<PAGE>
As filed with the Securities and Exchange Commission on March 30, 1998
Registration No. 333-45121
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
Amendment No. 2
to
FORM SB-2
REGISTRATION STATEMENT
Under The Securities Act of 1933
---------------------
FRISBY TECHNOLOGIES, INC.
(exact name of Registrant as specified in its charter)
62-1411534
Delaware 3086
(I.R.S. Employer
(Primary Standard Industrial
(State or other jurisdiction of
Identification Number)
Classification Number)
incorporation or organization)
417 South Main Street, Freeport, New York 11520 (516) 378-0162
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
---------------------
Gregory S. Frisby
Chief Executive Officer
417 South Main Street
Freeport, NY 11520
(516) 378-0162
(516) 378-0262 (fax)
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:
Irvin Brum, Esq. Shari K. Krouner, Esq.
William A. Ubert, Esq. Kramer, Levin, Naftalis & Frankel
Margo L. Intrator, Esq. 919 Third Avenue
Ruskin, Moscou, Evans & Faltischek, P.C. New York, New York 10022
170 Old Country Road (212) 715-9100
Mineola, New York 11501 (212) 715-8000 (fax)
(516) 663-6600
(516) 663-6641 (fax)
---------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================================
Title of each Class of Number of Shares to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered(1) Offering Price per Share Aggregate Offering Price Registration Fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 1,840,000(2) $ 8.00 $14,720,000 $ 4,342.40
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value(3) 160,000 $13.20 $ 2,112,000 $ 623.04
- --------------------------------------------------------------------------------------------------------------------------------
Total Fee ................................................................................................ $ 4,965.44
================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 240,0000 shares to cover the Over-Allotment Option.
(3) Issuable upon exercise of the Underwriter's Option.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION, DATED MARCH 30, 1998
PROSPECTUS
1,600,000 Shares
[GRAPHIC OMITTED]
Common Stock
Frisby Technologies, Inc. (the "Company") hereby offers (the "Offering")
1,600,000 shares of common stock, $.001 par value per share (the "Common
Stock"). Prior to the Offering, there has been no public market for the Common
Stock. The Company has applied for the listing of its Common Stock on the
Nasdaq SmallCap Market under the proposed symbol "FRIZ" and on the Boston Stock
Exchange ("BSE") under the proposed symbol "FRZ". It is currently estimated
that the initial public offering price of the Common Stock will be between
$6.00 and $8.00 per share. See "Underwriting" for information relating to the
factors to be considered in determining the initial public offering price.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND
SUBSTANTIAL DILUTION AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD
TO SUSTAIN A TOTAL LOSS OF THEIR INVESTMENT. PROSPECTIVE PURCHASERS SHOULD
CONSIDER CAREFULLY THE MATTERS SET FORTH UNDER "RISK FACTORS" BEGINNING ON
PAGE 9 OF THIS PROSPECTUS.
================================================================================
<TABLE>
<CAPTION>
Underwriting Discounts
Price to Public and Commissions (1) Proceeds to Company (2)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ......... $ $ $
- -----------------------------------------------------------------------------------------
Total (3) ......... $ $ $
- -----------------------------------------------------------------------------------------
</TABLE>
================================================================================
(1) Does not reflect additional compensation to be received by the Underwriter
including: (i) a non-accountable expense allowance equal to three percent
of the gross proceeds of the Offering (of which $40,000 has been paid);
and (ii) an option entitling the Underwriter to purchase from the Company,
for a period of five years from the date of this Prospectus, up to 160,000
shares of Common Stock at an exercise price equal to 165% of the initial
public offering price (the "Underwriter's Option").
(2) Before deducting expenses of the Offering payable by the Company (including
the Underwriter's non-accountable expense allowance) estimated at $______
($______ if the Over-Allotment Option is exercised in full). See "Use of
Proceeds."
