SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: March 31, 2000; or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _________ to __________
Commission File Number: 000-26261
AMERICAN FIRE RETARDANT CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 88-03826245
------------------------------ -----------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9337 Bond Avenue, El Cajon, California 92021
---------------------------------------------------- ------------------------
(Address of principal executive offices) Zip Code)
(619) 390-6888
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that a
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
On September 30, 1999 there were 2,349,647 shares of the registrant's
Common Stock, $0.01 par value, issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
This Form 10-QSB has 21 pages, the Exhibit Index is located at page 18.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements included herein have been prepared by the Company,
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading.
In the opinion of the Company, all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of March 31, 2000, and the results of its operations and changes in
its financial position from inception through March 31, 2000, have been made.
The results of operations for such interim period is not necessarily indicative
of the results to be expected for the entire year.
Index to Financial Statements
Page
Balance Sheets ......................................................... 3
Statements of Operations ............................................... 5
Statements of Stockholders' Equity (deficit) ............................ 6
Statements of Cash Flows ................................................ 7
Notes to Financial Statements for Period ................................ 8
All other schedules are not submitted because they are not applicable or
not required or because the information is included in the financial statements
or notes thereto.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS
------
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ - $ 3,408
Undeposited funds - 9,821
Inventory 106,627 174,978
Accounts receivable, net 690,715 539,197
------------ ------------
Total Current Assets 797,342 727,404
------------ ------------
PROPERTY AND EQUIPMENT 235,344 240,180
------------ ------------
OTHER ASSETS
Restricted cash 239,537 173,981
Intangible assets, net 38,250 42,500
Deposits and other assets 15,736 15,115
------------ ------------
Total Other Assets 293,523 231,596
------------ ------------
TOTAL ASSETS $ 1,326,209 $ 1,199,180
============ ============
</TABLE>
3
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets (Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Cash overdraft $ 14,157 $ -
Accounts payable 239,818 238,238
Accrued expenses 387,001 422,148
Unearned revenue 29,963 96,986
Shareholder loans 209,640 209,739
Notes payable, current portion 94,018 223,372
Capital leases, current portion 3,179 7,969
Line of credit 1,046,083 755,064
Subscribe stock issuance 5,000 -
------------ ------------
Total Current Liabilities 2,028,859 1,953,516
------------ ------------
LONG-TERM LIABILITIES
Notes payable 303,095 199,825
Capital leases, long-term portion 36,855 36,855
------------ ------------
Total Long-Term Liabilities 339,950 236,680
------------ ------------
Total Liabilities 2,368,809 2,190,196
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value; 25,000,000
shares authorized, 2,349,647 shares issued and
outstanding 2,350 2,350
Additional paid-in capital 921,710 921,710
Accumulated deficit (1,966,660) (1,915,076)
------------ ------------
Total Stockholders' Equity (Deficit) 1,042,660 (991,016)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 1,326,209 $ 1,199,180
============ ============
</TABLE>
4
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET SALES $ 881,811 $ 552,243
COST OF SALES 349,759 171,627
------------ ------------
GROSS MARGIN 532,052 380,616
------------ ------------
EXPENSES
Selling, general and administrative 180,566 181,074
Payroll expense 162,344 119,473
Outside services - 59,441
Travel and entertainment 81,546 11,122
Depreciation and amortization expense 15,958 11,460
Bad debt expense 7,303 5,463
------------ ------------
Total Expenses 447,717 388,033
------------ ------------
INCOME (LOSS) FROM OPERATIONS 84,335 (7,417)
------------ ------------
OTHER EXPENSES
Interest expense (135,919) (72,494)
------------ ------------
Total Other Expenses (135,919) (72,494)
------------ ------------
LOSS BEFORE INCOME TAXES (51,584) (79,911)
PROVISION FOR INCOME TAXES - -
------------ ------------
NET LOSS $ (51,584) $ (79,911)
============ ============
BASIC LOSS PER SHARE $ (0.02) $ (0.04)
============ ============
BASIC WEIGHTED AVERAGE SHARES 2,327,193 2,278,661
============ ============
</TABLE>
5
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Common Stock Additional Stock
--------------------------- Paid-in Subscription Accumulated
Shares Amount Capital Receivable Deficit
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 2,017,953 $ 2,018 $ 730,369 $ (30,000) $ (695,768)
Common stock issued for cash
at $3.87 per share 4,785 5 18,495 - -
Receipt of stock subscription - - - 30,000 -
Common stock issued for
services and interest
at $0.21 per share 255,923 256 52,726 - -
Contributed capital for
services rendered - - 70,500 - -
Net loss for the year ended
December 31, 1998 - - - - (511,104)
------------ ------------ ------------- ------------ ------------
Balance, December 31, 1998 2,278,661 2,279 872,090 - (1,206,872)
Common stock issued for
debt conversion at $0.70
per share 65,127 65 45,525 - -
Common stock issued for
services rendered at $0.70
per share 5,859 6 4,095 - -
Net loss for the year ended
December 31, 1999 - - - - (708,204)
------------ ------------ ------------- ------------ ------------
Balance, December 31, 1999 2,349,647 2,350 921,710 - (1,915,076)
Net loss for the three months
ended March 31, 2000
(unaudited) - - - - (51,584)
------------ ------------ ------------- ------------ ------------
Balance, March 31, 2000
