SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A-4
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUER UNDER SECTION 12 (b) OR
12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
AMERICAN FIRE RETARDANT CORP.
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(Name of Small Business Issuer in Its Charter)
NEVADA 88-0386245
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(State of other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification Number)
0-26261
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(SEC File No.)
9337 Bond Avenue, El Cajon, California 92021
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(Address of principal offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (619) 390-6888
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Securities to be registered pursuant to Section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, 0.001 Par Value
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(Title of Class)
DOCUMENTS INCORPORATED BY REFERENCE: See Exhibit Index herein.
<PAGE>
PART I.
Item 1. Description of Business
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(a) Business Development.
American Fire Retardant Corporation, a Nevada corporation, ("American Fire"
or the "Company") is a fire protection company that specializes in fire
prevention and fire containment. The Company is in the business of developing,
manufacturing and marketing a line of interior and exterior fire retardant
chemicals and provides fire resistive finishing services through the Company's
"Textile Processing Center" for commercial users. The Company also designs new
technology for future fire resistive applications that are being mandated by
local, state and governmental agencies and is active in the construction
industry as sub-contractors for fire stop and fire film installations.
The Company originally commenced operations as American Fire Retardant
Corporation, a corporation organized under the laws of the State of Florida
("AFRC Florida") on November 20, 1992.
On June 1, 1993, the Board of Directors of AFRC Florida unanimously agreed
to incorporate in the State of Louisiana, as a separate and distinct entity
having the same shareholders as AFRC Florida.
On June 29, 1993, American Fire Retardant Corporation, a Louisiana
corporation ("AFRC Louisiana") was formed. AFRC Louisiana was initially
authorized to issue a total of 1,000 shares of common stock, without par value.
On March 4, 1994, AFRC Florida qualified to do business in the State of
California under the name American Fire Retardant Corporation.
In August 1994, the facility operated in Florida by AFRC Florida was
closed, but continued to maintain its good standing status within the State of
Florida.
On April 7, 1995, a group of individuals doing business as the MCM Group,
comprised of Thomas Mahoney, James Mahoney and Richard Mahoney, none of which
were affiliated with the Company, proposed to raise capital for AFRC Louisiana.
The MCM Group, as consultants and as placement agent for the Company, arranged
for the sale of 152,291 post-reverse split adjusted shares of the Common Stock
of AFRC Louisiana, to Firepro Corporation of America, a Nevada corporation, in
consideration of $12,500, which shares represented 12.18% of the issued and
outstanding shares of AFRC Louisiana at that time.
The MCM Group as consultants to AFRC Louisiana advised the Company to form
a Wyoming corporation and reincorporate in the State of Wyoming. On June 15,
1995, by unanimous consent of the shareholders of AFRC Louisiana, AFRC Louisiana
approved the formation of a new corporation in the State of Wyoming under the
name American Fire Retardant Corporation.
On July 24, 1995, American Fire Retardant Corporation, a Wyoming
corporation ("AFRC Wyoming"), was incorporated. Upon the formation of AFRC
Wyoming, AFRC Wyoming acquired all the issued and outstanding shares from the
shareholders of AFRC Florida and AFRC Louisiana, in exchange for newly issued
shares of AFRC Wyoming, whereby AFRC Florida and AFRC Louisiana became wholly
owned subsidiaries of AFRC Wyoming.
On July 25, 1995, AFRC Wyoming undertook a private placement under which
the MCM Group, as consultant and as the placement agent for AFRC Wyoming,
proposed to raise a total of $500,000 through the sale of 83,333 post-reverse
split adjusted shares of the Common Stock of AFRC Wyoming. As part of the
private placement, the AFRC Wyoming Shareholders agreed to cancel and deliver
back to the Company up to 42,875 post-reverse split adjusted shares. Based on
the pro rata amount of funds raised by the MCM Group, these shares were to be
delivered to new investors as an incentive to help the Company obtain necessary
funding.
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Between July 1995 and November 1995, The MCM Group raised a total of
$155,000 through the sale of 25,833 of the authorized by unissued post-reverse
split adjusted shares of AFRC Wyoming Common stock to the following individuals:
<TABLE>
<CAPTION>
Price per
Name Investment Share Shares
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John H. Smith Jr. $100,000 $6.00 16,667 post-reverse split adjusted shares
Thomas W. Fell Jr. $ 25,000 $6.00 4,167 post-reverse split adjusted shares
Martin A. Chase $ 10,000 $6.00 1,667 post-reverse split adjusted shares
Robert L. Gipe $ 10,000 $6.00 1,666 post-reverse split adjusted shares
John Elizalde $ 10,000 $6.00 1,666 post-reverse split adjusted shares
</TABLE>
Because AFRC Wyoming and the MCM Group was having difficulty raising
capital under the private placement and AFRC Wyoming was in need of capital, in
order to secure a $100,000 investment by John H. Smith, Jr., the AFRC Wyoming
shareholders as a group agreed to and did, for the benefit of the Company,
transfer a total of 25,000 post-reverse split adjusted shares of Common Stock
owned by them directly to Mr. Smith as an incentive to Mr. Smith for making the
$100,000 investment in the Company. Mr. Smith did make the investment with all
$100,000 being received by the Company. The shareholders received none of the
$100,000.
The private placement was terminated by AFRC Wyoming on December 15, 1995
on the grounds that the MCM Group had not produced the desired results. AFRC
Wyoming issued 152,291 post-reverse split shares of its common stock for Firepro
Corp in exchange for Firpro's 152,291 shares of AFRC Louisiana. AFRC Wyoming
issued 25,822 post-reverse split shares to investors in the July 25, 1995
private placement. Thus in its reincorporated status, AFRC Wyoming issued
178,125 post-reverse split adjusted shares and further transferred to John H.
Smith, Jr., 25,000 post-reverse split shares as detailed above.
Pursuant to the terms of the private placement and the agreement between
AFRC Wyoming and the MCM Group, AFRC paid the MCM Group $24,000 representing
their commission and expenses under the private placement.
In January 1998, the company began to develop a restructuring plan for the
Company which included the assessment of the jurisdictions where the Company
conducted business and where the Company intended to pursue additional business,
and the appropriate jurisdiction for the domicile of the Company. The Company
determined that because the company was not conducting any business in the State
of Wyoming and was conducting business in the State of Nevada, and intended on
pursuing further business activities in the state of Nevada which had favorable
and flexible corporate laws, that as part of the Company's restructuring plans,
it was in the best interest of the Company and its shareholders, as part of the
consolidation of its subsidiaries and the Company's restructuring, to
reincorporate and change its domicile from the State of Wyoming to the State of
Nevada.
Accordingly, in January 1998, as part of the plan restructuring and change
of the domicile of the Company, AFRC Wyoming formed American Fire Retardant
Corp., a Nevada corporation ("AFRC Nevada"), the present Company. AFRC Nevada is
authorized to issue a total of 25,000,000 shares of common stock, $0.001 par
value. A copy of the Articles of Incorporation as filed with the Secretary of
State of Nevada are attached hereto and incorporated herein by reference. See
Exhibit Index.
The Board of Directors of AFRC Wyoming unanimously resolved on September 3,
1998 to effect a one-for-twelve (1-for-12) reverse stock split of all issued and
outstanding shares of the common stock of the Company as of September 1, 1998.
At a special meeting of the shareholders of the Company held on September 29,
1998, the shareholders approved the reverse stock split.
On March 17, 1999, at a special meeting of the shareholders of the Company,
the shareholders authorized the restructuring of the Company to simplify its
corporate structure by:
(1) Merging its wholly owned subsidiary, AFRC Louisiana into AFRC Wyoming,
whereupon the separate corporate existence of AFRC Louisiana would cease;
and
(2) Merging its wholly owned subsidiary, AFRC Florida into AFRC Wyoming,
whereupon the separate corporate existence of AFRC Florida would cease;
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The shareholders further authorized the Company to change its domicile to
the state of Nevada through the merger of AFRC Wyoming with and into AFRC
Nevada, with no change in the nature of the business or management of the
Company and no dilution to the shareholders or change in the shareholdings of
the Company.
The Merger of AFRC Louisiana, with and into its parent AFRC Wyoming was
completed on March 25, 1999. A copy of the Articles of Merger and Plan of
Reorganization are attached hereto and incorporated herein by reference. See
Exhibit Index, Part III.
The Merger of AFRC Florida, with and into its parent AFRC Wyoming was
completed on March 25, 1999. A copy of the Articles of Merger and Plan of
Reorganization are attached hereto and incorporated herein by reference. See
Exhibit Index, Part III.
On March 31, 1999, as the final step of the restructuring of the Company,
the merger of AFRC Wyoming, the parent with and into AFRC Nevada, for the sole
purpose of changing the domicile of the Company from that of Wyoming to Nevada
was completed. A copy of the Articles of Merger and Plan of Reorganization are
attached hereto and incorporated herein by reference. See Exhibit Index, Part
III.
On April 6, 1999, the Company applied for qualification as a foreign
corporation in the State of Mississippi. A copy of the Application for
Certificate of Authority whereby the Company qualified to do business in the
State of Mississippi is attached hereto and is incorporated herein by this
reference. See Exhibit Index, Part III.
On April 14, 1999, the Company qualified as a foreign corporation in the
State of Florida. A copy of the Application by Foreign Corporation for
Authorization to Transact Business in Florida whereby the Company qualified to
do business in the State of Florida is attached hereto and is incorporated
herein by this reference. See Exhibit Index, Part III.
On April 15, 1999, the Company qualified as a foreign corporation in the
State of Louisiana. A copy of the Application for Certificate of Authority to
Transact Business in Louisiana whereby the Company qualified to do business in
the State of Louisiana is attached hereto and is incorporated herein by this
reference. See Exhibit Index, Part III.
On April 20, 1999, the Company qualified as a foreign corporation in the
State of California. A copy of the Statement and Designation by Foreign
Corporation whereby the Company qualified to do business in the State of
California is attached hereto and is incorporated herein by this reference. See
Exhibit Index, Part III.
On April 21, 1999, the Company qualified as a foreign corporation in the
State of Colorado. A copy of the Application for Authority whereby the Company
qualified to do business in the State of Colorado is attached hereto and is
incorporated herein by this reference. See Exhibit Index, Part III.
On June 1, 1999, the Company by written consent of its shareholders,
Restated the By-laws of the Company. A copy of the Restated By-laws of the
Company are attached hereto and incorporated herein by reference. See Exhibit
Index, Part III.
(b) Business of issuer
(1) Principal products, services and markets for the Company.
The Company's initial product, which has now become obsolete and is not
utilized or sold, was developed in 1979 by P.T.E. Industries. In March of 1988,
Stephen F. Owens began his employment with P.T.E. Industries as Vice President
in charge of sales and marketing. In late 1991, the president and founder of
P.T.E. Industries, retired and granted Stephen F. Owens the right to market this
product. In 1992, AFRC Florida was incorporated and the Company began to develop
new formulations that safely and effectively inhibit combustion and flame
propagation in a wide variety of textile fabrics. In 1993 the Company began to
expand in the field of fire retarding textile fabrics for both industrial and
commercial applications in the market place.
In September 1993, the Company expanded its operation to the West Coast
through the acquisition of the assets of San Diego Flame proofing, for the
contract fee of $30,000.00, which was paid in 12 monthly installments of
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$2,500.00 each. This asset purchase allowed the Company to establish an existing
base of operations in order to take advantage of the California market place and
stringent fire code enforcement.
In 1995, the Company entered into the field of fire stop systems in the
construction industry, while establishing its credibility with the fire service
and increasing the Company's client base. In October 1995, the Company purchased
the assets of "Fabric Protection", a fire resistive fabric company in Huntington
Beach, California for a contract fee of $40,000.00, with $5,000.00 down and
balance paid in 13 installments of $2,692.00.
In November 1998, the Company purchased the formulation 238, an exterior
fire retardant compound for the contract fee of $45,000.00, with $20,000 down
and balance paid in 5 installments of $5,000.00.
At the Company's inception, numerous products were created from the
Company's own research and development. The Company does not presently have an
active research and development department.
KEY PRODUCTS AND SERVICES
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The Company offers a wide range of products and services. The Company is
actively engaged in the following operations, which are divided into three areas
of sales income:
(1) Manufacturer of Fire Retardant Chemicals and Coatings. The Company
has several proprietary formulations. Raw materials are ordered from
several supply sources such as B. F. Goodrich, Van Waters & Rogers, and
Albright & Wilson. The formulation of these various chemicals produce fire
retardant chemicals for resale. These same formulations are used in the
textile processing described next.
(2) Textile Processing Center for Fire Resistive Fabrics. The Company
applies fire retardant chemicals to fabrics for commercial customers. The
company's main clients are purchasing agents who are hired by major hotel
chains to assist the hotels as "buyers" during new construction or
refurbishing. Because of the fire standards & codes that are enforced
through city ordinances, it is mandatory for fabrics such as upholstery and
drapes to meet flammability requirements when installed in publicly used
buildings. The clients fabrics are shipped to the Company's business
location where the fabrics are processed to meet the necessary flammability
standards and then shipped to the clients desired location.
(3) Firestop and Firefilm Installation. The Company is recognized by
the State Contractors Board of California as a subcontractor in the field
of Fireproofing - California License #729794. Firestop and Fire Film is a
service the company offers in the new and retrofit construction industry.
Chemicals
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The Company's chemical sales have not proceeded as fast as they could
because the Company's attention has been directed to handling the rapid increase
in fire stop and fire film sales discussed below. The central core of the
Company has always been the chemical area of operations with the focus on the
manufacturing, marketing and distribution of the Company's current product
lines. Chemicals consists of two different classes:
(i) Company owned where the Company is the owner of several formulations
(both proprietary and patented) that the company manufactures and markets; and
(ii) non-exclusive marketed products where the Company has agreements to
market several fire retardant products that are owned by other entities, on a
non-exclusive basis.
Chemical Applications
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1. Textiles--In House Processing.
Since 1993, the Company has been successfully treating a wide variety of
fabrics, and has become technical consultants in the field of topically treated
yard goods and piece goods in the commercial industry. Due to the limited number
of fire retardant consultants in the United States market place, commercial
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customers who are forced to comply with their local fire ordinances are told by
their local inspectors what ordinances that they must comply with, but are not
told how to comply with such ordinances. For the past four years, the Company
has been committed to assisting clients in solving their fire ordinance
problems. The Company's ability to successfully treat a wide variety of fabrics
has been due to the ability to create and manufacture fire retardants to meet
the hundreds of different fabric blends that are in the market place. Because of
this success, most of the Company's fabric business is through referrals from
current customers. As more emphasis and manpower is placed on enforcing the
stringent flammability codes for the use of textiles, the growth of the fabric
processing division is expected to increase.
For four years the Company has used and is currently using a process called
"topical coatings" to meet all current flammability standards. A topical coating
applies chemicals to the surface of the fabric which is then air-dried. If the
fabric is laundered, the treatment will wash out and re-treatment is necessary
The Company believes that this process will become second to a new durable
textile process that will be in demand within the next two years and will affect
the fire retardant industry as a whole. Durable processing is achieved by
applying chemicals that are absorbed into the fibers of the fabric and a
controlled heat cure is used for drying. This locks the fire retardants into the
fiber, which can withstand multiple washings.
The Company has the durable technology and is planning to enter the durable
fire resistive fabric marketplace within the next 2 years. Due to the cost of
the durable processing equipment, the company is currently unable to enter the
marketplace today.
Current applications of the Company's various fire retardant compounds are
accomplished through the following procedures.
(1) Textile processing for fire resistive fabric treatments are in bulk
rolled goods (by the yard). Applications are designed for interior designers,
hotels, purchasing agents, restaurants, hospitals, schools, business, etc.
