of the pro forma condensed consolidated statements of
operations, an adjustment of $651,145 and $54,262 has been made to
record additional amortization required for the year ended
December 31, 1997 and the six months ended June 30, 1998,
respectively. Goodwill is to be amortized over seven years.
(b) Loss Per Share
For purposes of the pro forma condensed consolidated statements of
operations, an adjustment of 800,000 shares for the year ended
December 31, 1997 and 685,053 for the six months ended June 30,
1998 has been added to weighted average common shares outstanding
to reflect the shares issued in connection with the merger of
Exeter.
4
<PAGE>
No dealer, salesman or any other person has been authorized to
give any information or to make any representations other than
those contained in this prospectus, and, if given or made, such
information or representations may not be relied on as having been
authorized by the Company or by any of the Underwriters. Neither
the delivery of this Prospectus nor any sale made hereunder shall
under any circumstances create an implication that there has been
no change in the affairs of the Company since the date hereof.
This Prospectus does not constitute an offer to sell, or solicitation
of any offer to buy, by any person in any jurisdiction in which it
is unlawful for any such person to make such offer or solicitation.
Neither the delivery of this Prospectus nor any offer, solicitation
or sale made hereunder, shall under any circumstances create any
implication that the information herein is correct as of any time
subsequent to the date of the Prospectus.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary......................................................................................................
Risk Factors............................................................................................................
The Company ............................................................................................................
Use of Proceeds.........................................................................................................
Dilution................................................................................................................
Financing...............................................................................................................
Business................................................................................................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................................................................................................
Management..............................................................................................................
Recent Transactions.....................................................................................................
Security Ownership of Certain
Beneficial Owners and Management......................................................................................
Concurrent Sales by Selling Securityholders.............................................................................
Description of Securities...............................................................................................
Legal Proceedings.......................................................................................................
Legal Matters...........................................................................................................
Experts.................................................................................................................
Available Information...................................................................................................
Index to Financial Statements...........................................................................................
</TABLE>
Until 90 days after the Effective Date, all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a prospectus. This is in addition to
the obligations of dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
=======================
TTI Technologies, Inc.
500,000 Shares of Common Stock;
888,500 shares of Common Stock,
1,367,103 Warrants and
1,367,103 Shares of Common Stock
underlying such Warrants
to be sold by the Holders Thereof
----------
PROSPECTUS
----------
August ____, 1998
=======================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses in connection with this
Registration Statement. All of such expenses are estimates, other than the
filing fees payable to the Securities and Exchange Commission.
Filing Fee - Securities and Exchange Commission $ 2,230
Fees and Expenses of Accountants 135,000
Fees and Expenses of legal counsel 100,000
Blue Sky Fees and Expenses 5,000
Printing and Engraving Expenses 3,000
Miscellaneous Expenses 3,000
Total $248,230
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is incorporated in Delaware. Under Section 145 of the General
Corporation Law of the State of Delaware, a Delaware corporation has the power,
under specified circumstances, to indemnify its directors, officers, employees
and agents in connection with actions, suits or proceedings brought against them
by a third party or in the right of the corporation, by reason of the fact that
they were or are such directors, officers, employees or agents, against expenses
incurred in any action, suit or proceeding. The Certificate of Incorporation and
the By-laws of the Company provide for indemnification of directors and officers
to the fullest extent permitted by the General Corporation Law of the State of
Delaware.
The General Corporation Law of the State of Delaware provides that a
certificate of incorporation may contain a provision eliminating the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock) of
the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit. The
Company's Certificate of Incorporation contains such a provision.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS
CONTROLLING THE COMPANY PURSUANT TO THE FOREGOING PROVISIONS, IT IS THE OPINION
OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH INDEMNIFICATION IS AGAINST
PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
As listed below, the Company issued shares of its Common Stock par value
$.0001 per share to the following individuals or entities for the consideration
as listed in cash or services. All sales made within the United States or to
United States citizens or residents, were made in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933.