(3) The Company has granted to the Underwriter an option (the "Over-Allotment
Option"), exercisable within 45 days after the date of the Offering to
purchase up to 240,000 additional shares of Common Stock on the same terms
and conditions as set forth above solely to cover over-allotments. If the
Over-Allotment Option is exercised in full, the total Price to Public,
total Underwriting Discounts and Commissions and total Proceeds to Company
will be $_______, $_______ and $_______, respectively. See "Underwriting."
The Common Stock offered hereby is subject to prior sale, when, as and if
delivered to and accepted by the Underwriter, and subject to approval of
certain legal matters by its counsel and to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify such offer and to
reject any order in whole or part. It is expected that delivery of the
certificates representing the shares of Common Stock will be made at the
offices of Barington Capital Group, 888 Seventh Avenue, New York, New York
10019, on or about ___________, 1998.
BARINGTON CAPITAL GROUP
The date of this Prospectus is _____________, 1998
<PAGE>
- --------------------------------------------------------------------------------
Group Photograph
of product applications
- --------------------------------------------------------------------------------
Depicted above are various product applications incorporating the
Company's Thermasorb(R) and ComforTemp(R) products.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
ON THE NASDAQ SMALLCAP MARKET, REGIONAL MARKETS OR OTHERWISE, WHICH STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK ON THE OPEN MARKET IN ORDER TO
STABILIZE THE MARKET PRICE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
---------------------
Upon completion of the Offering, the Company will be subject to the
reporting requirements of the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.
---------------------
Thermasorb(R) and ComforTemp(R) are registered trademarks of the Company
and the Company has applied for trademark registration for Comfort in the
Extreme(TM). This Prospectus also contains trademarks and trade names of other
companies.
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
------------------------------------------ ----------------------------------------
Photograph of
LOGO Gloves Photograph of
COMFORTEMP & Helmet
HangTag Ear-warmers
------------------------------------------ ----------------------------------------
- ---------------------------------------- ------------------------------------------ ----------------------------------------
Photograph of Photograph of Photograph of
Waders Boots Packaging
- ---------------------------------------- ------------------------------------------ ----------------------------------------
Depicted above are various product
applications incorporating the Company's
Thermasorb(R) and ComforTemp(R) products.
- ---------------------------------------- ------------------------------------------ ----------------------------------------
The Company's thermal managment
technology utilized in Thermasorb(R)
additives and CorforTemp(R) foams provide
the following unique characteristics:
o Intelligent thermal management -- provide
pre-selected temperature control;
o Versatile -- may be incorporated into a
wide variety of end-use products;
Photograph of o Lightweight -- lighter and less bulky than Photograph of
Thermasorb(R) additive conventional insulating materials; ComforTemp(R) foam
o Durable -- typically outlasts product to
which it is applied;
o Rechargeable -- continuous, automatic thermal
management;
o Customizable -- may be engineered to meet the
requirements of applications across a wide
temperature range;
o Complementary -- may be used to enhance other
insulating products.
- ---------------------------------------- ------------------------------------------ ----------------------------------------
The Company's Thermasorb(R) additive. The Company's ComforTemp(R) product in
the form of polyurethane foam.
</TABLE>
<PAGE>
Unless otherwise indicated, the information contained in this Prospectus
assumes the Over-Allotment Option is not exercised. Except as otherwise
indicated, all share information and per share amounts set forth in this
Prospectus have been adjusted to reflect the issuance of 587,500 shares of the
Company's convertible preferred stock (the "Convertible Preferred Stock"), in a
private placement, concluded prior to the commencement of the Offering. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed under the
heading "Risk Factors." The shares offered hereby involve a high degree of
risk.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and should be read in conjunction with that
information and those financial statements and notes. Prospective investors are
urged to read this Prospectus in its entirety.