(2) Other Non-Textile Applications - Piece or finished goods, such as wood,
mini-blinds, hay, costumes, thatch roofing, tents, artificial foliage, props,
etc. are treated for use in the theme park industry, theater sets, construction,
exterior decorative design, for restaurants and bars, hotel interior scene
designers, etc. These applications may be performed in house or at the various
locations where the material has been already installed.
(3) On site applications are required when customers have failed fire
inspections and are forced to comply with fire codes. When it is impossible for
the customer to transport materials for treatment, the company's crew are sent
on site to perform the application.
Firestop and Firefilm
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Since the middle of the 1980's fire stopping of through wall penetrations
of plumbing, electrical and other mechanical devices through fire rated walls
and floor assemblies has become a major focus of fire safety and building
officials. In the fall of 1995 the Company was asked to provide the services and
materials to fire stop several large hotels on the Mississippi Gulf Coast. With
each project satisfactorily completed came additional requests for bids on more
construction projects. The growth rate is such that the Company had to devote
extra time and effort to maintaining stability. The Company works on fire
stopping projects in the states of Alabama, Mississippi, Louisiana, California,
Colorado, Florida, and Nevada. The building codes require that all buildings,
with the exception of one and two family dwellings, must have firewalls and fire
rated walls in certain areas to allow the occupants of those buildings to escape
in the event of fire.
A "fire wall" is a fireproof wall used in buildings and machinery to
prevent the spread of fire. For example, two - 1/2" gypsum wallboards in an
assembly will achieve approximately a 1-hour fire rating. This means there is 1
hour before the structure fails in a fire.
A "fire rated wall" is a fireproof wall that has additional fire rated
materials added to the face of the wall to increase the fire rating or time
allowed before the structure fails in a fire. These assemblies can achieve a 3
to 4 hour fire rating.
No matter how the buildings are constructed, plumbing, electrical and
mechanical devices routinely penetrate and are routed through these firewalls
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and fire rated walls as part of the construction. When this penetration occurs,
the wall looses its integrity and materials must be used to reinstate the fire
resistance integrity. These materials include fire rated silicone caulks,
sealants, mineral wool, intumescent putty and putty pads, intumescent wraps,
collars, alumna-silica blanket wraps, etc. "Intumescent" is the property of
swelling, enlarging or expanding, or bubbling up as with heat. Accordingly, in a
fire the product softens and then expands to form a white, meringue-like layer,
up to 100 mm (4 in.) thick, which insulates the structure and protects the steel
from fire.
The Company specializes in the installation of fire stopping materials. The
Company's fire stop crews work directly under the general, electrical,
mechanical or plumbing contractors. To relieve our customer's liability and
reduce the possibility of delays due to failed inspections, the Company uses
only those products which have been tested and listed by approved testing
laboratories for the through wall penetration or construction gap to be fire
stopped. Project submittal packages are provided by the Company showing the
proper engineering diagram and the testing laboratory number for each type of
through wall penetration, construction gap or special installation involved in
the project. The project submittal packages are presented to the local building
and fire inspectors, as well as the general and subcontractors involved for
review and approval before work is begun. Once the project submittal package has
been approved and the contract signed, our trained and certified fire stop
installation crews begin their work coordinating with the other contractors
involved to complete the project in the most efficient and timely manner
possible.
The Company has received their Nevada State Contractor's License #0046990,
in order to take advantage of the fire stop projects that the Company has future
work for. In addition, the Company markets A/D Fire Barrier Products, which are
thoroughly tested to ASTM E-814 "Through Penetration Fire Stop Systems" and are
listed by Underwriters Laboratories, Inc. ("UL"), Underwriter Laboratories of
Canada ("ULC"), Factory Mutual ("FM"), and Warnock Hersey Testing Laboratories.
The Company has trained and certified crews in the application of A/D
Firefilm. A/D Firefilm is a decorative, thin-film, intumescent fire protection
for structural steel. It allows the designer to express the structure as an art
form for interior locations in buildings where fire resistance ratings are
required. In the past, steel beams and structural members could only be
protected by boxing them in with gypsum board or by applying an unattractive
cement fiber coating to them. Beneath the colorful surface, A/D Firefilm is a
thin film coating that is an intumescent.
Intumescent is the property of swelling, enlarging or expanding, or
bubbling up when heated. Accordingly, in a fire the product softens and then
expands to form a white meringue-like layer, up to 100 mm (4 in.) thick, which
insulates the structure and protects the steel from fire
The second component of the system is the decorative topcoat, which acts as
a protective layer and serves as the attractive finish. A/D Firefilm has been
tested and is certified by ULC and Warnock Hersey. Flammability ratings up to
two hours were attained in accordance with CAN/ULC-S101 and ASTM-E119.
CAN/ULC-S101 and ASTM-E119 are two different fire test protocols or standards
used to measure the strength and time the product must meet before it is
approved for use in a commercial building. The product must hold back combustion
(fire) or the bi-products of combustion, such as carbon monoxide and carbon
dioxide for a definitive time period. The product could withstand 1, 2 or 3
hours of exposure to fire. To receive a two-hour rating means that if an
approved product is applied to the structure that meets the ASTM-E119 Standard,
the structure will withstand two hours of direct heat before the integrity of
the structure will begin to fail.
PROPRIETARY PRODUCTS
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Fyberix(TM)2000V is a non-durable fire retardant compound designed for use
on textiles used in hospitals, nursing homes, hospices and other health care
facilities as well as in the transportation and tourist industries. (i.e. cruise
ships, aircraft, hotels, motels, restaurants, etc.). It enables fabric to be
fire resistive while maintaining a clean appearance with its anti-soiling agent
and at the same time resists the growth bacteria, fungus, mites, etc. U.S.
Patent #5.631.047
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Firextra(TM)1000 sold in either concentrate or ready-to-use form is a
proprietary product which is an primary all-purpose, non-durable aqueous saline
based fire retardant compound. It is used on almost every type of textile fabric
-- natural, synthetic, or blended. It may be used on unfinished wood and wood
products as well as hay and paper. It is effective in treating leather and is
used by the major leather tanners in the United States.
Fyberix(TM)2000 is a proprietary formulation, which is an all-purpose,
non-durable aqueous saline-based fire retardant and anti-soiling compound. It is
designed for fabrics used as upholstery, drapery and curtain.
Firextra(TM)NS200 is a proprietary formulation, which is an all-purpose
non-durable, and non-saline aqueous based fire retardant compound. It is used on
almost every type of textile fabric natural, synthetic, or blended. It is
especially useful for treating fabrics where chemical salt content could present
problems.
Firextra(TM)4000 is a proprietary formulation which is an aqueous saline
based fire retardant compound. It is designed to treat unfinished wood and wood
products, thatch and bamboo. Wood products treated with this product should be
kept indoors or away from weathering unless the surface has been sealed with a
paint or sealant after application.
Firextra(TM)4135 is a proprietary formulation which is a non-durable
aqueous saline based fire retardant compound. It is designed to treat spun woven
polyester fabrics.
Firextra(TM)5000 is a proprietary formulation which is a non-durable
aqueous saline based fire retardant compound. It is designed specifically for
nylon fabrics.
Firextra(TM)UV-11 is a proprietary and highly complex formulation which is
a concentrate that can be diluted with plain water or added to other fire
retardant or soil protection compounds to afford an effective block against
Ultra Violet "B" waves that cause color fading, fabric thread weakening and
fabric aging.
Firextra(TM)FBC is a proprietary formulation, which is latex in an aqueous
base. It is manufactured for the Company by a major chemical manufacturing
company and can only be obtained from them by a coded number. The product is
used on the backside of hard-to-treat textile products. In addition to providing
fire resistance the product adds fabric strength and integrity to the fabric.
B.F. Goodrich, is the major chemical supplier of Firextra FBC. The formula is
the proprietary formulation of the B. F. Goodrich Company, which was created for
the use of the Company. There is no contract with regard to the development by
B.F. Goodrich of this formulation for the Company and the product can only be
ordered by a confidential code number, which was assigned to the Company by the
B.F. Goodrich Company.
Firextra(TM)238 is a proprietary formulation that is an acrylic base clear
coating fire retardant compound. It is used on thatch, bamboo and other wood
products that must be used outdoors and/or be exposed to the elements of
weather. It must be re-applied every three years to maintain its integrity.
Overall, AFRC's existing chemical product line is broad for today's
marketplace that consists mainly of water based fire retardant chemicals. The
Company's products are able to treat a wide variety of manufactured goods and
with the addition of intumescent paints and other fire retardant coatings, we
are now able to provide additional services to the customer.
Research and development is continuously needed for the expansion of the
Company's lines. Development of the next generation of fire retardant
formulations is limited only by the need for a research staff at this time.
Product development is necessary in order to progress and further develop
products for the future. The Company's products either meet or exceed the
various protocols as required by local, state and federal regulation. All
products are thoroughly tested and certified by the State of California Fire
Marshall's Office. In order to sell or market a fire retardant chemical in the
State of California, each chemical must be tested by an outside laboratory for
the chemicals use. All other states have the choice to utilize their own state's
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regulations or to adopt the standards mandated by the State of California, which
are the most restrictive. Therefore, because the Company follows California
mandated rules, which are the most restricted, the Company believes it to be in
compliance. A copy of the test for flammability is sent to the State Fire
Marshall's Office, along with a sample of the chemical, the fabric or item that
the chemical is specifically designed to treat. Once the State Fire Marshall's
Office has performed their own flammability test, they issue a certification
number on the product.
THE MARKET
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According to the National Fire Protection Agency (NFPA) a fire occurs
somewhere in the United States every 18 seconds, resulting in an injury every 23
minutes and a death every 130 minutes. The statistical data obtained through the
United States Fire Administration (USFA) and the Consumer Product Safety
Commission (CPSC), reflects that in 1998 alone, there were over 381,500
residential fires, 3,250 deaths and 17,175 injuries, which caused in excess of
$4.4 billion dollars in damages. The residential fire problem represents
approximately 80 percent of all fire deaths and 74 percent of the injuries to
civilians. Fire is the third leading cause of accidental death in the home. The
true cost of fire in the United States is much greater than just the value of
property destroyed by fire, perhaps as high as billions per year. Analysis of
the growing costs of the major components of the total cost of fire is being
given more consideration in setting new priorities by our government. See the
Article "1998 Fire Loss in the United States" from the NFPA Journal,
September/October 1999 is attached hereto and incorporated herein by reference.
See Exhibit Index, Part III.
The market is rapidly undergoing changes through federal and state
regulations and codes that are continuously being enforced in the United States.
The direction and emphasis is on the removal of potential fire loads and flame
spreads in structures. The market has incurred various problems, which include a
lack of public awareness for the need of fire resistant materials and a lack of
formal education for the enforcement personnel. The United States Fire
Administration's National Fire Data Center ("NFDC") states that mayors, city
managers, school officials, the media, and the general public, are still largely
unaware of the magnitude of the losses incurred by fire. Their lack of awareness
and failure to realize the seriousness of fire to communities and the country
are factors in keeping the U.S. fire problem one of the worst in the world per
capita. See NFDC Statistics attached hereto and incorporated herein by
reference, as posted on the NFDC website at:
www.usfa.fema.goc/nfdc/statistics.hrm. See Exhibit Index, Part III.
The Company believes it has gained recognition in the field of fire
retardant and fire stop technology. Because of the Company's involvement in
assisting to educate the fire law enforcement, the Company has received many
referrals for its fire stop services. In the past, the Company has conducted
various seminars for building officials, architects, and Fire Marshall's at
their request.
The Company believes that with an increase in its marketing ability, the
products and technology can reach the world market. With the acquisition of two
chemical companies, the market size is large and diverse. The markets include
retailers, paint and coating suppliers, industrial manufacturers, distributors,
field users such as contractors, contractor suppliers, thatch and bamboo
wholesalers, silk foliage wholesalers, any many others.
Currently, in the United Kingdom, there are six firms that provide fire
resistant coatings for the upholstery market. It is estimated that the finishers
treat 25,590,500 linear yards per year at approximately $2.00 per yard. The fire
resistive fabric industry is estimated at approximately $51.0 million annually.
The United Kingdom has a population base of approximately 70 million people. In
comparison to the United States population of approximately 260 million people,
the ratio is 3.7 to 1. Therefore the estimates for the United States fire
resistive fabrics for the upholstery industry alone could exceed $190.0 million
annually. The company currently has two methods of distribution for this new
market. (1) To treat the clients textiles at the Company's textile processing
facility; and (2) To offer chemicals and technology to established clients, such
as mills, tanneries, etc., so they may implement this process prior to or along
with the production of their goods.
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(2) Distribution methods of products or services.
Distribution of the company's products or services is relatively simple, as
most new business comes by referrals and reputation. Orders or service needs are
requested by phone, and distribution is through one of the company's two
locations. Promotional costs and effective sales programs have to date limited
the company's ability to expand this area. The company offers its products and
services to a multiple cross section of industries, such as Institutional,
Commercial, Industrial, Government, Manufacturers, Consumers, Independent
Retailers and Certified Applicators. The majority of the company's clients are
identified as end users of the products or services. In certain industries,
companies that are considered end users have also been able to distribute the
products for resale. The company established their web site in 1998, which can
be found at "www.americanfireretardant.com", which the Company uses only for
marketing and for providing a summary of information pertaining to fire
retardant processes, rules and regulations. The information contained on the
Company's website is a summary only and is not to be construed as a complete
statement of all fire stopping and retardant procedures, and rules and
regulations. This registration statement contains and sets forth in further
detail the information summarized on the Company's website.
Strategic Alliances
-------------------
On May 5, 1999, the Company entered into a Letter of Intent with Fabritek
Industries LLC, a Connecticut Limited Liability Company ("Fabritek") to acquire
Fabritek in a stock for stock exchange, upon the conversion of Fabritek to a
corporation The parties had until June 30, 1999 to complete their Due Diligence
and execute a mutually acceptable definitive Acquisition Agreement. The deadline
to execute said definitive Acquisition Agreement expired and the Company has
chosen not to proceed further.
(3) Status of any publicly announced new product or service.
The Company has not made any public announcements of new products or
services offered by the Company.
(4) Competitive business conditions and the small business issuer's
competitive position in the industry and methods of competition.
There are several fire retardant companies in the United States offering
the same types of products and are engaged in an ongoing fight for the market
share.
Among these are California Flame Proofing, Flamort and Flame Control. The
Company's products are different in composition due to different proprietary
ingredients, such as smoke inhibitors, rust inhibitors and anti-fungal
properties (the Company's patented formulation).
The Company's largest competitors in the fabric finishing market are
Kiesling and Hess, Texas Flameproofing and Schneider Banks. The Company has not
promoted any marketing in this area due to the time that management has devoted
to its other divisions. The majority of the work performed by finishers comes
from the hotel industry for new and refurbishing installation projects. All of
the Company's current customers were past customers of one of the above
competitors. The advantage the Company has over all three of these competitors
is the ability to treat diverse fabrics with little or no change in the fabric's
dyes or feel to the touch of the hand, as a result of processing.
The in-house tracking service offered by the Company is considered one of
great importance to the customers. There are hundreds of rolls of fabrics that
are sent to the Company for the fire retardant process on a weekly basis. In
some cases, one customer or purchasing agent may be responsible for 4 different
hotel projects. The agent has the fabric mill send all fabrics directly to the
Company, which are side marked with what hotel and customer the fabric is for.
The Company's computerized tracking of each client's fabrics allows the Company
to print a report on the date received by job name. It also indicates when the
fabric was treated, shipped out and to whom.
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There are several competitors in the Company's fire stop division, but most
are through other market segments. Currently, electrical, plumbing and
mechanical contractors perform most fire stop installations. The advantages are
that the Company specializes in fire stop systems, fire codes and statutes and
is continuously aware of the constant changes being made in building codes,
whereas, this is not a main focus for subcontractors. The Company saves the
contractor time and money loss from failed inspections, deals directly with the
building inspectors and provides approved submittals directly to the general
contractor. The reputation the Company has in this market is its strongest asset
today.