(unaudited) 2,349,647 $ 2,350 $ 921,710 $ - $(1,966,660)
============ ============ ============= ============ ============
</TABLE>
6
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
----------------------------
2000 1999
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (51,584) $ (79,911)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Depreciation and amortization 15,958 18,008
Bad debt expense 4,630 5,463
Stock issued for interest expense - 11,178
Change in assets and liabilities:
(Increase) decrease in restricted cash (65,556) -
(Increase) decrease in undeposited funds 9,820 -
(Increase) decrease in accounts receivable (156,769) 11,834
(Increase) decrease in inventory 68,351 16,246
Increase (decrease) in accounts payable 1,579 (5,198)
Increased (decrease) in accrued expenses (35,146) 39,126
Increase (decrease) in unearned revenue (67,023) 27,205
Increase (decrease) in cash overdraft 14,157 -
------------- ------------
Net Cash Provided (Used) by Operating Activities (261,583) 43,951
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (6,872) (7,060)
------------- ------------
Net Cash (Used) by Investing Activities (6,872) (7,060)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from subscribed stock 5,000 -
Payments on notes payable - related 98 -
Proceeds from lines of credit 291,019 (43,402)
Payment on notes payable (31,070) (26,814)
------------- ------------
Net Cash Provided (Used) by Financing Activities 265,047 (70,216)
------------- ------------
NET INCREASE (DECREASE) IN CASH (3,408) (33,325)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,408 62,057
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ - $ 28,732
============= ============
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR
Interest $ - $ 56,437
Income taxes $ - $ -
NON-CASH FINANCING ACTIVITIES
Common stock issued for debt $ - $ 34,411
Common stock issued for interest $ - $ 11,178
</TABLE>
7
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
March 31, 2000 and December 31, 1999
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared
by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of
operations and cash flows at March 31, 2000 and 1999 and for all
periods presented have been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 1999 audited
consolidated financial statements. The results of operations for the
periods ended March 31, 2000 and 1999 are not necessarily indicative
of the operating results for the full years.
NOTE 2 - GOING CONCERN
These consolidated financial statements are presented on the basis
that the Company is a going concern. Going concern contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business over a reasonable length of time. The
Company has an accumulated deficit which raises substantial doubt
about its ability to continue as a going concern.
Management is presently pursuing plans to increase sales volume,
reduce administrative costs, and improve cash flows as well as obtain
additional financing through stock offerings. The ability of the
Company to achieve its operating goals and to obtain such additional
finances, however, is uncertain.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere herein.
Trends and Uncertainties.
-------------------------
Demand for the Company's products is constantly increasing. The United
States Fire Administration (USFA), The Consumer Product Safety Commission
(CPSC), and The National Fire Protection Association (NFPA) all agree that the
United States has the worst per capita record of fire related accidents and
deaths in the world. As a result, the federal and state regulatory agencies are
continually adding new and stricter fire codes and are becoming more and more
vigilant in the enforcement of these codes. In addition, non-governmental bodies
such as Insurance Companies are constantly instituting regulations and standards
that are, in some instances, even stricter than those imposed through federal
and state agencies. The Company, of course, benefits from increased governmental
and non-governmental fire regulations.
However, due to the Company's limited resources, the sales and marketing of
the Company's products has been limited to date. The success of the Company is
dependent upon its ability to market and sell the products and services of the
Company with such limited resources. Although the management of the Company is
committed to the business and continued development and growth of the business,
the addition of specialized key personnel and sales persons to assist the
Company in its expansion will be necessary. There can be no assurance that the
Company will be able to locate and hire such specialized personnel on acceptable
terms.
The industry in which the Company operates is highly competitive, rapidly
growing and the Company will have to compete with a multitude of similar
companies, possessing substantially greater financial, personnel, technological
and marketing resources. As discussed below, there is no assurance that the
Company will be able to compete in such an environment without additional
financing.
Capital and Sources of Liquidity.
--------------------------------
The Company expects to continue to incur significant capital expenses in
pursuing its plans to increase sales volume and to expand its product line. In
order for the Company to continue its operations at its existing levels, the
Company will require $675,000 of additional funds over the next twelve months.
Only through the factoring of its receivables can the Company generate funds to
maintain its daily operations. The construction industry in general does not use
factors. Funding for construction projects are generally done through lines of
credit with banks that advance moneys against contract at reasonable rates and
are equipped to deal with progress billing and percentage of completion
contracts. The Company has not been able to establish such a relationship with a
bank, and the penalties imposed by the factors for timing differences have
eroded the Company's profit on construction projects. This erosion can be seen
in the substantial increase in interest expense.