<TABLE>
<CAPTION>
Date Shareholder Number of Shares Consideration
- ---- ----------- ---------------- -------------
<S> <C> <C> <C>
11/06/95 Ronald Roots 780,707 $1,031,226
11/06/95 Karma Roots 40,648 Included above
11/06/95 Timothy McReynolds(Voting Trust #1) 286,446 $0
11/06/95 Ronald Roots 281,431 $196,694
11/06/95 Timothy McReynolds 266,956 $144,332
11/06/95 Jeannette McReynolds 2,353 $2,500
11/06/95 Terracare, Inc. 81,701 $111,807
11/06/95 Mech-Chem Associates, Inc. 188,236 $80,000
11/06/95 Donald Gall 2,353 $2,500
11/06/95 Jordan Fox-Collis 2,353 $2,500
11/06/95 Frank West 15,687 $50,000
11/06/95 Michael Dudding 7,844 $25,000
11/06/95 Alan Bogge 7,884 $25,000
11/06/95 Robert Brummer 9,412 $30,000
11/06/95 James Lukas 17,074 $54,422
11/06/95 John Feagler 20,160 $64,256
11/06/95 Mustang Partnership 16,703 $53,239
11/06/95 Waste Partnership 23,383 $74,533
11/06/95 Rolland & Bonnie Collins 16,703 $53,239
11/06/95 McReynolds, as Trustee of trust 58,824 $0
11/06/95 Joseph A. Macchietto 7,844 $25,000
11/06/95 Horace Ginn, Marian Ginn 942 $3,000
11/06/95 Andrew Ginn and Kathleen Ginn 942 $3,000
11/06/95 Kathleen Ginn 942 $3,000
11/06/95 Joseph Simpson and Kathy Simpson 1,600 $5,100
11/06/95 George Kotch 2,353 $7,500
01/25/96 John Feagler 12,353 $26,250
02/15/96 Edward Zachary 5,000 $25,000
01/15/96 Michael Amick 5,000 $25,000
01/25/96 Hematology Associates PC 10,000 $50,000
04/11/96 Robert Hancock 5,000 $25,000
06/25/96 HiTech, Inc. 70,589 acquisition
06/25/96 Jordan Fox-Collis 14,118 acquisition
06/25/96 George Kotch 2,500 employee bonus
06/25/96 Raymond Pape 4,000 $200,000
03/19/97 Michael Fahey 104,384 $221,816
03/19/97 Ronald Burns 104,384 $221,816
05/05/97 James McClymond 25,000 $13,125
09/05/97 John Wiskowski 8,000 $50,000
09/05/97 Arthur Steinberg 8,000 $50,000
09/15/97 Ronald Carson 4,000 $25,000
09/15/97 Robert Crawford 4,000 $25,000
09/15/97 Victor Radzibaba 4,000 $25,000
09/15/97 Stanley Magid 4,000 $25,000
09/15/97 James Venezia 4,000 $25,000
09/22/97 Herman Heintein 4,000 $25,000
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C> <C> <C>
09/22/97 William McNeil 4,000 $25,000
09/22/97 Maurice Gozlan 2,000 $12,500
10/02/97 Azriel Nagar 4,000 $25,000
09/05/97 Arthur Steinberg Ira Rollover 8,000 $50,000
12/30/97 Porter & Hedges 20,000 services rendered
12/30/97 Blackwell Sanders 5,130 $11,747
12/31/97 Ronald Burns 193,658 $442,646
12/31/97 James McClymond 48,606 $111,100
12/31/97 Timothy J. McReynolds 72,844 $166,500
12/31/97 Donald Gall 23,414 $53,516
12/31/97 Bernard Reznicek 24,281 $55,500
12/31/97 Charles Fox-Collis 24,150 $55,200
12/31/97 Wayne Simmonds 48,179 $111,266
12/31/97 Robert Peterson 22,998 $52,567
12/31/97 Ronald Burns 193,658 $442,646
12/31/97 James McClymond 48,606 $111,100
12/31/97 Timothy J. McReynolds 72,844 $166,500
12/31/97 Donald Gall 23,414 $ 53,516
12/31/97 Bernard W. Reznicek 24,281 $ 55,500
12/31/97 Charles Jordan Fox-Collis 24,150 $ 55,200
12/31/97 Wayne Simmonds 48,679 $111,266
12/31/97 Robert A. Peterson 22,998 $ 52,566
12/31/97 John J. Fitzgerald 48,271 $110,333
12/31/97 Michael G. Fahey 47,863 $109,400
12/31/97 Kathleen Fahey 47,863 $109,400
12/31/97 Jim Cripe 24,245 $ 55,416
12/31/97 Frank Labedz, Trustee of Labedz Trust 47,956 $109,613
12/31/97 Michael & Barbara R. O'Malley 4,375 $ 10,000
12/31/97 Brigitte Uher 6,563 $ 15,000
12/31/97 Frank Labedz & Shirley Lou Labedz 32,813 $ 75,000
12/31/97 Maurine Joyce DeRoin 43,750 $100,000
12/31/97 Edward Zachary 11,084 Compensation
12/31/97 Joseph J. Rahal 21,875 $ 50,000
12/31/97 Pierce Mill 150,000 Interest Purchase in TPG
Corp.