(5) Sources and availability of raw materials and the names of principal
suppliers.
The company does not utilize any specialized raw materials and as such any
and all materials and raw materials are readily available. The company is not
aware of any problem that exist at present time or that is projected to occur
with the near future that will materially affect the source and availability of
raw materials, which would be required by the company. The company currently
purchases raw materials from Van Waters and Rogers, Morre-tech, Albright and
Wilson, B.F.Goodrich and Great Lakes Chemical.
(6) Dependence on one or a few major customers;
In 1998 one job, the Beau Rivage Casino, in Biloxi, Mississippi, accounted
for 12% of total sales. This 12% was comprised of revenues from three
subcontractors, on this job, Edwards Electric, A & B Electric and MCC
Mechanical, for whom the Company performed services. The Company feels that the
because of the diversity of the applications and uses of the various products
and services provided by the Company and the wide base of customers for such
products and services, that this alleviates the dependence on one or more major
customers. With the introduction of new fire laws, codes and regulations and the
continuing growth in the new construction, retrofitting and refurbishing
industry, the company will develop a wider base of customers.
(7) Patents, trademarks, licenses, franchises, concessions, royalty
agreements or labor contracts, including duration;
The Company believes its chemical products and technology to be unique. The
company is also dedicated to the protection of its trade secrets through tight
security, the advancement of the technology, and the establishment of strong
patent protection. Therefore, the Company has retained legal counsel to develop
and submit patent applications for its chemical products and technologies that
the Company views as patented. To date one patent has been granted in the United
States and one other patent application has been filed and is pending in the
United States.
A very brief summary of the categories covered by the patent which has been
issued which relates to the application of the Company's compounds and products.
Subject Matter of Issued Patent
-------------------------------
(1) Relates to compounds applied to porous materials, such as fabrics,
wood, cardboard, and fiberboard, to protect the materials from various
destructive and undesirable processes.
(2) Relates to compounds applied to porous materials, especially
fabrics of natural and synthetic materials used to make rugs, carpets,
furniture coverings, and wall hangings, to protect against fire, soil and
water damage, and virus and fungus growth.
(3) Protects not only the materials to which it is applied but also
protects persons in contact with the materials, by stopping fire and germ
growth.
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UNITED STATES PATENTS
---------------------
The Company has had one U.S. patent granted on its chemical products and
has one additional patent application pending:
Fyberix (TM)2000V U.S. Patent #5.631.047
Fyberix (TM)2000 Patent Pending #08.089793
COPYRIGHTS / TRADEMARKS
-----------------------
The Company has a copyright on "Fire Retardant Applicator's Manual"
certificate of registration number TX 3-878-798 and two trademarks,
"Firextra(TM)" registration number 1,812,119 and "Fyberix(TM)" registration
number 1,815,602.
LICENSE AND ROYALTY AGREEMENTS
------------------------------
June 24, 1997, American Fire Retardant Corporation, entered into a royalty
agreement with Norman O. Houser, wherein American Fire will utilize Mr. Houser's
vermicide compound for the companies patented 2000V formulation. The agreement
grants Mr. Houser the sum of $0.75 per gallon on the sale of the companies
Fyberix 2000V. Said royalties are to begin at the time of agreement. As of the
date of this Registration Statement, the product has not entered the market
place, so no royalties have been paid. Cancellation of this royalty agreement
would occur if the company no longer used Mr. Houser's compound in the
formulation. A copy of the Agreement with Mr. Houser is attached hereto and
incorporated herein by reference. See Exhibit Index, Part III.
RESEARCH, DEVELOPMENT AN INTELLECTUAL PROPERTY
----------------------------------------------
The Company's water-based chemical development stage has been completed.
The fire retardant product line is constantly being evaluated and upgraded to
keep up with the market demands, customer problems and new discoveries in field
applications. In textile finishing, not all fabrics can be made fire resistive
due to several different specialty blends. As in the United Kingdom, there will
be problems with this and U.S. mills will began to discontinue those fabrics
targeted for the upholstery industry and work closely with the fire resistive
finishers in order to produce those fabrics that can easily be treated. This is
where research and development into new chemical formulations and technology
will come into its heaviest stage.
Testing
-------
All of the Company's products have undergone vigorous testing to insure
that they meet the flame resistance protocols for their applicable use. Properly
treated materials have successfully passed the burn requirements of the
following test protocols and more:
(a) retardancy
(b) toxicity
(c) corrosiveness
(d) resistance to staining
(e) static electricity reduction
(f) tensile strength
The fire stop and fire film materials have been tested by various
independent testing laboratories and pass the protocols that must be met for the
various types of through wall/floor/ceiling assemblies.
Over the past 5 years the Company has tested the chemical uses on many
various materials through outside laboratories. The Company has over 100
different flammability test reports of various fabric blends performed by
independent testing laboratories, such as United States Testing Laboratories,
Textest, Better Fabrics Testing Bureau and many others. The Company is an active
member of several fire protection-related organizations, including the National
Fire Protection Association, International Fire Service Training Association,
Associated General Contractors, The American Society for Testing and Materials,
and The Industrial Fabric Association International.
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(8) Need for any government approval of principal products or services. If
government approval is necessary and the small business issuer has not yet
received that approval, discuss the status of the approval within the government
approval process.
All of the products the company currently manufactures do not contain any
constituents that require government regulation. The state does require that all
fire retardant chemicals must be certified and registered with the State of
California Fire Marshall's Office. The company is in compliance with this.
(9) Effect of existing or probable governmental regulations on the business
The Company is governed by the California Health and Safety Code of
regulations under which the State of California established flammability
standards that must be met by any and all companies providing flame-proofing
services to the public in the State of California. In order to comply with
California's law for the application of flame retardants, each applicator must
be certified by the state. The Company is mandated by the State of California to
meet the following flammability standards upon the completion of treating
drapes, hangings, curtains, drops, tents, upholstery furniture fabrics or it's
components and other decorative material for use in the State of California. All
materials treated by the Company require a "Certificate of Flamepoofing" to be
issued to the customer.
Cal Title 19 - which dictates the vertical flame test for drapes, hangings,
curtains, drops, all other decorative material, Christmas trees, tents, awnings,
and fabric enclosures.
Cal. TB-116 which is the standard of fire test for Cigarette Ignition
Resistance of Components of Furniture.
Cal. TB-117 which is the standard of fire test for Cigarette Ignition
Resistance of Upholstered Furniture Assemblies.
Cal. TB-133 which is the standard of fire test for Seating Furniture in
Public Buildings.
While management is unaware of any new regulations being contemplated by
the subject agencies, it remains possible that these agencies could institute
new guidelines which could affect all companies in this field.
The Company has voluntarily filed this Registration Statement on Form 10-SB
in order to register it common stock pursuant to Section 12(g) of the Securities
Exchange Act of 1934.
As a result of the effectiveness of its Registration Statement on Form
10-SB, the Company shall be subject to Regulation 14A of the Commission, which
regulates proxy solicitations. Section 14(a) of the Securities Exchange Act of
1934, as amended (the "1934 Act"), requires all companies with securities
registered pursuant to Section 12(g) thereof to comply with the rules and
regulations of the Commission regarding proxy solicitations, as outlined in
Regulation 14A. Matters submitted to stockholders of the Company at a special or
annual meeting thereof or pursuant to a written consent will require the Company
to provide its stockholders with the information outlined in Schedules 14A or
14C of Regulation 14. Preliminary copies of this information must be submitted
to the Commission at least 10 days prior to the date that definitive copies of
this information are mailed to stockholders.
The Company will also be required to file annual reports on Form 10-KSB and
quarterly reports on Form 10-QSB with the Commission on a regular basis and will
be required to timely disclose certain events (e.g., changes in corporate
control; acquisitions or dispositions of a significant amount of assets other
than in the ordinary course of business and bankruptcy) in a Current Report on
Form 8-K.
The Company's Management believes that it is in the Company's best interest
to become subject to the periodic reporting requirements as set forth above, in
order to provide a mechanism for the disclosure and publication of material
information about the Company and its financial condition to its shareholders
and the financial community. In the event that the Company's obligation to file
periodic reports is suspended under the Securities Exchange Act, it is the
intention of the Company to continue to voluntarily file period reports as if so
required to do so.
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Management believes that these reporting obligations will increase the
Company's annual legal and accounting costs, but it is expected that revenues
will be sufficient to meet these costs.
(10) The Company is not aware of any other governmental regulations now in
existence or that may arise in the future that would have an effect on the
present business of the Company.
(11) During the last two fiscal years the Company has not incurred any cost
on research and development and no expenses have been born by customers of the
Company relating to research and development activities.
(12) Costs and effects of compliance with environmental laws (federal,
state and local).
As the present time, the Company does not manufacture any chemicals that
are subject to federal, state or local environmental compliance laws and
regulations.
Employees
---------
The Company employs nineteen full time employees as of December of 1999.
Two of the Company's employees are employed in administrative positions as
President and Executive Vice President. One employee is Sales and Technical
Manager for the firestop division of the Company. One employee is an accountant
in charge of accounts receivable and accounts payable. One employee is the
shipping and receiving manager. Another employee is in charge of construction
contracts and general secretarial duties and one is clerical only. Three of the
other twelve employees are warehouse and field supervisors. The other nine
employees are laborers. The company performs all activities at the Company's
business location, with the exception of construction, which is performed at the
clients' location. The activities include, but are not limited to, sales,
marketing, accounting, shipping, manufacturing (blending chemicals), treating of
fabrics and other goods with fire retardant chemicals, architect blue print
reading and construction. Outside services are legal and certified accounting.
The company also uses job finders for part time work in the construction area.
None of these employees are covered by collective bargaining agreements.
RISKS FACTORS
-------------
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 $675,000 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.
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FORWARD LOOKING STATEMENTS. When used in this Registration Statement, the
words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "projected", "intends to" or similar expressions are
intended to identify "forward-looking statements." Such statements are subject
to certain risks and uncertainties, including but not limited to market
conditions, competition, factors affecting the Company's ability to implement
its growth strategy, the Company's dependence on future financing, fluctuations
in operating results, the Company's ability to sustain levels of growth,
diversification of the Company's business, contingent risks, state and federal
regulation and licensing requirements, and environmental concerns that could
cause the Company's actual results to differ materially from those presently
anticipated or projected. Such factors, which are discussed in "Risk Factors,"
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the notes to consolidated financial statements, could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in this Registration Statement. As a
result all parties are cautioned not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company's
independent accountants have not examined or compiled the accompanying
forward-looking statements and accordingly do not provide any assurance with
respect to such statements.
The Company's present and proposed business operations will be highly
speculative and subject to the same types of risks inherent in any new or
unproven venture, as well as risk factors particular to the industries in which
it will operate, and will include, among other things, those types of risk
factors outlined below.
PATENTS AND PROPRIETARY RIGHTS. THE UNAUTHORIZED USE OF INTELLECTUAL
PROPERTY BY THIRD PARTIES MAY HARM THE COMPANY'S BUSINESS. 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 is integral to product performance.
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.
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TWO OF THE COMPANY'S SHAREHOLDERS HAVE VOTING CONTROL OVER THE COMPANY. 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.
THERE IS NO MARKET FOR THE COMPANY'S COMMON STOCK AND THERE IS NO ASSURANCE
THAT A MARKET WILL DEVELOP. 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.
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 THAT THE COMPANY'S COMMON STOCK MAY BE DEEMED A "PENNY STOCK" AND MAY
RESULT IN ADDITIONAL INFORMATION REQUIRED FROM AN INVESTOR AS TO THE SUITABILITY
OF AN INVESTMENT IN A "PENNY STOCK." 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
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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.
In the event that the Company's Stock is deemed a penny stock this could
inhibit and limited an investor from buying the Company's stock because of the
procedures that and investor and the broker must adhere to may been viewed as to
burdensome by the investor. Additionally, because the Company's stock may be
designated as a penny stock, prior to the sale of a penny stock recommended by a
broker-dealer to a new customer, who is not an institutional accredited
investor, the broker-dealer must approve the customer's account for transactions
in penny stocks in accordance with the rules outlined above. The time, effect
and burden in approving a customer's account to be approved for trading in penny
stocks could hamper or limited the market for the Company's common stock as
broker-dealers may be less inclined to recommend an investment to a new customer
in a penny stock.
THE COMPANY IS DEPENDANT ON CERTAIN 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.
IF THE COMPANY IS UNABLE TOO HIRE AND RETAIN NECESSARY SPECIALIZED KEY
PERSONNEL THE COMPANY'S BUSINESS AND GROWTH WILL SUFFER. 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 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.
IF THE COMPANY IS UNABLE TO MAINTAIN ADEQUATE LEVELS OF INVENTORY THE
COMPANY'S BUSINESS MAY BE DISRUPTED. 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.
IF THE COMPANY IS UNABLE TO MARKET ITS PRODUCTS AND SERVICES ITS BUSINESS
WILL SUFFER. 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.
IF THE GOVERNMENT IMPLEMENTS NEW OR ADDITIONAL REGULATIONS IN THE INDUSTRY
IN WHICH THE COMPANY OPERATES, THESE REGULATIONS MAY BE COSTLY OR DIFFICULT FOR
THE COMPANY TO COMPLY WITH AND COULD RESULT IN LOSS OF SALE. While the Company
is unaware of any new regulation being contemplated by the subject agencies, it
remains possible that these agencies could institute new guidelines which could
affect all similar companies in this field. The implementation of new regulatory
compliance factors could restrict sales of certain products. Additional testing
could be required and such additional testing could cause delays in the
introduction of products into certain market sectors, which delays could
adversely affect the Company's revenues.
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IF THE COMPANY DOES NOT OBTAIN ADDITIONAL FINANCING IT MAY NOT BE ABLE TO
IMPLEMENT ALL OF ITS BUSINESS PLAN. 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.
COMPETITION AND RAPID TECHNOLOGICAL CHANGE COULD HARM THE COMPANY'S
BUSINESS. 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. It is particularly difficult for small independent
companies to compete with such major companies in the automobile industries,
fabric manufacturers, mills, etc. There is no assurance that the Company will be
able to compete in such an environment.
Item 2. Management's Discussion and Analysis of Plan of Operation.
---------------------------------------------------------
The following discussion and analysis should be read together with the
Consolidated Financial Statements of the Company and the notes to the
Consolidated Financial Statements included elsewhere in this Registration
Statement.
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
18
<PAGE>
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 over the past two years. See
analysis of fiscal 1999 vs. fiscal 1998 for details.
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.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------
The Company sustained net losses of $708,204 and $1,072,337 for the fiscal
years ending December 31, 1999 and December 31, 1998 respectively, for a
decrease of $364,133 or 34%. As discussed in detail below, this loss was
attributable mainly to (1) increased legal and accounting fees incurred in
connection with the Company's Public Filing, (2) increased interest expense
incurred because progress billings on construction projects did not meet
factoring payment schedules and thus the Company was liable for large penalties
from the factor, and (3) increased travel expenses incurred in connection with
both the on-site running of construction jobs and the need of the Company's
principals to raise outside capital for continued operations of the business.
Selling, general and administrative expenses, and bad debt expense has
decreased in contract to increased sales for fiscal 1999; Even though, included
in SG&A for 1999 are legal and accounting fees specifically attributable to the
preparation of the Company's Form 10-SB. These fees amounted to $215,685 in
1999. Throughout 1999 management has made a concerted effort to reduce SG&A. The
decreases in SG&A accounts that are directly related to the everyday running of
the business have been offset by the legal and accounting fees attributable to
the public offering. Management does not feel that these large costs will
continue in 2000. Depreciation and amortization expense has risen due to the
purchase of equipment needed for increased construction work. There are no
significant fluctuations in the depreciation and amortization accounts that
warrant any further discussion here. Included in SG & A for 1998 is an expense
of $501,816 for 209,090 shares of its common stock which were issued for
consulting services. Excluding this one time charge SG & A would have been
$648,412 or 31% of sales compared to 28% in 1999.