THE COMPANY
Frisby Technologies, Inc. (the "Company") is engaged in the development
and commercialization of innovative advanced thermal management products for
use in a broad range of consumer and industrial products such as gloves, boots,
athletic footwear, apparel, protective and temperature retardant equipment,
electronics cooling systems, packaging materials, and coating substances. The
Company's Thermasorb(R) and ComforTemp(R) products utilize licensed patents and
the Company's proprietary microencapsulated phase change material ("MicroPCM")
technology to enhance thermal characteristics (i.e., insulation, cooling or
temperature control properties) of these and a variety of other consumer and
industrial products. For example, when ComforTemp(R) foams are incorporated
into ski gloves, the skier's hands remain within a constant, pre-set
temperature range without the typical accumulation of moisture. If a
firefighter were to wear flame retardant clothing incorporating ComforTemp(R)
foam, the firefighter would remain cooler and be able to fight fires longer and
more safely than a firefighter wearing flame retardant clothing without
ComforTemp(R) foam. See "Business -- General."
The Company's marketing strategy is based on penetrating large select
markets for its thermal management technology through relationships with
strategic partners. The Company works closely with its strategic partners
within each market to develop commercially viable product applications. To
date, the Company has entered into such strategic partnerships with, among
others, Wells Lamont Division of Marmon Holdings, Inc., LaCrosse Footwear, Inc.
and Bell Sports Corp.
Industry Overview
Thermal management is the process by which the temperature of various
materials is controlled or manipulated. The thermal management materials
industry consists primarily of a wide variety of non-phase change materials
such as Thinsulate(R) brand insulation for use in apparel; flexible and rigid
polyurethane foams for use in footwear, sporting goods, automotive and
transportation industries; specialized chemical additives for use in
temperature resistant paints and coatings; and liquid coolants for use in
aerospace, automotive and computer/electronics cooling systems. Phase change
thermal management materials are comprised of materials that have the ability
to absorb and reject large amounts of heat by changing from solid to liquid and
back, thereby greatly enhancing the ability to heat or cool a particular
object. See "Business -- Industry Overview."
The Company believes that its products are the first to combine the two
distinct technologies of thermal management phase change materials ("PCMs") and
microencapsulation to effect meaningful thermal performance improvements within
applications across broad markets. Microencapsulation is the enclosing of
materials inside a microscopic shell to maintain the integrity of the enclosed
material. The combination
3
<PAGE>
of PCM technology with microencapsulation technology overcomes many of the
inherent shortcomings of non-encapsulated PCMs, such as the tendency of
non-encapsulated PCMs to lose their integrity, and to dissipate, evaporate or
exhaust themselves over time. Microencapsulation permits PCMs to be imbedded
into a variety of host materials, while maintaining the integrity and thermal
functionality of the core PCMs. Microencapsulation is a proven technology and
has been used extensively in the pharmaceutical industry (time release
medication) and the paper industry (carbonless copy paper). Since its advent,
microencapsulation has been increasingly utilized across diverse applications.
Management believes that the technology will continue to gain further
penetration and usage in different fields, including thermal management.
Products
The Company's products offer impressive and cost-effective thermal
management solutions for a broad range of industries. The Company's current
MicroPCM based products consist of a series of thermal additives and a series
of foams in which the thermal additives are embedded. The Company currently
markets its thermal additives and foams under the trademarks Thermasorb(R) and
ComforTemp(R), respectively. See "Risk Factor -- Limited Operating History" and
"Business -- Products."
Thermasorb(R) additives are a series of thermal management additives
developed using the latest advances in microencapsulation technology.
Thermasorb(R) MicroPCMs are micron-sized particles in the form of a dry,
free-flowing powder, consisting of a heat absorbing core material encapsulated
within a proprietary, durable shell wall. Thermasorb(R) additives can improve
the thermal storage capacity of a variety of host materials, including liquid,
foam, epoxy or composite materials. Thermasorb(R) additives are currently
commercially available in a variety of transition temperatures ranging from 43o
F to 190o F. Thermasorb(R) additives incorporated into solid materials enable
those materials to absorb up to ten times more heat than traditional insulating
materials. In tests performed for the United States Air Force by Triangle
Research and Development Corp. ("TRDC"), the principal licensor of the
Company's technology, liquid coolants containing Thermasorb(R) additives were
shown to remove up to 40 times more heat than traditional coolants. See
"Business -- Products."