Also, if additional capital is not obtained, there may be a reduction in
the Company's ability to accept new projects which may, in turn, have an effect
on the Company's ability to maintain its operations. Therefore the Company is
dependent on funds raised through equity or debt offerings, and through
receivable factoring. Additional financing may not be available on terms
favorable to the Company, or at all. If adequate funds are not available or are
not available on acceptable terms, the Company may not be able to execute its
business plan or take advantage of business opportunities. The ability of the
Company to obtain such additional financing and to achieve its operating goals
is uncertain. In the event that the Company does not obtain additional capital
or is not able to increase cash flow through the increase of sales, there is a
substantial doubt of its being able to continue as a going concern.
9
<PAGE>
THREE MONTHS ENDED MARCH 31,2000 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS RESTATED TO PROPERLY CLASSIFY EXPENSES AS COST OF GOODS
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage
March 31 March 31 Increase
2000 1999 (Decrease)
---------------------------------------------
<S> <C> <C> <C>
Net Sales
Chemicals $ 99,071 $ 131,316 (24.00%)
Textiles 99,684 222,666 (55.00%)
FireStop/FireFilm 683,056 198,261 24.00%
---------------------------------------------
881,811 552,243 59.00%
Cost of Goods
Chemicals 20,978 21,313 (1.50%)
Textiles 60,521 86,829 (30.00%)
FireStop/FireFilm 354,046 145,068 144.00%
---------------------------------------------
435,545 253,210 72.00%
Gross Profit
Chemicals 78,093 110,003 (29.00%)
Textiles 39,163 135,837 (71.00%)
FireStop/FireFilm 329,010 53,193 518.00%
---------------------------------------------
446,266 299,033 49.00%
SG&A 162,480 177,947 (8.60%)
Payroll 96,769 102,488 (5.50%)
Outside Services -0- -0-
Travel & Entertainment 79,421 9,092 773.00%
Depreciation & AmortiZation 15,958 11,460 39.00%
Bad Debt Expense 7,303 5,463 33.00%
---------------------------------------------
361,931 306,450 18.00%
Net Income (Loss) from Operations 84,335 (7,417) ( 0%)
Interest Expense 135,919 72,494 87.50%
---------------------------------------------
Net Loss $ (51,584) $ (79,911) (35.50%)
Gross Profit
Chemicals 79% 84%
Textiles 40% 61%
FireStop/FireFilm 48% 27%
Combined 51% 54%
Percentage of Total Sales
Chemicals 11% 24%
Textiles 12% 40%
FireStop/FireFilm 77% 36%
Percentage of Gross Profit
Chemicals 18% 37%
Textiles 8% 46%
FireStop/FireFilm 74% 17%
</TABLE>
10
<PAGE>
RECONCILIATION OF FINANCIAL STATEMENTS
---------------------------------------
<TABLE>
<CAPTION>
March 31 March 31
2000 1999
------------------------------
<S> <C> <C>
Cost of Goods Per Analysis $ 435,545 $ 253,210
Less: Outside Services -0-(1) 59,441(1)
Construction Payroll 65,575(2) 16,985(2)
Construction Travel 2,125(3) 2,030(3)
Construction Lodging 18,086(4) 3,127(4)
------------------------------
Cost of Goods per Financials $ 349,759 $ 171,627
SG&A per Analysis $ 162,480 $ 177,947
Add: Construction Lodging 18,086(4) 3,127(4)
------------------------------
SG&A per Financials: $ 180,566 $ 181,074
Payroll per Analysis: $ 96,769 $ 102,488
Add: Construction Payroll 65,575(2) 16,985(2)
------------------------------
Payroll per Financials: $ 162,344 $ 119,473
Outside Services per Analysis: $ -0- $ -0-
Add: Outside Services -0-(1) 59,441(1)
------------------------------
Outside Services per Financials: $ -0- $ 59,441
Travel per Analysis: $ 79,421 $ 9,092
Add: Construction Travel 2,124(3) 2,030(3)
------------------------------
Travel per Financials: $ 81,546 $ 11,122
</TABLE>
(1) Outside Services represents workers hired specifically for performing
one particular construction job. For first quarter 2000, outside services is
properly included in cost of goods per the financial statements
(2) Construction Payroll represents those people who are employed by the
Company full time, but who work only on detailed construction projects at the
job-site.
(3) Construction Travel represents the cost of getting a crew of workers to
the job-site.
(4) Construction Lodging represents the cost of housing a crew of workers
while they are at the job-site.
ANALYSIS
--------
The Company sustained net losses of $51,584 and $79,911 for the three
months ended March 31, 1999 and March 31, 2000 respectively. This represents a
decrease in net loss of $28,327 or 35.5%. This decrease is due to the following:
(1) Overall net sales increase of $59.6%.
(2) Selling,General and Adminstrative expenses decreased by 8.6%. The
Company is committed to lowering SG&A and beginning January 2000, the Company
began an even more concerted effort to reduce overall SG&A than that seen in
1999. The Company has further plans to consolidate redundant facilities and
personnel during the year 2000. This 8.6% decrease indicates that the policy is
being enacted.