Changes in Payroll expense, Outside services, Travel and Entertainment, and
Interest expense will be discussed below.
19
<PAGE>
OPERATIONAL RESULTS
-------------------
The following schedule compares the changes in major components of sales,
costs of sales, gross margin and expenses between 1999 and 1998.
RESULTS OF OPERATIONS RESTATED TO PROPERLY CLASSIFY EXPENSES AS COST OF GOODS
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage
Increase
1999 1998 (Decrease)
------------ ----------- -----------
<S> <C> <C> <C>
Net Sales
Chemicals $ 458,201 $ 363,376 26.00%
Textiles 343,813 301,088 14.20%
FireStop/FireFilm 1,650,892 1,395,432 18.30%
------------ ----------- -----------
2,452,906 2,059,896 19.00%
Cost of Goods
Chemicals 100,457 85,881 17.00%
Textiles 176,432 119,927 47.00%
FireStop/FireFilm 1,056,938 1,057,327 (3.00%)
------------ ----------- -----------
1,333,827 1,263,135 5.60%
Gross Margin
Chemicals 357,744 277,495 28.90%
Textiles 167,381 181,161 7.60%
FireStop/FireFilm 593,954 338,105 75.60%
------------ ----------- -----------
1,119,079 796,761 40.50%
SG&A 690,898 1,150,228 (40.00%)
Payroll 380,383 328,204 16.00%
Travel & Entertainment 189,038 78,537 140.00%
Depreciation & AmortiZation 68,592 39,286 74.60%
Bad Debt Expense 22,042 17,370 26.90%
------------ ----------- -----------
1,350,953 1,613,625 (16.00%)
Net Loss from Operations (231,874) (816,864) (72.00%)
Interest Expense 476,330 255,473 86.50%
------------ ----------- -----------
Net Loss $(708,204) $(1,072,337) (34.00%)
Gross Profit
Chemicals 78% 85%
Textiles 49% 60%
FireStop/FireFilm 36% 24%
Combined 46% 39%
Percentage of Total Sales
Chemicals 19% 18%
Textiles 14% 14%
FireStop/FireFilm 67% 68%
Percentage of Gross Profit
Chemicals 33% 35%
Textiles 14% 23%
FireStop/FireFilm 53% 42%
</TABLE>
In 1999 the Company issued 5,859 shares to a consultant. The shares were
valued at $0.70 per share which is the price at which the Company issued other
shares in 1999. The consultant performed legal and investment banking services
for the Company. In 1998 the Company issued 209,090 shares of common stock
valued at $2.40 per share which is the price at which the Company issued other
shares in 1998.
The Company's sales of chemicals, textiles and firestop / fire film
products increased in 1999 over 1998. The sales increased because of the
Company's increased market and name recognition by potential customers. Sales
also increased due to the Company's expanded marketing efforts which includes
sales through representatives and the recommendation of the Company by
contractors familiar with the Company.
20
<PAGE>
ANALYSIS
--------
The Company's net sales derive from three divisions: (1)Chemical Sales, (2)
Textile Processing, and (3)Fire Stop/Fire Film construction projects. During
fiscal 1999, Chemical sales increased by 26%, Fire Stop/Fire Film increased by
18.3%, and Textile increased by 14.2% as a percentage of net sales 1999 vs.
1998. For 1999, the Chemical sales, Textile sales, and Fire Stop/Fire Film sales
have a gross profit of 78%, 49% and 36% respectively, and the Company has a
combined gross profit of 46%. Increased growth in gross profit beyond that
applicable to the percentage increase in net sales demonstrates the fact that
the Company is relying on increased volume in both Chemical and
FireStop/FireFilm as the chief product mix to create this higher combined gross
profit. Textile processing produced only 14% of 1999's gross profit, yet this
division does not consume a great deal of management's time. The Company intends
to concentrate on its Chemical division which has a much higher gross profit,
and the FireStop/FireFilm division which although it has a lower gross profit,
it is easy to contract and represents a small number of large dollar jobs.
However, the FireStop/FireFilm division does produce excessive cash needs early
in the fulfillment of the contract which forces the Company to rely heavily on
the Factors for financing the start up. Hence, if outside capital is not
obtained in order to eliminate the need for factoring, this division cannot
operate effectively without drastically increasing interest expense.
For 1999 Chemical process, Textile processing, and FireStop/Fire Film
contributed $357,744, $167,381, and $593,954 respectively to the companies total
gross profit of $1,119,079. The Company expects the sales of Chemicals and Fire
Stop/Fire Film to continue to increase and the Textile processing should remain
consistent by the end of the year 2000.
The Company's increase in gross profit has also been brought about by the
fact that the Company is becoming more experienced in the FireStop/Fire Film
construction business and is able to more effectively manage these large jobs.
As a result, the gross profit for FireStop/FireFilm increased from 24% in 1998
to 36% in 1999. The Company is also more effectively managing its purchase of
raw material for all divisions of the business which is also evident in the
decreased raw goods inventory.
As noted above, certain of the Company's Operating Expenses increased
substantially during 1999. Of the $111,000 increase in travel expenses,
approximately $58,000 is attributable to management's need to visit prospective
Fire Stop/Fire Film sites in order to compile proper bids, approximately $37,000
is attributable to management's constant involvement in attempts to raise
outside capital for the Company, and the balance is due to travel expenses
incurred in the normal course of business, especially for the marketing of the
Company's patented product, Fiberix 2000V. This product is packaged as an
aerosol application to the consumer. Management feels that the prospects for
this product are great; however, the Company cannot fund the necessary expenses
to bring this product to the market place. Hence, if outside capital is not
found, this product will have to remain dormant.
The single most significant cause of the net loss for 1999 is the increase
in interest expense of $220,857 or 86.5%. As noted earlier, the Company is now
engaging in the construction business which requires enormous outlays of capital
at the beginning of the project which is then reimbursed through standard
percentage of completion billing as the work is done. The Company has been
forced to work with Factors who are not really part of the construction
industry, and hence the factoring agreement contains harsh penalties should the
factored receivables age beyond a certain date. Because the Company is new to
this construction industry, certain dates were not met throughout the fiscal
year and penalties have been incurred by the Company. Interest including these
penalties for 1999 is $476,330 on a loan/line of credit base of approximately
$1,388,000. This creates an effective interest rate for 1999 of 34.31%. Had the
company been able to avoid these penalties, interest expense for 1999 would have
been $262,139, or 18.8%.
The Company believes that the expenses for filing the Form 10-sb and travel
will not be the substantial burden in the year 2000 that they were in the year
1999. However, the Company will incur the same substantial interest rates in
2000 because the Company is still factoring its receivables. The Company
currently estimates that it would need a capital infusion of $675,000 over the
next twelve months in order to be able to avoid the excessive interest rates
discussed above. At this time, although the Company is exploring several avenues
of financing, no one answer to this problem has been found.
21
<PAGE>
St. Martin Bank - Accounts Receivable Financing.
-----------------------------------------------
In March 1997, the Company entered into a Merchant Services Agreement with
St. Martin Bank and Trust of St. Martinville, Louisiana. Under the terms of this
agreement, the Company would sell certain qualified account receivables to St.
Martin Bank on a discount from full face value in order to obtain necessary
working capital, up to a set limit. The initial limit of this financing was
$100,090 as evidenced by a promissory note executed by the Company in favor of
St. Martin Bank. This promissory note was secured by a Commercial Guaranty by
the Company and personally by the then acting officers of the Company, Stephen
F. Owens, Angela R. Raidl and Edward Friloux.
On May 21, 1997, the line of credit available to the Company for factoring
of its receivables with St. Martin Bank was increased to $250,000 as evidenced
by a new promissory note. On August 18, 1998, the Company ceased factoring its
receivables with St. Martin Bank. The balance due and owing to St. Martin Bank
as of August 18, 1998 was $172,725.73 as evidenced by a promissory note executed
by the Company in favor of St. Martin Bank. The note was had a maturity date of
November 16, 1998 and was secured by a Commercial Guaranty executed by all of
the then acting officers of the Company, a Commercial Pledge Agreement covering
all inventory, accounts and equipment of the Company and a second position
Collateral Mortgage Lien against the real property owned by the Company located
in Lafayette, Louisiana. The maturity date of this note was extended and on
February 4, 1999, with a balance of $154,059.29, the loan was converted to a 7
year term loan under which the Company is to make monthly installment payments
of $2,600.57 per month for 84 months.
A Summary of the terms of the current and existing note with St. Martin
Bank are as follows:
Principal Amount of Note: $154,059.29
Date of Note: February 4, 1999
Maturity Date: April 20, 2006
Initial Interest Rate: 9.750%
Variable Interest: The interest rate of the note is subject to change from
time to time based on changes in an index which is the St. Martin Bank
Prime Rate Adjusted Daily.
Security: The note is secured by a Commercial Pledge Agreement covering all
inventory, accounts and equipment of the Company and a second position
Collateral Mortgage Lien against the real property owned by the Company
located in Lafayette, Louisiana.
A copy of the agreements between the Company and St. Martin Bank are
attached hereto and incorporated herein by reference. See the Exhibit Index,
22
<PAGE>
Private Capital - Accounts Receivable Financing
-----------------------------------------------
On April 17, 1999, the Company entered into a Purchase and Security
Agreement with Private Capital, Inc., located in Lafayette, Louisiana. Under the
terms of this agreement, the Company would sell certain qualified account
receivables to Private Capital, Inc., at a price equal to the net amount of the
acceptable account receivable, less a discount equal to 8.0% of the net amount
of the acceptable account receivable. At the time of purchase of such account
receivable by Private Capital, Private Capital shall pay to the Company the net
amount of the account receivable less the discount. Private Capital agrees to
rebate to the Company a sum equal to 2.0% on each account receivable that is
paid within thirty (30) days. Any account that pays after thirty (30) days will
be charged the full discount, plus any account purchased by Private Capital from
the Company unpaid for a period in excess of ninety (90) days from the date of
said purchase by Private Capital, the Company agrees to pay to Private Capital
additional sums equal to and calculated based on 2.0% for any part of a thirty
(30) day increment, exceeding sixty (60) days that Private Capital purchases
said account receivable.
To secure the payment by the Company to Private Capital for any
indebtedness which may result from a charge back as a result of a delinquent or
non-paying account, the Company has granted to Private Capital a security
interest in all of the Company's inventory now or hereafter acquired by the
Company located at the Company's offices in Broussard, Louisiana, and all
accounts receivable, deposit accounts with Private Capital, equipment and
general intangibles and chattel papers of the Company and all proceeds thereof.
As additional security for the payment by the Company to Private Capital
for any indebtedness which may result from a charge back as a result of a
delinquent or non-paying account, the then acting officers of the Company,
Stephen F. Owens, Angela M. Raidl and Edward Friloux all executed guarantees.
A copy of the agreements between the Company and Private Capital, Inc., are
attached hereto and incorporated herein by reference. See the Exhibit Index,
Part III.
23
<PAGE>
Bank of Erath - Unsecured Note
------------------------------
On June 16, 1997 the Company borrowed the sum of $15,030.00 from the Bank
of Erath if Abbeville, Louisiana. The loan is unsecured and had an original
maturity date of September 14, 1997. One October 20, 1998 the loan was extended
to April 15, 2001.
A Summary of the terms of the loan with Bank of Erath are as follows:
Principal Amount of Note: $15,000.00
Original Date of Note: June 16, 1997
Maturity Date: April 15, 2001
Initial Interest Rate: 12.672%
Monthly Installments: $488.04
A copy of the original promissory note and Loan Extension Agreement between
the Company and Bank of Erath are attached hereto and incorporated herein by
reference. See the Exhibit Index, Part III.
Item 3. Properties
----------
California Office.
-----------------
The Company's main office facility is located at 9337 Bond Avenue, El
Cajon, California 92021, which serves as its corporate headquarters and is
situated in a leased 7,800 square feet office/warehouse building which contains
1,500 square feet of office space and 6,300 square feet of warehouse. The
Company leases this space from Darwin E. Zavadil, who is not affiliated in any
way with the Company and the terms of the lease were negotiated at arms-length.
A Summary of the terms of the lease are as follows:
Lease Term: From June 1, 1997 through May 31, 2002.
Security Deposit: $4,155.00
Rental rate: $4,155.00 subject to a cost of living adjustment beginning
in the second year of the lease.
Rental Adjustments: The monthly rent for the 2nd year of the lease and
cumulatively for every year thereafter and through the option period shall
automatically be adjusted based upon any increase that may occur in the
Consumer Price Index. The maximum increase in the Cost of Living shall be
capped at five (5%) per adjustment. The minimum rent increase shall be
three (3%).
Option to Renew: There are no options to renew the lease.
Option to Purchase: The Company has the option to purchase the property for
the sum of $528,780 in the first year of the lease. Beginning June 1, 1998
and each year thereafter, the same cost of living increase that affects the
rent shall also increase the selling price.
Real Property Taxes: Lessor is responsible for the payment of property
taxes.
Personal Property Taxes: The Company shall pay all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the premises.
Utilities: The Company shall pay for all gas, heat, light, power telephone
and other utilities and services supplied to the premises, together with
any taxes thereon.
Subleasing: Consent of Lessor is required.
Guaranty of Lease: Angela M. Raidl, the largest shareholder, a director and
officer of the Company has personally guaranteed the lease obligations of
the Company.
A copy of the Industrial Lease Agreement for the premises located at 9337
Bond Avenue, El Cajon, California 92021 is attached hereto and incorporated
herein by reference. See the Exhibit Index, Part III.
24
<PAGE>
Louisiana Office.
----------------
The Company's Louisiana office is located at 110 Brush Road, Broussard,
Louisiana, 70518 ("Broussard Property") and is situated in a Company-owned 4,000
square feet metal building of which 1,200 square feet is office space and 2,800
square feet is warehouse. The facility is used for the Gulf and East Coast sales
as well as manufacturing and warehousing of products. This location is also the
training center for fire retardant application and fire safe seminars, a
flammability testing laboratory capable of accomplishing several diverse test
protocols and the base for the on-site fire safe installation and fire retardant
applications.
The Company owns the Broussard Property, which is mortgaged to one of the
Company's lenders, Whitney National Bank, and now stands as collateral for a
promissory note in the principal amount of $74,400.00. The monthly payment for
the initial five year period is $925.00 per month. The promissory note bears
interest on the principal amount due as follows: (1) for the initial five year
period the interest rate shall be 8.50 percent per annum; (2) for the second
five year period, commencing on December 13, 2001, the interest rate shall be
fixed at one-quarter (0.25%) of one percent above Whitney prime; such interest
rate to continue for the remainder of the loan, with the final payment being due
and payable on December 30, 2006.
The production process undertaken by each of the Companies location can be
classified as light manufacturing. In regards to chemical manufacturing the
Company has avoided using hard-to-get raw materials. The chemicals are
reasonably simple to manufacture so there is no need to overstock in blended
products. The Company has an excellent relationship with all of its suppliers.
Most raw materials are available from more than one source. No unique equipment
is necessary for manufacturing chemicals, although automation equipment could
cut production time in projecting for the future increase in this area. No
special skills are needed to manufacture Firextra products. Increased orders
will increase the need for raw materials, which should cut the cost for
materials.
The production of the fire resistive textile fabrics currently occupies
most of the 6,300 square feet of warehouse in California. The State of
California must certify all applicators in order to apply fire retardants. The
cost of chemicals is minimum since the Company manufactures the chemicals used
for this department. At this time, for topical treatments no unique equipment is
needed. As we enter the next phase into the durable market, increase in labor,
production automation equipment, and a larger facility will be required.