ComforTemp(R) foams are a series of foam products that contain embedded
Thermasorb(R) additives. ComforTemp(R) foams can be fabricated in different
ways to have the ability to retain or exclude heat thereby maintaining a more
constant temperature. ComforTemp(R) foams are currently available in a light,
breathable polyurethane foam which has the added capability of wicking away
moisture while maintaining comfort in extreme hot or cold climates. For cold
weather apparel products, the greatest asset of ComforTemp(R) foams is the
ability to retain body heat during periods of activity and to release the heat
back to the individual during periods of inactivity when the body is most in
need of warmth. ComforTemp(R) foams "recharge" naturally depending on the
individual level of physical activity or other external conditions. For hot
weather products, ComforTemp(R) foams can be used as a thin thermal
barrier/heat shield to protect against extreme heat as well as to facilitate
the regulation of body heat generated during activity thereby providing a
cooling effect.
The Company's thermal management technology utilized in Thermasorb(R)
additives and ComforTemp(R) foams provides the following unique
characteristics:
o Intelligent thermal management -- provides pre-selected temperature
control;
o Versatile -- may be incorporated into a wide variety of end-use products;
o Lightweight -- lighter and less bulky than conventional insulating
materials;
o Durable -- typically outlasts product to which it is applied;
o Rechargeable -- continuous, automatic thermal management;
o Customizable -- may be engineered to meet the requirements of applications
across a wide temperature range;
o Maintenance free -- no maintenance or power source required; and
o Complementary -- may be used to enhance other insulating products.
4
<PAGE>
Strategy
The Company's current primary objective is to increase acceptance and
usage of its existing products and to adapt such products for use in additional
consumer and commercial products within targeted industries through strategic
partnerships with leaders in such industries. The Company intends to establish
its Thermasorb(R) and ComforTemp(R) products as the most advanced thermal
management products available, and to establish Thermasorb(R) and ComforTemp(R)
as internationally recognized consumer and industrial brands. See "Risk Factor
- -- Limited Operating History," "-- Market Acceptance" and "Business --
Strategy."
A significant portion of the Company's marketing and brand promotion
efforts are coordinated with its strategic partners. The Company's agreements
with its strategic partners typically obligate the strategic partner to display
and promote the Company's trademarks, including Thermasorb(R) and
ComforTemp(R), in all promotional materials, point of sale displays and direct
product advertising relating to end-products incorporating the Company's
products. The Company refers to these efforts as "co-branding."
The Company's products are currently being marketed commercially in
apparel, footwear and sporting goods products. Three additional fields in which
its products are most likely to become commercially feasible in the near term
are home furnishings, shipping/packaging and healthcare. In the future, the
Company's plans include developing products and establishing strategic
partnerships in the automotive, aerospace and computers and electronics
industries.
The Company's strategy is to pursue product applications which it
determines can: (i) offer significant growth potential within large,
established and/or growing markets; (ii) generate attractive margins and
enhanced brand recognition while having low capital requirements; (iii) meet a
significant unmet market need; and (iv) provide a strong proprietary
opportunity for industry leaders entering into strategic partnerships with the
Company. Once a specific market or product is identified, the Company seeks to
introduce that product by: (i) targeting a market leader in that specific
industry; (ii) establishing a strategic relationship with that market leader;
(iii) working closely with its strategic partner to develop the optimal
characteristics and marketing efforts for each product incorporating the
Company's products; and (iv) coordinating with its strategic partner to
maximize market penetration including penetration of the mass market.
The Company's current plans involve maximizing the commercial viability
and success of its thermal management products. From time to time, the Company
becomes aware of and considers conducting funded research projects that do not
relate to thermal management. The Company expects to evaluate future funded
research and development projects on a case-by-case basis and will engage in
those projects management considers to offer complementary opportunities for
the Company.
Strategic Partners
Through mid-1996, the Company focused its efforts on acquiring patent
licenses and developing proprietary technology and identifying and testing
potential applications for its innovative thermal management products. During
that period, the Company generated substantially all of its revenues from
United States government related research and development contracts. In March
1996, the Company began to commercially market its Thermasorb(R) and
ComforTemp(R) products. See "Risk Factor -- Dependence on Small Number of
Strategic Partners; Limited Sales and Marketing Experience" and "Business --
Strategic Partnerships."