12/31/97 Kahler & Associates 4,325 Services Rendered
4/9/98 James McClymond 43,750 $100,000
6/1/98 Gilbert Wright 7,500 Services Rendered
6/1/98 Charles W. Shields 7,500 Services Rendered
6/4/98 Jeffrey Batchman 720,000 Stock Exchange
6/4/98 Michael H. Wilkinson 80,000 Stock Exchange
6/4/98 B. H. Capital, Ltd. 16,500 Services rendered
6/30/98 Joseph Rahal 15,000 Compensation
6/30/98 Robert S. Johnson 15,000 Compensation
6/30/98 B. H. Capital, Ltd. 130,000 Compensation
6/30/98 Kahler & Associates 7,675 Compensation
6/30/98 Ronald Burns 10,000 Outside Director's
Compensation
6/30/98 Michael G. Fahey 10,000 Outside Director's
Compensation
6/30/98 Robert G. Aldrich 10,000 Outside Director's
Compensation
6/30/98 James McClymond 10,000 Outside Director's
Compensation
6/30/98 Bernard Reznicek 10,000 Outside Director's
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C> <C>
Compensation
6/30/98 Donald Gall 10,000 Outside Director's
Compensation
6/30/98 Carol Short 1,500 Compensation
6/30/98 Robin Norquay 1,500 Compensation
6/30/98 Rob Reedy 10,000 Consulting services
6/30/98 William J. Riley 10,000 Consulting services
6/30/98 Douglas D. Kluver 10,000 Consulting services
6/30/98 George M. Kotch 10,000 Compensation
6/30/98 John J. Fitzgerald 20,000 Director's Compensation
6/30/98 Miller, Matt 500 Compensation
6/30/98 Turner, Zane 650 Compensation
6/30/98 Janicek, Jeff 500 Compensation
6/30/98 Beightol, Kevin 500 Compensation
6/30/98 Marty, Lynne 500 Compensation
6/30/98 Stowell, Phil 500 Compensation
6/30/98 Smith, Raymond 250 Compensation
6/30/98 Duim, Andy 100 Compensation
6/30/98 Nims, Jeff 500 Compensation
6/30/98 Ariston, Patty 500 Compensation
6/30/98 Barnhart, Charles 100 Compensation
6/30/98 Batchman, Michael 500 Compensation
6/30/98 Bedwell, Jack 1,000 Compensation
6/30/98 Carpenter, David 500 Compensation
6/30/98 Contreras, Dimas 100 Compensation
6/30/98 Flores, Paul 100 Compensation
6/30/98 Greaves, Brian 100 Compensation
6/30/98 Guy, Kevin 500 Compensation
6/30/98 Hill, Dain 100 Compensation
6/30/98 Howard, Barbara 1,000 Compensation
6/30/98 Jewel, Ryan 500 Compensation
6/30/98 Knight, David 100 Compensation
6/30/98 Knight, Mike 100 Compensation
6/30/98 Kyle, Richard 500 Compensation
6/30/98 Lantrip, Richard 1,000 Compensation
6/30/98 Lopez, Anthony 100 Compensation
6/30/98 Lozano, Joseph 1,000 Compensation
6/30/98 Masiel, Jose 500 Compensation
6/30/98 McHugh, James 100 Compensation
6/30/98 Mills, David 500 Compensation
6/30/98 Mills, George 1,000 Compensation
6/30/98 Monroe, David 100 Compensation
6/30/98 Moreno, Pete 100 Compensation
6/30/98 Mudford, Jamie 100 Compensation
6/30/98 Nursery, Harold 100 Compensation
6/30/98 Olesky, Glenna 500 Compensation
6/30/98 Rowland, Elizabeth 100 Compensation
6/30/98 Schultz, Debra 100 Compensation
6/30/98 Shonk, Greg 1,000 Compensation
6/30/98 Spurger, Carlotta 500 Compensation
6/30/98 Stevens, Alan 100 Compensation
6/30/98 Thomas, Michael 500 Compensation
6/30/98 Thomas, Ronnie 100 Compensation
6/30/98 Venegas, Eddie 100 Compensation
6/30/98 Watters, Ronald 100 Compensation
</TABLE>
II-4
<PAGE>