A copy of the Promissory Note and Collateral Mortgage executed by the
Company in favor of Whitney Bank is attached hereto and incorporated herein by
reference. See the Exhibit Index, Part III.
Louisiana Corporate Apartment.
-----------------------------
The Company leases an apartment in Lafayette, Louisiana which is located at
211 Liberty Avenue, Lafayette, Louisiana 70508. This apartment is utilized by
the Company's principals or employees when visiting the Louisiana facility. The
apartment is approximately 900 square feet. The Company leases this space from
The Plantations at Lafayette, who is not affiliated in any way with the Company
and the terms of the lease were negotiated at arms-length.
Summary of the terms of the lease are as follows:
Lease Term: From March 13, 1998 through April 30, 1999.
Security Deposit: $200.00
Rental rate: $925.00 per month.
Rental Adjustments: No rental increases.
Option to Renew: The lease will automatically renew on a month to month
basis at the expiration of the term of the lease in the event that the
Company or Landlord fails to give 30 days prior notice of their intent to
terminate the lease.
25
<PAGE>
Option to Purchase: Not applicable.
Real Property Taxes: Lessor is responsible for the payment of property
taxes.
Personal Property Taxes: The Company shall pay all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the premises.
Utilities: The Company shall pay for all gas, heat, light, power telephone
and other utilities and services supplied to the premises, together with
any taxes thereon.
Subleasing: No subleasing allowed.
Guaranty of Lease: Angela M. Raidl, the largest shareholder, a director and
officer of the Company has personally guaranteed the lease obligations of
the Company.
A copy of the Industrial Lease Agreement for the premises located at 211
Liberty Avenue, Lafayette, Louisiana 70508 is attached hereto and incorporated
herein by reference. See the Exhibit Index, Part III.
Oil, Gas and Mineral Interest.
-----------------------------
On October 31, 1997, the Company has entered into a Oil, Gas and Mineral
Lease with Penwell Energy, Inc., a Texas Corporation, giving Penwell the right
to drill on a portion of the Company's property located in Lafayette Parish,
Louisiana, consisting of approximately 1.0 acres of land. At the present time
the Company feels that the Oil, Gas and Mineral Lease has little or no value.
Penwell is not affiliated in any way with the Company and the terms of the lease
were negotiated at arms-length.
A Summary of the terms of the lease are as follows:
Lease Term: Three (3) years.
Royalties: The Company shall receive royalties on oil, gas, and other
minerals set forth in the lease equal to one-fourth (1/4th) of that
produced and saved from the land and not used for fuel in conducting
operations on the property.
A copy of the Oil, Gas and Mineral Lease is attached hereto and
incorporated herein by reference. See the Exhibit Index, Part III.
Automobile Purchase Contracts.
-----------------------------
In September 1996, the Company purchased two Ford F-150 pick-up trucks for
use by the Company at its Louisiana facility. The Company borrowed the sum of
$42,888.46 from Whitney Bank to purchase these vehicles. The promissory note to
Whitney Bank in the principal amount of $42,888.46 was secured by a security
agreement in which both Ford F-150 trucks are collateral. This promissory note
accrues interest at 7.75% with principal and interest payments of $867 per
month. A copy of the Promissory Note and Commercial Security Agreement executed
by the Company in favor of Whitney Bank is attached hereto and incorporated
herein by reference. See the Exhibit Index, Part III.
In October 1997, the Company purchased two 1997 Ford F-150 pick-up trucks
from Bay City Motors, Inc., of Lafayette, Louisiana, who is not affiliated in
any way with the Company and the terms of the purchase were negotiated at
arms-length. These vehicles are for use in the Company's business. The purchase
of these two vehicles were financed through Regions Bank of Birmingham, Alabama.
A Summary of the Purchase Financing Terms are as follows:
Vehicle No 1. 1997 Ford F-150
-----------------------------------
VIN: 1FTDX1720VKC99219
Purchase Price: $18,003.78
Contract Date: 10/13/97
Amount Financed: $18,003.78
Percentage Rate: 8.90%
Payments: 48 Months
Payment Amount: $448.81 per month
First Payment: 11/27/97
26
<PAGE>
Vehicle No 2. 1997 Ford F-150
----------------------------------
VIN: 1FTDX1720VKD8225
Purchase Price: $17,684.28
Contract Date: 10/14/97
Amount Financed: $17,684.28
Percentage Rate: 8.90%
Payments: 48 Months
Payment Amount: $440.85 per month
First Payment: 11/28/97
The Company also leases various vehicles and equipment from the following
companies:
1997 Ford Expedition Lease. The Company leases a 1997 Ford Expedition for
use by the President of the Company. This lease is through Ford Motor Credit and
a summary of the lease terms are as follows:
Vehicle: 1997 Ford Expedition
Gross Costs: 38,883.44
Down Payment: $5,104.78
Total Payments: $24,631.88
Lease Term: 36 Months
Monthly Payment: $575.06
1997 Ford F-150 Pick Up. The Company leases a 1997 Ford F-150 pick up for
use at the California facilities. This lease is through Ford Motor Credit and a
summary of the lease terms are as follows:
Vehicle: 1997 Ford F-150
Gross Costs: $25,994.58
Down Payment: $1,514.91
Total Payments: $22,795.68
Lease Term: 48 Months
Monthly Payment: $474.91
IOS Capital Lease.
-----------------
The Company leases from IOS Capital Ricoh copier and Canon facsimile
machine. A summary of the lease terms are as follows:
Down Payment: $182.86
Lease Term: 60 Months
Monthly Payment: $169.71
Preferred Capital Corporation Equipment Lease
---------------------------------------------
On August 25, 1999, the Company leased various Fire Proofing equipment from
Preferred Capital Corporation. The term of the lease is 36 months with monthly
payments of $1,666.44. A copy of the Lease documents are attached hereto and
incorporated herein by reference. See the Exhibit Index, Part III.
Private Capital Inc. Loan
-------------------------
On December 7, 1999, the Company executed a Promissory Note in the
principal amount of $100,000 with Private Capital, Inc., with interest thereon
at the rate of 72% per annum assessed against the unpaid principal amount of the
note commencing on January 7, 2000. The loan is unsecured but is guaranteed by
Stephen F. Owens and Angela Raidl, officers and directors of the Company. The
Company agrees to repay the note in eight (8) equal monthly installments of
$12,500.00 each, plus accrued interest, with a final balloon payment of all
accrued interest, if any on August 7, 2000. A copy of the Promissory Note
between the Company and Private Capital, Inc., is attached hereto and
incorporated herein by reference. See the Exhibit Index, Part III.
27
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Security Ownership of Certain Beneficial Owners
-----------------------------------------------
The following table sets forth security ownership information (on a
Post-reverse split adjusted basis) as of the close of business on April 19,
1999, for any person or group, known by the Company to own more than five
percent (5%) of the Company's voting securities.
The following table sets forth security ownership information as of the
close of business on April 19, 1999, for any person or group, known by the
Company to own more than five percent (5%) of the Company's voting securities.
Title of Name of Amount of Percent
Class Beneficial Owner Ownership of Class
Common Stock Angela M. Raidl 1,016,291 43.36%
1951 Tavern Road
Alpine, CA 91901
Common Stock Edward E. Friloux 175,257 7.47%
117 Red Barn Drive
Carenco, LA 70520
Common Stock Bruce E. Raidl 166,667 7.11%
12139 Valhalla Drive
Lakeside, CA 92040
Common Stock David Ian Foster 157,000 6.69%
PO Drawer 5127
Lake Charles, LA 70606
Common Stock Richard Rosenberg 130,211 5.55%
901 Foxpointe Circle
Delray Beach, FL 33445
Angela M. Raidl has sole investment power and sole voting power over the
shares set forth in the above table.
(b) Security Ownership of Management
The following table sets forth security ownership information (on a
Post-reverse split adjusted basis, as of the close of business on April 19,
1999, for any director, executive officer or group of the Company's voting
securities:
Title of Name of Amount of Percent
Class Beneficial Owner Ownership of Class
Common Stock Angela M. Raidl 1,016,291 43.36%
1951 Tavern Road
Alpine, CA 91901
Common Stock Stephen F. Owens 0 0.0%
1951 Tavern Road
Alpine, California 91901
Common Stock All Directors & Officers
as a Group (2 Persons) 1,016,291 43.36%
(c) Change in Control.
There are no present arrangements or pledges of the Company's securities
which may result in a change in control of the Company.
28
<PAGE>
Item 5. Directors, Executive Officers, Promoters and Control Persons
------------------------------------------------------------
See Item 11 for information on the beneficial ownership of the Company's
securities.
The directors and executive officers of the Company are as follows:
(a) Identity of Directors and Executive Officers.
Name and Address Age Position Term Served Since
Stephen F. Owens 40 President, CEO, 1 Year 1992
1951 Tavern Road and Director
Alpine, California 91901
Angela M. Raidl 39 Vice President, 1 Year 1992
1951 Tavern Road Treasurer,
Alpine, California 91901 Secretary and Director
Each of the persons listed in the above table possesses sole investment
power and sole voting power over the shares set forth in the above table.
There are no arrangements or understandings between any of the directors or
executive officers, or any other person or persons pursuant to which they were
selected as directors and/or officers
Stephen F. Owens - Chairman of the Board of Directors, Chief Executive
Officer and President. Mr. Owens, a native of New York and a resident of
California, has served as Chief Executive Officer and President since the
company's inception. Mr. Owens has 13 years experience in the fire retardant
industry, specializing in product evaluations, sales and marketing. Mr. Owens is
able to quickly recognize future market requirements and develop effective short
range action and long term plans to capitalize on new opportunities. Mr. Owens
was Vice President of Sales for International Research Center from 1987 to 1989
prior to founding American Fire Retardant Corporation. He is a member of the
National Fire Protection Association. Mr. Owens co-authored along with Mr.
Edward E. Friloux the Fire Retardant Applicator's Manual, which has been under
copyright protection with the Library of Congress Number TX 3-878-798 since 11
August 1994. Prior to his entry into the fire retardant industry, Mr. Owens
served in the United States Army.
Angela M. Raidl - Vice President, Treasurer, Secretary and a Director. Ms.
Raidl, a native of Louisiana and a resident of California, has served as officer
and director since the company's inception. Ms. Raidl has 11 years experience in
the fire retardant industry, specializing in the management and administration
of the day to day responsibilities of the company, including training all
clerical staff, cash flow management, receivables, payables, payroll, purchasing
and personnel. Ms. Raidl also heads the operations division of American Fire's
Fabric Treatment Division, monitoring quality control, researching new ways of
increasing production, in addition to soliciting new accounts for this division.
Ms. Raidl has held administrative positions for 19 years. She attended Nicholls
State University and the University of Southwestern Louisiana, studying Business
Administration at both. Ms. Raidl is a Licensed Certified Applicator by the
State of California and is a member of the National Fire Protection Association.
Other Key Advisors and Consultants
----------------------------------
The Company has retained Presidio Capital & Management Corp. of Deerfield
Beach, Florida as its financial consultant and advisor, effective on June 11,
1998 by written Consulting Agreement entered into on that date ("Consulting
Agreement"). The Consulting Agreement provides that Presidio or its
broker-dealer affiliate, Capstone Partners, L.C. ("Capstone") will perform work
and render services in connection with the completing of a business plan and
offering documentation necessary in conducting a Rule 504 offering of the
Company's Common Stock. Additionally, the Consulting Agreement permits Presidio
to nominate one director on the board of directors to represent any new group of
investors that subscribe to the Offering, assuming the board of directors is no
larger than five members. If the board of directors is expanded to seven
members, then Presidio has the right to nominate two of such directors. This
provision contained in the Consulting Agreement obligates the Company to permit
29
<PAGE>
such board composition for a term of five years after the date that the Offering
terminates. In exchange for its services under the Consulting Agreement,
Presidio or its broker-dealer affiliate, Capstone, were to receive certain
compensation established as a set fee and based upon the success of the
Offering. The Rule 504 offering was terminated on January 6, 1999 with no shares
being sold under said offering.
A copy of the Consulting Agreement with Presidio Capital is attached hereto
and incorporated herein by reference. See the Exhibit Index, Part III.
On September 27, 1999, the Company entered into an Investment Banking and
Consulting Agreement (the "Investment Banking Agreement") with Capstone Partners
LLC, a Utah limited liability company. The Investment Banking Agreement provides
that Capstone will provide advice and counsel in relation to the Company's
strategic business and financial plans, and other strategies, including
negotiations with potential lenders and investors, mergers and acquisition
candidates, joint ventures, corporate partners and others involving financial
and financially related transactions, as well as marketing and public relation
matters as requested by the Company. In addition, Capstone is to assist in
creating one or more securities offering structures for the Company, either debt
and equity offerings, will assist in identifying one or more funding sources and
strategies designed to locate investment capital for the Company, and
specifically will use its best efforts to identify and negotiate the placement
of a "bridge capital" facility currently being undertaken by the Company. Under
the terms of the Investment Banking Agreement as compensation of their services
Capstone is to receive (i) cash compensation of $2,500 per month for a period of
six months, (ii) 23,438 shares of restricted common stock of the Company to be
issued and delivered upon certain milestones, and (iii) a warrant entitling
Capstone to purchase an additional 23,438 shares at a price equal to 75% of the
average bid of the Company's common stock for the five day trading period prior
to the date of exercise. The term of the warrant is for three years.
On March 9, 2000 the Company terminated the agreement for Capstone's lack
of performance.
A copy of the Investment Bank and Consulting Agreement with Capstone
Partners LLC, is attached hereto and incorporated herein by reference. See the
Exhibit Index, Part III.
(1) Directorships
No Director of the Company or person nominated or chosen to become a
director holds any other directorship in any company with a class of securities
registered pursuant to section 12 of the Exchange Act or subject to the
requirements of section 15(d) of such Act or any other company registered as an
investment company under the Investment Company Act of 1940.
(a) Identity of Significant Employees.
The Company has one employee, Mr. Bruce Raidl, who is not an executive
officer, but is expected to make a significant contribution to the Company's
business. It is expected that current members of management and the Board of
Directors will be the only persons whose activities will be material to the
Company's operations. Members of management are the only persons who may be
deemed to be promoters of the Company
(b) Family Relationships.
Stephen F. Owens, the President and Chairman of the Board is the husband of
Angela M. Raidl, the Vice President, Treasurer, Secretary and a director.
Additionally, Bruce Raidl, an employee of the Company is the brother of Angela
Raidl. Other than the husband-wife relationship of Mr. Owens and Mrs. Raidl, and
the brother-sister relationship of Ms. Raidl and Mr. Raidl, there is no family
relationship between any director or executive officer of the Company.
30
<PAGE>
(c) Involvement in Certain Legal Proceedings
During the past five years, no present or former director, executive
officer or person nominated to become a director or an executive officer of the
Company:
(1) was a general partner or executive officer of any business against
which any bankruptcy petition was filed, either at the time of the bankruptcy or
two years prior to that time;
(2) was convicted in a criminal proceeding or named subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
(3) was subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; or
(4) was found by a court of competent jurisdiction (in a civil action), the
Securities and Exchange Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended or vacated.