11
<PAGE>
(3) There were no expenses during this quarter relating to the filing of
Form 10-sb. Only those expenses for the filing of Forms 10-K and 10Q have been
incurred.
(4) The Company has still incurred excessive travel expense during the
first quarter of 2000. Management has incurred travel expense of approximately
$68,600 for the purpose of placing bids on large construction projects and
meeting with potential capital investors.. Management believes that the final
large travel expenses will be incurred during the second quarter of 2000 and the
final half of the fiscal year will show substantial decreases in this area.
As a result of these four factors, the first quarter of 2000 produced
income from operations of $84,335 and with regular deduction for interest
expense, the overall quarter would have shown a net profit of $49,423. However,
regular interest expense of $49,423 is increased by $86,496 to $135,919 due to
the penalties incurred from the factors for deadlines not met by percentage of
completion billing and collection procedures. The Company was able to obtain
approximately $150,000 of the $650,000 needed to sustain operations during the
year 2000, but had to do so by qualifying for a larger line of credit with the
factors. Thus the source of capital aid is tied to a billing and funding
situation that incurs the excessive interest charges noted in the MD&A for
fiscal 1999 vs. 1998.
During the first quarter of 2000, Chemical, Textiles, and FireStop/FireFilm
accounted for $99,071 (11%), $99,684 (12%), and $683,056 (77%) respectively of
total net sales of $881,811. The shift in product mix noted in detail in the
Company's 1999 Form 10-K began subsequent to the first quarter 1999. As a
result, there are dramatic shifts from the Textile Processing net sales of
$222,666 or 40% of total sales and the FiresStop/FireFilm net sales of $198,261
or 36% of total net sales for the quarter ended March 31, 1999.
In addition, FireStop/FireFilm accounts for 74% of the percentage of gross
profit for the quarter ended March 31, 2000. However, as noted above, the
Company is still incurring substantial interest rates because it is now
factoring virtually all of its receivables. The only cure for this problem is a
capital investment of approximately $500,000 over the next nine months, and
$700,000 over the next twelve months. At this time, although the Company is
exploring several avenues of financing, no one answer to this problem has been
found.
CAUTIONARY FORWARD -LOOKING STATEMENT
-------------------------------------
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) the extremely competitive conditions that
currently exist in the fire retardant and fireproofing industry are expected to
continue, placing further pressure on pricing which could adversely impact sales
and erode profit margins; (ii) many of the Company's major competitors in its
channels of distribution have significantly greater financial resources than the
Company; and (iii) the inability to carry out marketing and sales plans would
have a materially adverse impact on the Company's projections. The foregoing
list should not be construed as exhaustive and the Company disclaims any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
12
<PAGE>
IMPACT OF YEAR 2000
-------------------
During 1999 we completed our remediation and testing of our platform
systems, management support, systems, and our internal information technology
and non-information technology systems. Because of those planning and
implementation efforts, we experienced no disruptions in our information
technology and non-information technology systems and those systems have
successfully responded to the Year 2000 date change. We did not incur any
significant expenses during 1999 in conjunction with remediating our systems. We
are not aware of any material problems resulting from Year 2000 issues, either
with our products, internal systems, or the products and services of third
parties. We will continue to monitor our mission critical computer applications
and those of our suppliers and vendors throughout the Year 2000 to ensure any
latent Year 2000 matters arising are addressed promptly.
RISK FACTORS
------------
Several of the matters discussed in this document contain forward-looking
statements that involve risks and uncertainties. Factors associated with the
forward-looking statements that could cause actual results to differ materially
from those projected or forecast appear in the statements below. In addition to
other information contained in this document, readers should carefully consider
the following cautionary statements and risk factors:
FUTURE CAPITAL REQUIREMENTS; UNCERTAININTY OF FUTURE FUNDING. The Company's
plan of operation calls for additional capital to facilitate growth and support
its long-term development and marketing programs. It is likely that the Company
would need to seek additional financing through subsequent future public or
private sales of its securities, including equity securities. The Company may
also seek funding for the development and marketing of its products through
strategic partnerships and other arrangements with investment partners. There
can be no assurance, however, that such collaborative arrangements or additional
funds will be available when needed, or on terms acceptable to the Company, if
at all. Any such additional financing may result in significant dilution to
existing stockholders. If adequate funds are not available, the Company may be
required to curtail one or more of its future programs.
SUBSTANTIAL DOUBT THAT THE COMPANY CAN CONTINUE AS A GOING CONCERN. The
Company expects to continue to incur significant capital expenses in pursuing
its plans to increase sales volume, the expansion of its product line and to
obtain additional financing through stock offerings or other feasible financing
alternatives. In order for the Company to continue its operations at its
existing levels, the Company will require $700,000 of additional funds over the
next twelve months. While the Company can generate funds necessary to maintain
its operations, without additional funds there will be a reduction in the number
of new projects that the Company could take on which may have an effect on the
Company's ability to maintain its operations. Therefore, the Company is
dependent on funds raised through equity or debt offerings. Additional financing
may not be available on terms favorable to the Company, or at all. If adequate
funds are not available or are not available on acceptable terms, the Company
may not be able to execute its business plan or take advantage of business
opportunities. The ability of the Company to obtain such additional financing
and to achieve its operating goals is uncertain. In the event that the Company
does not obtain additional capital or is not able to increase cash flow through
the increase of sales, there is a substantial doubt of its being able to
continue as a going concern.