6/30/98 Zavala, David 100 Compensation
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
3.1* Certificate of Incorporation
3.2* By-Laws of the Company
4.1* Form of Common Stock Certificate
4.2* Series A Warrant Agreement and form of Warrant
4.3* Series B Warrant Agreement and form of Warrant
4.4* Series C Warrant Agreement and form of Warrant
4.5* Series D Warrant Agreement and form of Warrant
4.7* Pierce Mill Warrant Agreement and form of Warrant
4.8* Fahey Warrant Agreement and form of Warrants
5.1* Opinion of Cassidy & Associates
10.1* Agreement and Plan of Merger among TTI Technologies, Inc., Exeter
Engineering, Inc., Jeffrey Batchman, and Michael Wilkinson.
21.1* Subsidiaries of the Company
24.1 Consent of KPMG Peat Marwick LLP
24.2* Consent of Cassidy & Associates (included in Exhibit 5)
27* Financial Data Schedule
- ---------------
* To be filed by Amendment.
(b) The following financial statement schedules are included in this
Registration Statement.
None.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission is that such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
TTI Technologies, Inc. certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and has duly caused
this Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Omaha, Nebraska on the
12th day of August, 1998.
TTI TECHNOLOGIES, INC.
By: /s/ Timothy J. McReynolds
President
By /s/ Robert S. Johnson
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Timothy J. McReynolds Director, President August 12, 1998
/s/ John J. Fitzgerald Director August 12, 1998
/s/ Ronald J. Burns Director August 12, 1998
/s/ Michael G. Fahey Director August 12, 1998
/s/ Bernard W. Reznicek Director August 13, 1998
/s/ Jeffrey Batchman Director August 12, 1998
/s/ James M. McClymond Director August 12, 1998
II-7
<PAGE>
EXHIBIT 24.1
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
ACCOUNTANTS' CONSENT
The Board of Directors
TTI Technologies, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Experts" and "Selected Financial Data" in the
prospectus. Our report on TTI Technologies, Inc. and subsidiary dated March 20,
1998, except as to the second paragraph of Note 4 and the third and fifth
paragraphs of Note 11, which are as of May 4, 1998, contains an explanatory
paragraph that states that the Company has suffered recurring losses from
operations and has a working capital and stockholders' deficit, which raise
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements of TTI Technologies, Inc. do not include any
adjustments that might result from the outcome of that uncertainty. Our report
on Exeter Engineering, Inc. dated March 20, 1998 contains an explanatory
paragraph that states that the Company has suffered recurring losses from
operations and has a working capital and stockholders' deficit, which raise
substantial doubt about its ability to continue as a going concern. The
financial statements of Exeter Engineering, Inc. do not include any adjustments
that might result from the outcome of that uncertainty.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Omaha, Nebraska
August 20, 1998