Item 6. Executive Compensation
-------------------------------
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the periods indicated:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
---------------------------
Long Term Compensation
--------------------------------------------------
Annual Compensation Awards Payouts
-----------------------------------------------------------------------------------------------
Securities All
Other Underlying Other
Annual Restricted Options/ LTIP Compen-
Name and Year or Compen- Stock SAR's Payouts sation
Principal Period Salary Bonus sation) Awards (#) ($) ($)
Position Ended ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Angela M. Raidl 1999 $72,000.00 0 0 0 0 0 0
Vice President 1998 $41,346.00 0 0 0 0 0 0
CFO and Secretary
Stephen F. Owens 1999 $25,500.00 0 0 0 0 0 0
President and 1998 $ 1,500.00 0 0 0 0 0 0
CEO
Bruce Raidl 1999 $60,000.00 0 0 0 0 0 0
Employee 1998 $50,000.00 0 0 0 0 0 0
Edward Friloux 1999 $11,200.00 0 0 0 0 0 0
Employee 1998 $32,200.00 0 0 0 0 0 0
</TABLE>
Keyman Life Insurance
---------------------
The Company does not presently own life insurance covering the death of any
officer, director or key employee of the Company. The Company is planning to
purchase such insurance in order to provide adequate funding for the Company's
repurchase of shares of Common Stock from the estate of any officer or director
as a result of death, and to provide the Company with capital to replace the
executive loss. However, the Company can make no assurance if and when such life
insurance coverage will be obtained, and if available, whether the premiums
payable for coverage will be reasonable.
31
<PAGE>
Directors' and Officers' Insurance
----------------------------------
The Company is exploring the possibility of obtaining directors' and
officers' liability insurance. The Company has obtained several premium
quotations but has not entered into any contractual arrangements with any
insurance company to provide said coverage as of the date of this Offering
Memorandum. Furthermore, there is no assurance that the Company will be able to
obtain such coverage in the future, or that if the coverage is obtainable that
the premiums will not be prohibitive.
EMPLOYMENT CONTRACTS/STOCK INCENTIVE PLANS
------------------------------------------
Management Employment Agreements and Compensation
-------------------------------------------------
The Company previously entered into written employment agreements effective
October 7, 1997 with several key members of the management team, which included
Stephen F. Owens, Angela M. Raidl, Bruce E. Raidl and Edward E. Friloux, Sr.
Each of these employment agreements established a base monthly salary for the
Company's officers, which base salary was to commence as of February 1, 1998.
The monthly base salaries for each of the above four individuals were set
pursuant in their respective employment agreements as follows:
Stephen F. Owens ...................... $6,000
Angela M Raidl ........................ $5,000
Bruce F. Raidl ........................ $5,000
Edward E. Friloux, Sr. ................ $3,500
Prior to these employment agreements becoming effective, all of the above
individuals mutually agreed that the agreements were null and void and of no
force or effect. All of the above individuals have executed written agreements
canceling such employment agreement with the exception of Mr. Edward Friloux who
has since refused to cancel his employment agreement. On April 28, 1999 the
Company terminated Mr. Friloux for failure to report to work and failure of
performance of his duties.
KEY EMPLOYEES
-------------
At the date of this registration statement, the Company has no other
employees that could not be replaced with other non-skilled labor. However, if
the Company is to grow, additional key personnel will be needed in the areas of
marketing, sales, and new product development. As the company expands,
additional sales, marketing, production, and support staff will be added.
Item 7. Certain Relationships and Related Transactions
----------------------------------------------
TRANSACTIONS WITH MANAGEMENT AND OTHERS
---------------------------------------
There have been several significant transactions entered into between the
Company and its management during the course of its development. Each of the
officers and directors of the Company may engage in other businesses, either
individually or through partnerships or corporations in which they have an
interest, hold an office or serve on boards of directors. Certain conflicts of
interest may arise between the Company and its officers and directors. All of
the officers and directors may have other business interests to which they
devote their time.
The Company attempts to resolve any such conflicts of interest in favor of
the Company. The officers and directors of the Company are accountable to it and
its shareholders as fiduciaries, which requires that such officers and directors
exercise good faith and integrity in handling the Company's affairs. A
shareholder may be able to institute legal action on behalf of the Company or on
behalf of itself and all other similarly situated shareholders to recover
damages or for other relief in cases of the resolution of conflicts in any
manner prejudicial to the Company.
During the course of the previous three years, several officers and
directors of the Company, as set forth below have received shares of the
Company's Common Stock in exchange for their services to the Company and in lieu
of cash compensation to which they would have been entitled.
32
<PAGE>
On April 1, 1997 the Company issued 3,333 post-reverse split adjusted
shares of restricted Common Stock to John E. Domingue, a former director and
officer of the Company exchange for his services with organization the business
and the development of the business plan. These shares were issued at $0.84 per
share on a post-reverse split adjusted basis. The securities were issued
pursuant to an exemption from registration provided under Section 4(2) of the
Securities Act of 1933. Mr. Domingue was, at the time of the issuance of said
shares, an officer and director of the Company and possessed all information
about the Company to make an informed investment decision.
The Company has also borrowed cash for working capital from certain
officers and directors as well as other shareholders of the Company. Each loan
has been documented by the Company's promissory notes, which are generally
described below, and all loans are current. The Company believes that the terms
of all of the loan transactions described herein are based upon terms which are
no more or less favorable than terms which would have been agreed to by persons
unaffiliated with the Company and that all of the transactions set forth below
are otherwise fair to the Company and its shareholders:
Warren Guidry Note. On October 3, 1997, the Company borrowed the principal
sum of $100,000 from Warren Guidry, a shareholder of the Company. Interest
accrues at the rate of 10.50% per annum simple interest. Additionally, in
consideration for making the loan to the Company, the Company issued 16,667
post-reverse split adjusted shares of Common Stock to the lender. This
consideration is included under stock issued for interest expense in the
Consolidated Statement of Stockholder's Equity. The note was due and payable in
120 days and the note is now past due. On May 10, 1999, Mr. Guidry granted the
Company an extension until August 31, 1999 provided that the Company make agreed
upon principal and interest payments of $3,735.37 per month. Mr. Guidry agree to
negotiate a further extension on or before August 31, 1999 provided that the
Company keeps current on all payments to him.
Issuance of shares to Founders. On October 16, 1997, AFRC Wyoming realizing
that it had failed to issue some 756,350 post-reverse split adjusted shares of
Common Stock to its founders resulting from the prior acquisition in 1995 of
AFRC LA issued a total of 756,350 post-reverse split adjusted shares as follows:
Name Shares
Angela Raidl 382,500 post-reverse split adjusted shares
Bruce Raidl 166,667 post-reverse split adjusted shares
Edward E. Friloux 78,667 post-reverse split adjusted shares
David Ian Foster 44,500 post-reverse split adjusted shares
Richard Rosenberg 41,667 post-reverse split adjusted shares
Rod Guidry Jr. 34,017 post-reverse split adjusted shares
David Aucion 8,333 post-reverse split adjusted shares
No underwriters were used. The securities were issued pursuant to an
exemption from registration provided under Section 4(2) of the Securities Act of
1933. All of the above individuals were, at the time when said shares were to
have been issued, were founders of the Company and possessed all information
about the Company to make an informed investment decision.
Richard Rosenberg Note Consolidation and Conversion. On March 31, 1999, the
Company entered into an agreement with Richard Rosenberg, a shareholder and
former director of the Company, which agreement was amended on April 12, 1999,
under which Mr. Rosenberg agreed to the convert $34,411.45 of the $77,545.79
debt owing to him by the Company, into 49,159 post-split shares of restricted
Common Stock at the rate of $0.70 per share. The price per shares was determined
through the negotiations between the Company and Mr. Rosenberg as part of the
negotiations in resolving the consolidation of and conversion of the notes owing
to Mr. Rosenberg as set forth below.
Mr. Rosenberg further agreed to consolidate all notes and loans made by him
to the Company into one note with a principal balance of $43,134.34, with
interest thereon at the rate of 6.0% interest. The Company will make monthly
payments of $2,500 per month for 18 months commencing on May 1, 1999.
In consideration for Mr. Rosenberg's agreement to convert a portion of his
debt to common stock and consolidate the note and loans made by him to the
Company into one note with a reduced interest rate of 6.0%, the Company agreed
to issue Mr. Rosenberg 15,968 shares of restricted common stock.
33
<PAGE>
Copies of the Agreement dated March 31, 1999, as amended April 12, 1999,
along with the consolidated promissory note are attached hereto and incorporated
herein by reference. See the Exhibit Index, Part III.
On September 27, 1999, the Company entered into an Investment Banking and
Consulting Agreement with Capstone Partners. A copy of the Agreement between the
Company and Capstone Partners is attached hereto and incorporated herein by
reference. See Exhibit Index.
There have been no preliminary contact or discussion by any of the
Company's officers, directors, promoters, their affiliates or associates with
any representatives of the owners of any business or company regarding the
possibility of any acquisitions or mergers transactions, and there are no
present plans, proposals, arrangements or understandings with any person or
company regarding the possibility of any acquisitions or merger transaction.
TRANSACTIONS WITH PROMOTERS
---------------------------
There have been no material transactions, series of similar transactions,
currently proposed transactions, or series of similar transactions, to which the
Company or any of its subsidiaries was or is to be a party, in which the amount
involved exceeded $60,000 and in which any promoter or founder, or any member of
the immediate family of any of the foregoing persons, had a material interest.
Item 8. Description of Securities
-------------------------
The Company has one class of securities authorized, consisting of
25,000,000 authorized shares of common stock with a par value of $0.001 per
share, of which 2,343,788 shares are issued and outstanding.
COMMON STOCK
------------
The holders of the Company's common stock are entitled to one vote per
share on each matter submitted to a vote at a meeting of stockholders. The
shares of common stock do not carry cumulative voting rights in the election of
directors.
The shareholders of the Company have no pre-emptive rights to acquire
additional shares of common stock or other securities. The common stock is not
subject to redemption rights and carries no subscription or conversion rights.
In the event of liquidation of the Company, the shares of common stock are
entitled to share equally in corporate assets after satisfaction of all
liabilities of the company. All shares of the common stock now outstanding are
fully paid and non-assessable.
OUTSTANDING STOCK OPTIONS AND WARRANTS
--------------------------------------
There are no outstanding options or calls to purchase any of the authorized
securities of the Company. Pursuant to the terms of the Investment Banking and
Consulting Agreement between the Company and Capstone Partners LLC, Capstone was
to receive a warrant Capstone to purchase 23,438 restricted shares at a price
equal to 75% of the average bid of the Company's common stock for the five day
trading period prior to the date of exercise. The term of the warrant was to be
for three years. On March 9, 2000 the Company terminated the agreement for
Capstone's lack of performance and the warrant was not issued to Capstone.
CHANGE IN CONTROL
-----------------
There is no provision in the Company's Articles of Incorporation, as
amended, or Bylaws, as amended, that would delay, defer, or prevent a change in
control of the Company.
34
<PAGE>
PART II.
-------
Item 1. Market Price of and Dividends on the Company's Common Equity and Related
Stockholder Matters
------------------------------------------------------------------------
Market Information. There has never been any established "public market"
for shares of common stock of the Company. The Company has submitted an
application for listing and quotation on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc. (the "NASD"). If approved for quotation,
there can be no assurance that any market for the Company's common stock will
develop or be maintained. If a public market develops in the future, the sale of
"unregistered" and "restricted" shares of common stock pursuant to Rule 144 of
the Securities and Exchange Commission by members of management may have a
substantial adverse impact on any such public market.
Holders. The number of record holders of the Company's common stock as of
the date of this Registration Statement is approximately 184.
Dividends. The Company has not declared any cash dividends with respect to
its common stock, and does not intend to declare dividends in the foreseeable
future. The future dividend policy of the Company cannot be ascertained with any
certainty. There are no material restrictions limiting, or that are likely to
limit, the Company's ability to pay dividends on its common stock.
Item 2. 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 thereon 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 an employment contract with Mr. Friloux and 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
than 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. A copy of the
promissory note dated March 7, 1994 is attached hereto. See Exhibit Index.
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 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 was 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 filed suit
against the Company alleging that the Company discriminated against the
35
<PAGE>
Plaintiff because Plaintiff was a female. The Plaintiff originally filed a claim
with the 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 after 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.
The Company believes that the costs of litigation associated with the
pending lawsuit Friloux v. AFRC will have little effect on the results of
operations and liquidity of the Company.
With the exception of the legal proceedings 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.
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 and Compromise
work-out agreement to obtain a substantial reduction of the outstanding payroll
tax balance due. The Company has since kept current with all present payroll and
other tax obligations.
Item 3. Changes in and Disagreements with Accountants
---------------------------------------------
There has been no change of the independent auditors of the Company and
there are no disagreements with such independent auditors.
36
<PAGE>
Item 4. Recent Sales of Unregistered Securities
---------------------------------------
The following transactions describe the sales of the Company's securities
over the last three years:
Transaction #1.
--------------
In January 22, 1997, the Company issued a total of 1,667 post-reverse split
adjusted shares of restricted Common Stock at a price of $1.62 per share on a
post-reverse split adjusted basis. 833 post-reverse split adjusted shares to
Jack Manckia and 834 post-reverse split adjusted shares to Julian Phillips, in
conversion of a total of $2,700 owing by the Company to Messrs. Manckia and
Philips. No underwriters were used. The securities were issued pursuant to an
exemption from registration provided under Section 4(2) of the Securities Act of
1933. Mr. Manckia and Mr. Philips were both lenders to the Company and possessed
all information about the Company to make an informed investment decision.
Transaction #2.
--------------
On April 1, 1997 the Company issued 3,333 post-reverse split adjusted
shares of restricted Common Stock at a price of $0.84 per share on a
post-reverse split adjusted basis, to John E. Domingue, a former director and
officer of the Company in lieu of cash, in exchange for his services provided to
the Company with organization of the business and the development of the
Company's business plan. No underwriters were used. The securities were issued
pursuant to an exemption from registration provided under Section 4(2) of the
Securities Act of 1933. Mr. Domingue was, at the time of the issuance of said
shares, an officer and director of the Company and possessed all information
about the Company to make an informed investment decision.
Transaction #3.
--------------
On October 16, 1997, the Company issued 50,833 post-reverse split adjusted
shares of Common Stock to five individuals in consideration for their services
and financial accommodations provided to the Company.
16,667 post-reverse split adjusted shares were issued to Warren Guidry
for Mr. Guidry's financial accommodations in making a loan of $100,000 to
the Company.
8,333 post-reverse split adjusted shares were issued to Julian
Phillips for Mr. Phillips' financial accommodations in making a loan of
$30,000 to the Company, and as interest on said loan. Said shares were
issued on a deemed value of $4.20 per share on a post-reverse split
adjusted basis.
833 post-reverse split adjusted shares were issued to Gerald Andrus at
a price of $4.20 per share on a post-reverse split adjusted basis, in
consideration for building maintenance and repair services provided by Mr.
Andrus to the Company.
8,333 post-reverse split adjusted shares were issued to Lewis
Rosenberg at a price of $4.20 per share on a post-reverse split adjusted
basis, in consideration for legal services provided by Mr. Rosenberg to the
Company.
16,667 post-reverse split adjusted shares were issues to Rich
Wambsgans at a price of $4.20 per share on a post-reverse split adjusted
basis, in consideration for his consulting and financial services to the
Company. Mr. Wambsgans is an accredited investor.
No underwriters were used in any of these transactions. The securities were
issued pursuant to an exemption from registration provided under Section 4(2) of
the Securities Act of 1933. All parties had a direct relationship with the
Company and possessed all information about the Company to make an informed
investment decision.
37
<PAGE>
Transaction #4.
--------------
On October 16, 1997, AFRC Wyoming realizing that it had failed to issue
some 756,350 post-reverse split adjusted shares of Common Stock to its founders
resulting from the prior acquisition in 1995 of AFRC LA issued a total of
756,350 post-reverse split adjusted shares as follows:
Name Shares
Angela Raidl .......... 382,500 post-reverse split adjusted shares
Bruce Raidl ........... 166,667 post-reverse split adjusted shares
Edward E. Friloux .. 78,667 post-reverse split adjusted shares
David Ian Foster ...... 44,500 post-reverse split adjusted shares
Richard Rosenberg .... 41,667 post-reverse split adjusted shares
Rod Guidry Jr. ........ 34,017 post-reverse split adjusted shares
David Aucion .......... 8,333 post-reverse split adjusted shares
No underwriters were used. The securities were issued pursuant to an
exemption from registration provided under Section 4(2) of the Securities Act of
1933. All of the above individuals were, at the time when said shares were to
have been issued, were founders of the Company and possessed all information
about the Company to make an informed investment decision.