Additionally, it should be noted that the Company's independent auditors
have included a going concern opinion in the note to financial statements. The
auditor's have included this provision because the Company has an accumulated
deficit which the auditor believes raises substantial doubt about its ability to
continue as a going concern. Until such time as the Company does receive
additional debt or equity financing, there is a risk that the Company's auditors
will continue to include a going concern provision in the notes to financial
statements.
PATENTS AND PROPRIETARY RIGHTS. The Company relies on patents, contractual
rights, trade secrets, trademarks, and copyrights to establish and protect its
proprietary rights in its products and its components. The Company has patented
the technology that is incorporated into its products and believes that, since
it is a technology patent, competitors will have a more difficult time
developing products functionally similar to the Company's. To further protect
its products, the Company will apply for additional patents for its inventions
and for non-commercial available components designed and developed by the
Company that are integral to product performance.
13
<PAGE>
PROSECUTING ANY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE
EXPENSIVE AND, IF THE COMPANY IS NOT SUCCESSFUL, COULD DISRUPT ITS BUSINESS. The
Company intends to closely monitor competing product introductions for any
infringement of the Company's proprietary rights. The Company believes that, as
the demand for products such as those developed by the Company increases,
infringement of intellectual property rights may also increase. If infringement
of the Company's proprietary rights is by industry competitors, they have
substantially greater financial, technical, and legal resources than the Company
which could adversely affect the Company's ability to defend its rights. In
addition, the Company could incur substantial costs in defending its rights.
Further, the Company's patents are U.S. patents, and the Company does not
have patent protection outside the United States. The Company will be unable to
obtain patent protection in most non-U.S. jurisdictions, including Europe and
Japan. Some competitors may have non-U.S. operations where U.S. Patent rights
are not effective which could permit competitors to infringe on the Company's
proprietary rights without violating U.S. law.
The Company anticipates, based on the size and sophistication of its
competitors and the history of rapid technological advances in its industry,
that several competitors may be working to develop the Company's patented
technology. The Company intends to closely monitor any infringement of the
Company's proprietary rights. Competitors may have patent applications in
progress in the United States that, if issued, could relate to the Company's
products. If such patents were to issue, there can be no assurance that the
patent holders or licensees will not assert infringement claims against the
Company or that such claims will not be successful. The Company could incur
substantial costs in defending itself and its customers against any such claims,
regardless of the merits of such claims. Parties making such claims may be able
to obtain injunctive or other equitable relief which could effectively block the
Company's ability to sell its products, and each claim could result in an award
of substantial damages. In the event of a successful claim of infringement, the
Company and its customers may be required to obtain one or more licenses from
third parties. There can be no assurance that the Company or its customers could
obtain necessary licenses from third parties at a reasonable or acceptable cost
or at all. Patent litigation could be very expensive, and there is no assurance
that it would not have an adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON KEY EMPLOYEES. Historically, the Company has been heavily
dependent on the ability of Bruce E. Raidl, to contribute essential technical
and management experience. In the event of future growth in administration,
marketing, manufacturing and customer support functions, the Company may have to
increase the depth and experience of its management team by adding new members.
The Company's success will depend to a large degree upon the active
participation of its key officers and employees. Loss of services of any of the
current officers and directors could have a significant adverse effect on the
operations and prospects of the Company. There can be no assurance that it will
be able to employ qualified persons on acceptable terms to replace officers that
become unavailable.
NEED FOR ADDITIONAL SPECIALIZED PERSONNEL. Although the management of the
Company is committed to the business and continued development and growth of the
business, the additional of specialized key personnel and sales persons to
assist the Company in its expansion of its national operations will be
necessary. There can be no assurance that the Company will be able to locate and
hire such specialized personnel on acceptable terms.
COMPETITION. There are numerous corporations, firms and individuals which
are engaged in the type of business activities in which the Company is presently
engaged. Many of those entities are more experienced and possess substantially
greater financial, technical and personnel resources than the Company. While the
Company hopes to be competitive with other similar companies, there can be no
assurance that such will be the case.
VOTING CONTROL. Due to the joint ownership of a majority of the shares of
the Company's outstanding common stock by Angela M. Raidl and her brother Bruce
Raidl, collectively, these individuals have the ability to elect all of the
Company's directors, who in turn elect all executive officers, without regard to
the votes of other stockholders.
14
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ABILITY TO MAINTAIN ADEQUATE INVENTORY LEVELS. The size of the fire
retardant and fire protection markets and need to maintain adequate inventories
with regard to such products could force the Company into implementing
additional manufacturing and warehousing programs. There can be no assurance
that the Company will have the necessary capital resource or man power to
implement such manufacturing and warehousing programs.
DEPENDENCE ON ABILITY TO MARKET PRODUCTS AND SERVICES. Due to the Company's
limited resources, the sales and marketing of the Company's products has been
limited to date. The success of the Company is dependent upon its ability to
market and sell the products and services of the Company with such limited
resources.
RISKS OF "PENNY STOCKS." The Company's common stock may be deemed to be
"penny stock" as that term is defined in Reg. Section 240.3a51-1 of the
Securities and Exchange Commission. Penny stocks are stocks (i) with a price of
less than five dollars per share; (ii) that are not traded on a "recognized"
national exchange; (iii) whose prices are not quoted on the NASDAQ automated
quotation system (NASDAQ-listed stocks must still meet requirement (i) above);
or (iv) of an issuer with net tangible assets less than US$2,000,000 (if the
issuer has been in continuous operation for at least three years) or
US$5,000,000 (if in continuous operation for less than three years), or with
average annual revenues of less than US$6,000,000 for the last three years.
Section 15(g) of the 1934 Act and Reg. Section 240.15g-2 of the Commission
require broker-dealers dealing in penny stocks to provide potential investors
with a document disclosing the risks of penny stocks and to obtain a manually
signed and dated written receipt of the document before effecting any
transaction in a penny stock for the investor's account. Potential investors in
the Company's common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock."
Moreover, Reg. Section 240.15g-9 of the Commission requires broker-dealers
in penny stocks to approve the account of any investor for transactions in such
stocks before selling any penny stock to that investor. This procedure requires
the broker-dealer to (i) obtain from the investor information concerning his or
her financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for investors in the Company's
common stock to resell their shares to third parties or to otherwise dispose of
them.
NO MARKET FOR COMMON STOCK. Although the Company intends to submit for
quotation of its common stock on the OTC Bulletin Board of the NASD following
the effectiveness of this registration statement, and to seek a broker-dealer to
act as market maker for its securities (without the use of any consultant),
there is currently no market for such shares, there have been no discussions
with any broker-dealer or any other person in this regard, and no market maker
has been identified; there can be no assurance that such a market will ever
develop or be maintained. Any market price for shares of common stock of the
Company is likely to be very volatile, and numerous factors beyond the control
of the Company may have a significant effect. In addition, the stock markets
generally have experienced, and continue to experience, extreme price and volume
fluctuations which have affected the market price of many small capital
companies and which have often been unrelated to the operating performance of
these companies. These broad market fluctuations, as well as general economic
and political conditions, may adversely affect the market price of the Company's
common stock in any market that may develop.
15
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PART II - OTHER INFORMATION.
Item 1. Legal Proceedings.
-----------------
Friloux v. AFRC
---------------
The Company is a party defendant in the matter Friloux v. American Fire
Retardant Corporation 15th Judicial District Court, Parish of Lafayette,
Louisiana, Docket No. 99-5744 "D". In this matter Mr. Friloux filed a Petition
seeking a pre-trial judgment alleging (1) that the Company is indebted to Mr.
Friloux under the terms of a promissory note dated March 7, 1994, in the
principal sum of $100,000 with interest there on at the rate of 5.0% per annum
and that the Company is in breach of said promissory note; (2) that the Company
is in breach of employment contract with Mr. Friloux an is obligated to pay Mr.
Friloux back wages; (3) that the Company is indebted to Mr. Friloux for past due
health and hospitalization costs due under the alleged employment agreement; and
(4) that the Company is indebted to Mr. Friloux as a result of the sale by Mr.
Friloux of shares of common stock owned by Mr. Friloux back to the Company. The
Company filed exceptions to the petition and counsel for Mr. Friloux and the
Company have agreed that any and all claims shall be disposed of at trial rather
that through Mr. Friloux's pre-trial petition. The Company denies the
allegations and intends to vigorously defend the complaint of Mr. Friloux. At
present Mr. Friloux and the Company are attempting to resolve this matter
amicably in order to avoid further costs to either party.
Alman v. AFRC Florida
---------------------
The Company was involved in litigation in the calendar year 1997. The
Company's former subsidiary, AFRC Florida was a party defendant in the matter
Allen E. Alman and Phyllis S. Alman v. American Fire Retardant Corporation of
Florida and Stephen F. Owens, Dade County Florida, Case No. 97-7203 CA 09. The
matter was a dispute over the terms of a Stock Purchase Agreement entered into
in September 1993, with regard to the purchase by AFRC Florida of all the stock
and assets of Apco Equipment Sale Corporation dba Thoro-Sheen Company. This
matter was resolved in July 1997. wherein AFRC Florida and Mr. Owens agreed to
pay to Mr. And Mrs. Almans the total sum of $51,550, payable $5,775.00, on or
before July 15, 1997; $5,775.00, on or before August 30, 1997; and the balance
of $40,000 in installments of $1,800.00 per month for 24 months commencing on
September 30, 1997, until paid in full.
All payments were made in a timely manner pursuant to the terms of the
Joint Stipulation and the final payment was made on September 15, 1999.