Transaction #5.
--------------
Private Placement Offering dated October 20, 1997 consisting of 250,000
post-reverse split adjusted shares of Common Stock under which all 250,000
post-reverse split adjusted shares of Common Stock were sold pursuant to an
exemption from registration provided by Rule 504, at a price of $0.12 per share
on a post-reverse split adjusted basis, for a total of $30,000 to the following:
Gooding Investments, Ltd. .... 100,000 post-reverse split adjusted shares
Glen Agar Investments, Ltd. .. 100,000 post-reverse split adjusted shares
Victor Keel .................. 50,000 post-reverse split adjusted shares
Transaction #6.
--------------
Private Placement Offering dated October 27, 1997 consisting of 135,667
post-reverse split adjusted shares of Common Stock under which a total of 46,905
post-reverse split adjusted shares of Common Stock were sold between October 27,
1997 and July 1998, at $4.20 per share on a post-reverse split adjusted basis,
for a total of $197,000 raised. The securities were sold pursuant to an
exemption from registration provided by Rule 504 to a class of investors being
comprised of both accredited and non-accredited investors who were residents of
various states. 380 of said shares represent fractional shares rounded up as a
result of the reverse stock split.
Transaction #7.
--------------
On December 28, 1998, the Company issued an aggregate of 255,923
post-reverse split shares of Common Stock to five individuals in consideration
of cash, services and to correct a prior transfer.
96,590 post-reverse split adjusted shares were issued to Edward E.
Friloux in consideration for the chemical engineering services provided by
Mr. Friloux to the Company valued at $17,386.
112,500 post-reverse split adjusted shares were issued to David Ian
Foster in consideration for the chemical engineering services provided by
Mr. Foster to the Company valued at $19,205.
33,333 post-reverse split adjusted shares were issued to Angela Raidl,
who in May 1998, in error transferred 33,333 post-reverse split adjusted
shares to Ruth and Richard Rosenberg for financial accommodations provided
by Mr. and Mrs. Rosenberg to the Company. These shares should have been
issued from the Company and not from Mrs. Raidl personally. Accordingly,
the issuance of these 33,333 post-reverse split adjusted shares were to
repay Ms. Raidl for the shares that Ms. Raidl transferred on behalf of the
Company to Mr. and Mrs. Rosenberg.
6,750 post-reverse split adjusted shares were issued to Lewis
Rosenberg for interest expense of $2,363 on loans made by Lewis Rosenberg
to the Company.
38
<PAGE>
6,750 post-reverse split adjusted shares were issued to Richard
Rosenberg for interest expense of $2,362 on loans made by Richard Rosenberg
to the Company.
No underwriters were used. The securities were issued pursuant to an
exemption from registration provided under Section 4(2) of the Securities Act of
1933. All parties had a direct relationship with the Company and possessed all
information about the Company to make an informed investment decision.
Transaction #8.
--------------
On March 31, 1999, the Company entered into an agreement with Richard
Rosenberg, a shareholder and former director of the Company, which agreement was
amended on April 12, 1999, under Mr. Rosenberg agreed to the convert $34,411.45
of the $77,545.79 debt owing to him by the Company, into 49,159 post-reverse
split adjusted shares of restricted Common Stock at the rate of $0.70 per share,
which price was negotiated at arms length between the Company and Mr. Rosenberg.
Mr. Rosenberg further agreed to consolidate all notes and loans made by him to
the Company into one note with a principal balance of $43,134.34, with interest
thereon at the rate of 6.0% interest. The Company will make month payments of
$2,500 per month for 18 months commencing on May 1, 1999. In consideration for
Mr. Rosenberg's agreement to convert a portion of his debt to common stock and
consolidate the note and loans made by him to the Company into one note with a
reduced interest rate of 6.0%, the Company agreed to issue Mr. Rosenberg 15,968
post-reverse split adjusted shares of restricted common stock. No underwriters
were used. The securities were sold pursuant to an exemption from registration
provided under Section 4(2) of the Securities Act of 1933 and Mr. Rosenberg is
an accredited investor.
Transaction #9.
--------------
On September 22, 1999, pursuant to the terms of that certain Investment
Banking Agreement between the Company and Capstone Partners LLC, a Utah limited
liability company and an NASD-member broker-dealer, the Company issued 5,859
post-split adjusted shares of restricted common stock to Capstone Partners for
investment banking and consulting services provided b Capstones Partners. No
underwriters were used. The securities were sold pursuant to an exemption from
registration provided under Section 4(2) of the Securities Act of 1933 and
Capstone Partners is an accredited investors.
Item 5. Indemnification of Directors and Officers
-----------------------------------------
Section 78.751(1) of the Nevada Revised Statutes ("NRS") authorizes a
Nevada corporation to indemnify any director, officer, employee, or corporate
agent "who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by or in the right
of the corporation" due to his corporate role.
Section 78.751(1) extends this protection "against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with the action, suit or proceeding if
he acted in good faith and in a manner which 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."
Section 78.751(2) of the NRS also authorizes indemnification of the
reasonable defense or settlement expenses of a corporate director, officer,
employee or agent who is sued, or is threatened with a suit, by or in the right
of the corporation. The party must have been acting in good faith and with the
reasonable belief that his actions were not opposed to the corporation's best
interests. Unless the court rules that the party is reasonably entitled to
indemnification, the party seeking indemnification must not have been found
liable to the corporation.
To the extent that a corporate director, officer, employee, or agent is
successful on the merits or otherwise in defending any action or proceeding
referred to in Section 78.751(1) or 78.751(2), Section 78.751(3) of the NRS
requires that he be indemnified "against expenses, including attorneys' fees,
actually and reasonably incurred by him in connection with the defense."
39
<PAGE>
Section 78.751 (4) of the NRS limits indemnification under Sections 78.751
(1) and 78.751(2) to situations in which either (1) the stockholders, (2)the
majority of a disinterested quorum of directors, or (3) independent legal
counsel determine that indemnification is proper under the circumstances.
Pursuant to Section 78.751(5) of the NRS, the corporation may advance an
officer's or director's expenses incurred in defending any action or proceeding
upon receipt of an undertaking. Section 78.751(6)(a) provides that the rights to
indemnification and advancement of expenses shall not be deemed exclusive of any
other rights under any bylaw, agreement, stockholder vote or vote of
disinterested directors. Section 78.751(6)(b) extends the rights to
indemnification and advancement of expenses to former directors, officers,
employees and agents, as well as their heirs, executors, and administrators.
Regardless of whether a director, officer, employee or agent has the right
to indemnity, Section 78.752 allows the corporation to purchase and maintain
insurance on his behalf against liability resulting from his corporate role.
The Articles of Incorporation provide for above-referenced indemnification
provisions of the NRS. This right to indemnification continues as to persons who
have ceased to be agents of the Company and inures to the benefit of such
persons' heirs, executors and administrators.
40
<PAGE>
PART F/S
--------
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
C O N T E N T S
---------------
Page
----
Independent Auditors' Report ........................................... 42
Consolidated Balance Sheet ............................................. 43
Consolidated Statements of Operations .................................. 45
Consolidated Statements of Stockholders' Equity (Deficit) .............. 46
Consolidated Statements of Cash Flows .................................. 48
Notes to the Consolidated Financial Statements ......................... 50
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
American Fire Retardant Corporation and Subsidiary
San Diego, California
We have audited the accompanying consolidated balance sheet of American Fire
Retardant Corporation and Subsidiary as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years ended December 31, 1999 and 1998. 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 audits 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 consolidated financial position of
American Fire Retardant Corporation and Subsidiary as of December 31, 1999 and
the consolidated results of their operations and their cash flows for the years
ended December 31, 1999 and 1998, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is a development stage company with no
significant operating results to date, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 11 to the consolidated financial statements, certain errors
were discovered regarding the valuation of several stock issuances in 1997 and
1998 which resulted in understatements of previously reported additional paid-in
capital and retained deficit for the years ended December 31, 1997 and 1998.
Jones, Jensen & Company
Salt Lake City, Utah
April 5, 2000
42
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheet
(As Restated - See Note 11)
ASSETS
------
<TABLE>
<CAPTION>
December 31,
1999
------------
CURRENT ASSETS
<S> <C>
Cash $ 3,408
Undeposited funds 9,821
Inventory (Note 1) 174,978
Accounts receivable, net (Notes 1 and 4) 539,197
------------
Total Current Assets 727,404
------------
PROPERTY AND EQUIPMENT (Notes 1 and 3) 240,180
------------
OTHER ASSETS
Restricted cash (Note 4) 173,981
Intangible assets, net 42,500
Deposits and other assets 15,115
------------
Total Other Assets 231,596
------------
TOTAL ASSETS $ 1,199,180
============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
43
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheet (Continued)
(As Restated - See Note 11)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<TABLE>
<CAPTION>
December 31,
1999
---------------
CURRENT LIABILITIES
<S> <C>
Accounts payable $ 238,238
Accrued expenses (Note 10) 422,148
Unearned revenue 96,986
Shareholder loans (Note 6) 209,739
Notes payable, current portion (Note 5) 223,372
Capital leases, current portion (Note 7) 7,969
Line of credit (Note 4) 755,064
---------------
Total Current Liabilities 1,953,516
---------------
LONG-TERM LIABILITIES
Notes payable (Note 5) 199,825
Capital leases, long-term portion (Note 7) 36,855
---------------
Total Long-Term Liabilities 236,680
---------------
Total Liabilities 2,190,196
---------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value; 25,000,000
shares authorized, 2,349,647 shares issued and
outstanding 2,351
Additional paid-in capital 1,485,541
Accumulated deficit (2,478,908)
---------------
Total Stockholders' Equity (Deficit) (991,016)
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,199,180
===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
(As Restated - See Note 11)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
NET SALES $ 2,452,906 $ 2,059,896
COST OF SALES 1,333,827 1,263,135
--------------- ---------------
GROSS MARGIN 1,119,079 796,761
--------------- ---------------
OPERATING EXPENSES
Selling, general and administrative 690,898 1,150,228
Payroll expense (Note 1) 380,383 328,204
Travel and entertainment (Note 1) 189,038 78,537
Depreciation and amortization expense (Note 1) 68,592 39,286
Bad debt expense 22,042 17,370
--------------- ---------------
Total Operating Expenses 1,350,953 1,613,625
--------------- ---------------
LOSS FROM OPERATIONS (231,874) (816,864)
--------------- ---------------
OTHER EXPENSES
Interest expense (476,330) (255,473)
--------------- ---------------
Total Other Expenses (476,330) (255,473)
--------------- ---------------
LOSS BEFORE INCOME TAXES (708,204) (1,072,337)
PROVISION FOR INCOME TAXES (Note 1) - -
--------------- ---------------
NET LOSS $ (708,204) $ (1,072,337)
=============== ===============
BASIC LOSS PER SHARE $ (0.30) $ (0.52)
=============== ===============
BASIC WEIGHTED AVERAGE SHARES 2,327,193 2,059,754
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
(As Restated - See Note 11)
<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 2,018,333 $ 2,019 $ 732,966 $ (30,000) $ (698,367)
January 10, 1998: common
stock issued for cash at $4.20
per share 833 1 3,498 - -
March 2, 1998: common stock
issued for cash at $4.20 per
share 1,905 2 7,999 - -
May 14, 1998: common stock
issued for cash at $4.20 per
share 1,667 2 6,999 - -
Receipt of stock subscription - - - 30,000 -
December 20, 1998: common
stock issued for consulting
services valued at $2.40
per share 209,090 209 501,607 - -
December 20, 1998: common
stock issued for interest
expense and consulting services
valued at $2.40 per
share 46,833 47 112,352 - -
Contribution of capital by
shareholder for services
rendered - - 70,500 - -
Net loss for the year ended
December 31, 1998 - - - - (1,072,337)
--------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1998 2,278,661 $ 2,280 $ 1,435,921 $ - $ (1,770,704)
--------------- --------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
(As Restated - See Note 11)
<TABLE>
<CAPTION>
Common Stock Additional Stock
--------------------------------- Paid-in Subscription Accumulated
Shares Amount Capital Receivable Deficit
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 2,278,661 $ 2,280 $ 1,435,921 $ - $ (1,770,704)
March 31, 1999: common stock
issued for reduction of related
party note payable and interest
valued at $0.70 per share 65,127 65 45,525 - -
September 22, 1999: common
stock issued for consulting
services valued 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 $ 2,351 $ 1,485,541 $ - $ (2,478,908)
=============== =============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
47
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(As Restated - See Note 11)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------
1999 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (708,204) $ (1,072,337)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Common stock issued for services and interest 4,101 614,215
Depreciation and amortization 68,593 67,018
Bad debt expense 22,042 17,370
Capital contributed for services rendered - 70,500
Change in Assets and Liabilities:
(Increase) decrease in restricted cash (111,924) (62,117)
(Increase) decrease in accounts receivable (88,937) (56,192)
(Increase) decrease in deferred charges - (44,486)
(Increase) decrease in deposits 1,257 (6,683)
(Increase) decrease in inventory (34,483) (77,128)
Increase (decrease) in accounts payable 172,352 (21,308)
Increase (decrease) in accrued expenses 192,827 155,720
(Increase) decrease in undeposited funds (9,821) -
Increase (decrease) in unearned revenue 54,296 -
--------------- ---------------
Net Cash (Used) by Operating Activities (437,901) (415,428)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (82,170) (15,866)
--------------- ---------------
Net Cash (Used) by Investing Activities (82,170) (15,866)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock - 48,501
Proceeds from notes payable - related 115,726 129,000
Payments on notes payable - related (87,983) (85,300)
Proceeds from notes payable 292,643 382,590
Proceeds from lines of credit 336,195 -
Payment on lines of credit (9,367) (79,517)
Payment on notes payable (123,735) (47,891)
--------------- ---------------
Net Cash Provided by Financing Activities $ 523,479 $ 347,383
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
(As Restated - See Note 11)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH $ 3,408 $ (83,911)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR - 83,911
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,408 $ -
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR
Interest $ 334,745 $ 208,490
Income taxes $ - $ -
NON-CASH FINANCING ACTIVITIES
Stock issued for interest and conversion of note payable $ 45,590 $ -
Note payable issued for purchase of Formulation 238 $ - $ 45,000
Common stock issued for services and interest $ 4,101 $ 614,215
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
49
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
American Fire Retardant Corporation, a Nevada corporation,
("American Fire" or the "Company") is a fire protection company
that specializes in fire prevention and fire containment. The
Company is in the business of developing, manufacturing and
marketing a unique line of interior and exterior fire retardant
chemicals and provides fire resistive finishing services through
the Company's "Textile Processing Center" for commercial users.
The Company also specializes in designing new technology for
future fire resistive applications that are being mandated by
local, state and governmental agencies. As specialists in fire
safe systems, the Company is active in the construction industry
as sub-contractors for fire stop and fire film installations.
The Company originally commenced operations as American Fire
Retardant Corporation, a corporation organized under the laws of
the State of Florida ("AFRC Florida") on November 20, 1992.
On June 1, 1993, the Board of Directors of AFRC Florida
unanimously agreed to incorporate in the State of Louisiana, as a
separate and distinct entity having the same shareholders of AFRC
Florida.
On June 29, 1993, American Fire Retardant Corporation, a Louisiana
Corporation ("AFRC Louisiana") was formed. AFRC Louisiana was
initially authorized to issue a total of 1,000 shares of common
stock, without par value.