Halvelin v. AFRC
----------------
The Company is a party defendant in the matter of Havelin v. American Fire
Retardant Corporation, United States District Court, Southern District of
Mississippi, Case No. 1-99CV156GR. The Plaintiff, Jennifer L. Havelin was suing
the Company alleging that the Company discriminated against the Plaintiff
because of Plaintiff's sex, a female. The Plaintiff originally filed a claim
with Equal Employment Opportunity Commission ("EEOC") in May 15, 1998, alleging
discrimination and that Plaintiff had been laid off because she was a female. On
January 29, 1999, the EEOC dismissed Plaintiffs claim as being without merit.
This action arose from the same facts set forth by Plaintiff in her claim with
the EEOC. Further, pursuant to Title VII the Plaintiff had 90 days (i.e. until
May 1, 1999) to file a lawsuit in Federal Court with regard to this matter. The
Plaintiff filed her action beyond the prescribed time period.
On August 25, 1999, the Company settled this matter for a total sum of
$5,000 paid by the Company to Ms. Havelin.
As a result of the resolution of the above matters, the costs of litigation
associated with those matters have ceased and, therefore, there is no further
effect on the results of operations and liquidity.
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Delinquent Payroll Taxes
------------------------
The Company owes the Internal Revenue Service $359,300 including interest
for prior delinquent payroll taxes by the Company's former subsidiaries, AFRC
Florida and AFRC Louisiana. These payroll taxes became delinquent starting in
the 3rd quarter of 1997 through the 4th quarter of 1998. The total delinquent
payroll tax liabilities are $166,472 attributed to AFRC Florida and $192,828
attributed to AFRC Louisiana. The Company has retained the tax counsel of
Royston & Hebert in Lafayette, Louisiana to represent the Company before the
Internal Revenue Service and the Company has submitted an Offer in Compromise
work-out agreement to obtain a substantial reduction of the outstanding payroll
tax balance due. The Company owes the IRS $45,882.92, including interest and
penalties for the 1st quarter 2000.
With the exception of the legal proceedings and tax matter set forth above,
the Company is not presently a party to any litigation, claim, or assessment.
Further, the Company is unaware of any unasserted claim or assessment, which
will have a material effect on the financial position or future operations of
the Company.
Item 2. Changes in Securities.
---------------------
Not required.
Item 3. Defaults Upon Senior Securities.
-------------------------------
Not required.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
17
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Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits attached or incorporated by referenced pursuant to
Item 601 of Regulation S-B.
Exhibit
Number Description*
------- -----------
2.1(a)(+) Certificate of Merger from the State of Wyoming regarding Merger
of AFRC Louisiana with and into AFRC Wyoming.
2.1(b)(+) Certificate of Merger from the State of Louisiana regarding
Merger of AFRC Louisiana with and into AFRC Wyoming.
2.1(c)(+) Articles of Merger regarding Merger of AFRC Louisiana with and
into AFRC Wyoming.
2.1(d)(+) Acquisition Agreement and Plan of Merger regarding Merger of AFRC
Louisiana with and into AFRC Wyoming.
2.2(a)(+) Certificate of Merger from the State of Florida regarding Merger
of AFRC Florida with and into AFRC Wyoming.
2.2(b)(+) Certificate of Merger from the State of Wyoming regarding Merger
of AFRC Louisiana with and into AFRC Wyoming.
2.2(c)(+) Florida Articles of Merger regarding Merger of AFRC Louisiana
with and into AFRC Wyoming.
2.2(d)(+) Wyoming Articles of Merger regarding Merger of AFRC Louisiana
with and into AFRC Wyoming.
2.2(e)(+) Acquisition Agreement and Plan of Merger regarding Merger of AFRC
Florida with and into AFRC Wyoming.
2.3(a)(+) Articles of Merger regarding Merger regarding Merger of AFRC
Wyoming with and into AFRC Nevada (the "Company") to change the
Domicile of the Company.
2.3(b)(+) Acquisition Agreement and Plan of Merger regarding Merger of AFRC
Wyoming with and into AFRC Nevada (the "Company") to change the
Domicile of the Company.
3.1(+) Articles of Incorporation of American Fire Retardant Corp. filed on
January 20, 1998.
3.2(+) Restated By-laws of American Fire Retardant Corp.
3.3(+) Qualification of American Fire Retardant Corp., as a Foreign
Corporation in the State of Florida.
3.4(+) Qualification of American Fire Retardant Corp., as a Foreign
Corporation in the State of Louisiana.
3.5(+) Statement and Designation of American Fire Retardant Corp., as a
Foreign Corporation in California.
3.6(+) Qualification of American Fire Retardant Corp., as a Foreign
Corporation in the State of Colorado.
3.7(+) Qualification of American Fire Retardant Corp., as a Foreign
Corporation in the State of Mississippi.
10.1(a)(+) Letter of Intent Between American Fire Retardant Corp., and
Fabritek Industries, LLC.
10.1(b)(+) Amendment to Letter of Intent Between American Fire Retardant
Corp., and Fabritek Industries, LLC.
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<PAGE>
10.2(+) Royalty Agreement between American Fire Retardant Corp., and Norman
O. Houser.
10.3(+) Sale, Assignment and Assumption Agreement between American Fire
Retardant Corp. and Patrick L. Brinkman with regard to the purchase of
manufacturing rights to De-Fyre X-238.
10.4(a)(+) Merchant Service Agreement between American Fire Retardant
Corp., and St. Martin Bank.
10.4(b)(+) St. Martin Bank $100,090 Promissory Note Dated March 11, 1997.
10.4(c)(+) Edward E. Friloux Commercial Guaranty to St. Martin Bank re:
$100,090 Promissory Note.
10.4(d)(+) Stephen F. Owens Commercial Guaranty to St. Martin Bank re:
$100,090 Promissory Note.
10.4(e)(+) Angela M. Raidl Commercial Guaranty to St. Martin Bank re:
$100,090 Promissory Note.
10.4(f)(+) St. Martin Bank $250,000 Promissory Note Dated May 21, 1998.
10.4(g)(+) St. Martin Bank Business Loan Agreement Dated August 18, 1998.
10.4(h)(+) St. Martin Bank $172,725.73 Promissory Note Dated August 18,
1998.
10.4(i)(+) Edward E. Friloux Commercial Guaranty to St. Martin Bank re:
$172,725.73 Promissory Note.
10.4(j)(+) Stephen F. Owens Commercial Guaranty to St. Martin Bank re:
$172,725.73 Promissory Note.
10.4(k)(+) Angela M. Raidl Commercial Guaranty to St. Martin Bank re:
$172,725.73 Promissory Note.
10.4(l)(+) St. Martin Bank Commercial Pledge Agreement re: $172,725.72
Promissory Note.
10.4(m)(+) St. Martin Bank Pledge of Collateral Mortgage Note re:
$172,725.72 Promissory Note.
10.4(n)(+) St. Martin Bank Agreement to Provide Insurance re: $172,725.72
Promissory Note.
10.4(o)(+) St. Martin Bank - Collateral Mortgage re: $172,725.72 Promissory
Note.
10.4(p)(+) St. Martin Bank - $54,059.29 Promissory Note Dated February 4,
1999.
10.5(a)(+) Private Capital, Inc. - Purchase and Security Agreement Dated
April 17, 1997.
10.5(b)(+) Private Capital, Inc. - Angela M. Raidl Continuing Guaranty &
Waiver.
10.5(c)(+) Private Capital, Inc. - Stephen F. Owens and Edward E. Friloux
Continuing Guaranty & Waiver.
10.6(a)(+) Bank of Erath $15,030 Promissory Note Dated June 16, 1997.
10.6(b)(+) Bank of Erath Loan Extension Agreement Dated October 20, 1998.
10.7(+) American Fire Retardant Corp. - El Cajon, California Industrial
Lease
10.8(a)(+) Whitney Bank - $74,400 Secured Promissory Note Dated
10.8(b)(+) Whitney Bank - Collateral Mortgage, Security Agreement and
Assignment of Leases and Rents
19
<PAGE>
10.9(+) American Fire Retardant Corp. - Standard Lease for Louisiana
Corporate Apartment
10.10(+) Oil, Gas & Mineral Lease with Penwell Energy Inc.
10.11(a)(+) Whitney National Bank - $42,888.46 Promissory Note
10.11(b)(+) Whitney National Bank - Security Agreement
10.12(+) Presidio Capital Consulting Agreement
10.13(+) Warren Guidry Letter Promissory Note
10.14(a)(+) Agreement with Richard Rosenberg
10.14(b)(+) Amendment to Agreement with Richard Rosenberg
10.14(c)(+) Richard Rosenberg - $43,134.39 Promissory Note
10.15(+) Investment Banking and Consulting Agreement with Capstone
Partners LLC.
10.16(+) March 7, 1999 $100,000 Promissory Note.
10.17(+) August 25, 1999 Equipment Lease with Preferred Capital Corporation
10.18(+) December 7, 1999 $100,000 Promissory Note with Private Capital,
Inc.
99.1 (+) Consumer Product Safety Commission's Notice of Public Hearing and
Request for Comments with regard to the proposed rule pertaining to
Flame Retardant Chemicals that may be suitable for use in upholstered
furniture.
99.2 (+) A copy of the Article "1998 Fire Loss in the United States" from
the NFPA Journal, September/October 1999.
99.3 (+) See National Fire Data Center Statistics as posted on the NFDC
website at "www.usfa.fema.goc/nfdc/statistics.htm"
(+) Previously filed.
(++) Attached hereto.
20
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the Undersigned, thereunto duly authorized.
AMERICAN FIRE RETARDANT CORP.
A Nevada Corporation
Date: June 27, 2000 /S/ Stephen F. Owens
------------------------------
By: Stephen F. Owens
Its: President and Director
Date: June 27, 2000 /S/ Angela M. Raidl
------------------------------
By: Angela M. Raidl
Its: Vice President,
Chief Financial Officer
Secretary and Director
21