On March 4, 1994, AFRC Florida qualified to do business in the
State of California under the name American Fire Retardant
Corporation.
On June 15, 1995, by unanimous consent of the shareholders of both
AFRC Florida an AFRC Louisiana, it was adopted that a new
corporation be formed in the State of Wyoming under the name
American Fire Retardant Corporation ("AFRC Wyoming"). The new
Wyoming corporation, AFRC Wyoming would acquire all the issued and
outstanding shares from the shareholders of AFRC Florida and AFRC
Louisiana, in exchange for newly issued shares of AFRC Wyoming,
whereby AFRC Florida and AFRC Louisiana would be wholly-owned
subsidiaries of AFRC Wyoming.
On July 24, 1995, AFRC Wyoming applied for and received approval
from the State of Wyoming to be domesticated in Wyoming without
any break in the corporate existence.
The Board of Directors of AFRC Wyoming unanimously resolved on
December 30, 1996 pursuant to Section 17-6-1002 of the Wyoming
Business Corporation Act, to amend the Articles of Incorporation
to increase its authorized capital from 1,000 shares of common
stock to an unlimited number of shares of common stock, without
par value.
Accordingly, in January 1998, AFRC Wyoming formed AFRC Nevada
(i.e. the present Company). AFRC Nevada is authorized to issue a
total of 25,000,000 shares of common stock, $0.001 par value.
50
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
a. Organization (Continued)
The Board of Directors of AFRC Wyoming unanimously resolved on
September 3, 1998 to effect a one-for-twelve (1-for-12) reverse
stock split of all issued and outstanding shares of the common
stock of the Company as of September 1, 1998. At a special meeting
of the shareholders of the Company held on September 29, 1998, the
shareholders approved the reverse stock split.
On March 17, 1999, at a special meeting of the shareholders of the
Company, the shareholders authorized the restructuring of the
Company to simplify its corporate structure by:
1) Merging its wholly-owned subsidiary, AFRC Louisiana into AFRC
Wyoming, whereupon the separate corporate existence of AFRC
Louisiana would cease;
2) Merging its wholly-owned subsidiary, AFRC Florida into AFRC
Wyoming, whereupon the separate corporate existence of AFRC
Florida would cease;
The shareholders further authorized the Company to change its
domicile to the State of Nevada through the merger of the Company
(i.e., AFRC Wyoming) with and into AFRC Nevada, with no change in
the nature of the business or management of the Company and no
dilution to the shareholders or change in the shareholdings of the
Company.
The Merger of AFRC Louisiana, with and into its parent AFRC
Wyoming was completed on March 25, 1999.
The Merger of AFRC Florida, with and into its parent AFRC Wyoming
was completed on March 25, 1999.
On March 31, 1999, as the final step of the restructuring of the
Company, the merger of AFRC Wyoming, the parent with and into AFRC
Nevada, for the sole purpose of changing the domicile of the
Company from that of Wyoming to that of Nevada was completed.
b. Accounting Method
The Company's consolidated financial statements are prepared using
the accrual method of accounting. The Company has elected a
December 31 year end.
c. Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments
with maturities of three months or less at the time of
acquisition.
51
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
d. Accounts Receivable
Accounts receivable are shown net of an allowance for doubtful
accounts of $16,461 at December 31, 1999.
e. Basic Loss Per Share
The computations of basic loss per share of common stock are based
on the weighted average number of shares outstanding during each
period presented.
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1999
---------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
--------------- --------------- ---------------
<S> <C> <C> <C>
Net loss $ (708,204) 2,327,193 $ (0.30)
=============== =============== ===============
For the Year Ended
December 31, 1998
---------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
--------------- --------------- ---------------
Net loss $ (1,072,337) 2,059,754 $ (0.52)
=============== =============== ===============
</TABLE>
f. Principles of Consolidation
The consolidated financial statements include those of American
Fire Retardant Corporation and its wholly-owned subsidiary,
American Fire Retardant Corporation (California) for 1998. In
1999, all of the companies were merged into a Nevada corporation.
All significant intercompany transactions and accounts have been
eliminated in the consolidation. Accordingly, the 1998 financial
statements are consolidated, and the 1999 financial statements are
not.
52
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
g. Property and Equipment
Property and equipment are stated at cost. Expenditures for small
tools, ordinary maintenance and repairs are charged to operations
as incurred. Major additions and improvements are capitalized.
Leasehold improvements are being amortized over their estimated
useful lives. Depreciation is computed using the straight-line and
accelerated methods as follows:
Machinery and equipment 4-5 years
Vehicles 5 years
Building 39.5 years
Furniture and fixtures 5 years
Leasehold improvements 7 years
Depreciation expense for the years ended December 31, 1999 and
1998 was $38,593 and $33,433, respectively.
h. Revenue Recognition
Revenue is recognized using the percentage of completion method
for fire retardant and prevention projects. The amount of revenue
recognized at year-end is the portion of the total contract price
that the cost expended to date bears to the anticipated final
total cost, based on current estimates of costs to complete. It is
not related to the progress billings to the customers. At the time
a loss on a contract becomes know, the entire amount of the
estimated loss is recognized in the financial statements.
Additionally, the Company recognizes revenue upon delivery of fire
prevention materials.
i. Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
j. Concentrations of Risk
Cash
At times, the Company has demand deposits in excess of amounts
protected by FDIC insurance.
53
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
j. Concentrations of Risk (Continued)
Accounts Receivable
Credit losses, if any, have been provided for in the financial
statements and are based on management's expectations. The
Company's accounts receivable are subject to potential
concentrations of credit risk. The Company does not believe that
it is subject to any unusual, or significant risk in the normal
course of its business.
Sales
The Company had one customer in 1999 which accounted for 10% of
the net sales.
k. Provision for Income Taxes
No provision for income taxes has been accrued because the Company
has net operating loss carryovers. The net operating loss
carryforwards of approximately $1,800,000 at December 31, 1999,
expire in 2019. No tax benefit has been reported in the
consolidated financial statements because the Company is uncertain
if the carryforwards will expire unused. Accordingly, the
potential tax benefits are offset by a valuation account of the
same amount.
l. Inventory
Inventories are stated at the lower of cost or market value using
the first-in, first-out method of valuation. Inventories consisted
of $158,414 of finished goods and $16,564 of raw materials.
m. Advertising
The Company expenses advertising costs as they are incurred.
n. Deferred Charges
Formulation 238
In November 1998, the Company acquired Formulation 238 for
$45,000. The cost of $45,000 is being amortized over a five year
life and is shown in the deferred charges net of accumulated
amortization of $10,500 at December 31, 1999.
54
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
n. Deferred Charges (Continued)
Fabric Protection
In 1995, the Company purchased various pieces of equipment and
customer lists for $40,000. The amount is being amortized over a 5
year period and is shown net of $32,000 of accumulated
amortization at December 31, 1999 as part of the deferred charges.
Thorosheen
In July 1997, the Company purchased various customer lists and
technologies for $40,000. The amount was amortized over a 2 year
period and is shown net of $40,000 of accumulated amortization.
Amortization expense for the three deferred charges for the years
ended December 31, 1999 and 1998 was $30,000 and $33,585,
respectively.
o. Change in Accounting Principle
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which requires
companies to record derivatives as assets or liabilities, measured
at fair market value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving
offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The adoption of this statement had no material
impact on the Company's financial statements. The Company adopted
SFAS No. 133 prior to the issuance of SFAS No. 137 which pushes
the effective date back to fiscal years beginning after June 15,
2000.
p. Reverse Stock Split
In September 1998, the Board of Directors authorized a 1-for-12
reverse stock split. All references to common stock have been
retroactively restated to reflect the reverse stock split.
q. Operating Expenses
Payroll expense, travel and entertainment and depreciation and
amortization expense amounts exclude the portions allocated to
cost of sales.
55
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1999
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.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31,
1999:
<TABLE>
<CAPTION>
December 31,
1999
<S> <C>
Machinery and equipment $ 184,302
Vehicles 93,605
Building 90,733
Land 10,000
Furniture and fixtures 21,652
Leasehold improvements 5,324
---------------
405,616
Less accumulated depreciation (165,436)
---------------
$ 240,180
===============
</TABLE>
The Company signed an oil, gas and mineral lease on October 31,
1997 with a Texas corporation on the land in Broussard, Louisiana.
The lease is for the initial term of 3 years with minimum annual
rents of $200 per year. The Company has not received any royalty
revenue in the years ended December 31, 1999 or 1998.
NOTE 4 - LINE OF CREDIT
The Company has entered into a purchase and security agreement
with Private Capital, Inc. (Private Capital) wherein the Company
may take advances against its accounts receivables. The Company is
accounting for the factoring agreement as financing because it
does not meet the requirements of SFAS No. 125. The balance due
Private Capital at December 31, 1999 was $755,064. The Company is
required to maintain a reserve account balance of 22% of the total
advances. The reserve account balance at December 31, 1999 was
$173,981. Private Capital charges the Company an 8% discount on
all receivables purchased.
56
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 1999 consisted of the following:
<S> <C>
December 31,
1999
Note payable to a bank secured by property and equipment, interest ---------------
at 8.5% on the outstanding balance, principal and interest
payments of $925, due monthly, maturing December
2006. $ 58,557
Note payable to a bank, secured by property accruing
interest at 7.75%, principal and interest payments of
$867 due monthly, maturing September 2001. 16,768
Note payable to a bank, secured by equipment accruing interest at
12.5%, principal and interest payments of $503,
due April 15, 2001. 7,796
Notes payable to a bank, secured by vehicles, accruing interest at
8.9%, principal and interest payments of $866,
maturing October 2001. 16,838
Note payable to St. Martin Bank bearing interest at 9.75%,
secured by building and due on April 20, 2006. 146,238
Note payable to an individual, unsecured, interest rate of
72% if the Company defaults. Principal and interest payments
of $12,500 due monthly, maturing August 2000. 100,000
Note payable to suppliers, secured by equipment,
interest at 10%, due on demand. 77,000
---------------
Total notes payable 423,197
Less: current portion (223,372)
---------------
Long-term notes payable $ 199,825
===============
</TABLE>
57
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
NOTE 5 - NOTES PAYABLE (Continued)
Maturities of long-term debt are as follows:
<S> <C>
Year ending December 31:
2000 $ 223,372
2001 43,418
2002 29,292
2003 32,427
2004 34,947
Thereafter 59,741
---------------
Total $ 423,197
===============
NOTE 6 - SHAREHOLDER LOANS
December 31,
1999
Note payable to shareholder dated November 3, 1996 and February 3,
1997, interest imputed at 10%, unsecured,
due on demand. $ 38,000
Note payable to shareholder dated October 28, 1998, bearing
interest at 6.00%, guaranteed by the president of the Company,
due on demand. 75,870
Note payable to shareholder dated October 3, 1997, bearing
interest at 10.50%, secured by Company stock and due
August 1999. 95,869
---------------
$ 209,739
===============
</TABLE>
All amounts are due on demand and are classified as current
liabilities.
58
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
NOTE 7 - CAPITAL LEASES
Equipment payments under capital leases as of December 31, 1999 is
summarized as follows:
<S> <C>
Year Ended
December 31,
2000 $ 19,997
2001 19,997
2002 19,997
2003 11,665
---------------
Total minimum lease payments 71,656
Less interest and taxes (26,832)
---------------
Present value of net minimum lese payments 44,824
Less current portion (7,969)
---------------
Long-term portion of capital lease obligations $ 36,855
===============
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under a non-cancelable operating
lease. The lease calls for monthly payments of 44,155 and expires
May 31, 2002. The Company has leased an apartment in Louisiana
which calls for monthly payments of $925 per month and expires on
April 30, 1999. Future minimum lease payments are as follows:
Amount
---------------
2000 $ 49,860
2001 49,860
2002 24,930
---------------
Total $ 124,650
===============
</TABLE>
Rent expense for the years ended December 31, 1999 and 1998 was
$63,020 and $63,244, respectively.
59
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1999
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Contract
-------------------
The Company has an employment contract with a key employee. Under
the terms of this contract, the Company is committed to paying
this individual $3,500 in salary per month through November 1,
2003. Salary expense under this contract for the years ended
December 31, 1999 and 1998 was $38,500 and $38,500, respectively.
This contract is currently is dispute.
Vehicle and Equipment Operating Leases
--------------------------------------
The Company has leased two vehicles under operating leases which
call for combined monthly payments of $1,050 per month. The
operating leases expire in 2000.
Royalty Agreement
-----------------
The Company has committed to paying an individual $0.75 per gallon
in royalties on the sale of Fyberix 2000V. The royalties are
payable monthly. Royalty expense for the years ended December 31,
1998 and 1997 was $-0- and $-0-, respectively, as there have been
no sales of Fyberix 2000V.
NOTE 9 - STOCK ISSUANCES
In January, March and May 1998, the Company issued 4,405 shares of
common stock at $4.20 per share for cash.
On December 20, 1998, the Company issued 209,090 shares of common
stock valued at $2.40 per share for consulting services.
On December 20, 1998, the Company issued 46,833 shares of common
stock valued at $2.40 per share for interest expense and
consulting services.
On March 31, 1999, the Company issued 65,127 shares of common
stock valued at $0.70 per share for reduction in a related party
note payable and interest.
On September 22, 1999, the Company issued 5,859 shares of common
stock valued at $0.70 per share for consulting services.
Currently, the Company has no established market for its common
stock. Accordingly, the stock issuances are valued at the fair
market value of the goods or services received, as well as the
fair value of the Company's common stock as determined by
examining previous and subsequent issuance valuations.
60
<PAGE>
AMERICAN FIRE RETARDANT CORPORATION
AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
NOTE 10 - ACCRUED EXPENSES
<S> <C> <C>
Accrued expenses consisted of the following at December 31, 1999:
Contract liability $ 30,000
Payroll taxes - federal and state 359,300
Accrued interest 12,791
Sales tax payable 20,057
---------------
The Company is delinquent in paying payroll taxes. Interest and
penalties have been accrued on the payroll taxes and are included
in the $359,300 liability. The Company has been current in their
payments from June 1998 to date and, as they are able to, are
making additional monthly payments on the delinquent taxes.
NOTE 11 - CORRECTION OF AN ERROR
Subsequent to the issuance of the December 31, 1999 consolidated
financial statements, the Company determined that certain shares
issued for consulting services and interest expense were valued
incorrectly. 255,923 shares issued on December 20, 1998 were
originally valued at $52,982. It was later determined that the
fair value of the shares was $614,215. This difference of
$561,233 was recorded as an increase to additional paid-in
capital and net loss for the year ended December 31, 1998.
Therefore, the correction of this error had no effect on the
Company's consolidated statement of operations for the year ended
December 31, 1999.
For the Years Ended
December 31,
---------------------------------
1999 1998
--------------- ---------------
Net loss - previously reported $ 708,204 $ 511,104
Correction of error - 561,233
--------------- ---------------
Net loss - as adjusted $ 708,204 $ 1,072,337
=============== ===============
</TABLE>
61
<PAGE>
PART III.
--------
ITEM 1. Index to Exhibits
--------------------------
The following Exhibits are filed as a part of this Registration Statement:
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.
62
<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
63
<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"
21 Subsidiaries of the Registrant
27 Financial Data Schedule
* Summaries of all exhibits contained within this registration statement
are modified in their entirety by reference to these exhibits.
(+) Previously filed.
(++) Attached hereto.
64
<PAGE>
SIGNATURE
---------
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Company has caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN FIRE RETARDANT CORP.
A Nevada Corporation
Date: January 16, 2001 /S/ Stephen F. Owens
----------------------------
By: Stephen F. Owens
Its: President and Director
Date: January 16, 2001 /S/ Angela M. Raidl
----------------------------
By: Angela M. Raidl
Its: Vice President, Chief Financial
Officer, Secretary and Director
65