After the conclusion of this Offering, the Company anticipates that it
will generate revenues from two principal sources: (i) sales of its
Thermasorb(R) and ComforTemp(R) products for use in the products of its
strategic partners; and (ii) royalties from the use of the Thermasorb(R) and
ComforTemp(R) trademarks by its strategic partners based on a percentage of its
strategic partners' sales of products containing the Company's products to
end-users. The Company also may receive license fees and development fees from
some strategic partners for the grant of exclusive rights within a specific
product category and for development services provided by the Company.
5
<PAGE>
To date, the Company's products have been incorporated into and are
currently being sold to consumers of products such as HotFingers(TM) ski gloves
by Wells Lamont, ski and snowboard helmets by Bell Sports Corp., hiking boots
and snowboots by Cove Shoe Company and Genfoot, Inc., and fishing waders by Fly
Technologies, Inc. In addition, the Company's products are currently being
incorporated into products such as snowboots by LaCrosse Footwear, Inc. and
personal hydration systems by FasTrak Systems, Inc., each of which are expected
to first be made available for sale to consumers in 1998.
The Company is currently in negotiations with additional entities that are
interested in entering into strategic partnerships for the use of Thermasorb(R)
additives or ComforTemp(R) foams in their products. These companies are in the
technical outerwear, athletic footwear, home furnishing, shipping and
packaging, healthcare, automotive, aerospace, and computer and electronics
industries.
History
The Company was incorporated in North Carolina in November 1989 and
reincorporated in Delaware in March 1998. The Company's principal executive
office is located at 417 South Main Street, Freeport, New York 11520. Its
telephone number is (516) 378-0162 and its web sites are http://www.frisby.com
and http://www.comfortemp.com.
6
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock Offered by the Company (1) ............ 1,600,000 shares
Common Stock Outstanding
Immediately Prior to the Offering (2) ............ 3,280,613 shares
Common Stock to be Outstanding
Following the Offering (1) (2) ................... 4,880,613 shares
Risk Factors ....................................... The shares of Common Stock offered hereby
involve a high degree of risk and should be pur-
chased only by persons who can afford to sustain
a total loss of their investment. See "Risk Factors"
and "Dilution."
Use of Proceeds .................................... The net proceeds of the Offering will be used by
the Company to provide resources for: (i) sales
and marketing; (ii) product development; (iii)
capital expenditures; (iv) research and develop-
ment; and (v) working capital. See "Use of
Proceeds."
Proposed Nasdaq SmallCap Market Symbol (3) ......... FRIZ
Proposed BSE Symbol (3) ............................ FRZ
</TABLE>
- -------------
(1) Does not include: (i) 240,000 shares of Common Stock issuable upon exercise
of the Over-Allotment Option; or (ii) 160,000 shares of Common Stock
issuable upon exercise of the Underwriter's Option. See "Underwriting."
(2) Does not include: (i) 587,500 shares of Common Stock issuable upon
conversion of 587,500 shares of the Convertible Preferred Stock issued in
February 1998 upon exercise of an option (the "Private Placement Option")
issued in December 1997 in a private placement (the "Private Placement");
or (ii) 250,000 shares of Common Stock reserved for issuance upon exercise
of options which may be granted under the Company's 1998 Stock Option Plan
(the "Stock Option Plan"). See "Capitalization," "Management -- Stock
Option Plan," "Certain Transactions" and "Description of Securities."
(3) Prior to the Offering there was no market for the Common Stock and there
can be no assurance that a market for the Common Stock will develop after
the Offering. The Company has applied for the listing of its Common Stock
on the Nasdaq SmallCap Market and the BSE. There can be no assurance,
however, that such listing will be granted or, if granted, maintained. See
"Risk Factors -- No Prior Market for the Common Stock; Determination of
Offering Price; Potential Volatility of Stock Price."
7
<PAGE>
SUMMARY FINANCIAL DATA
The actual summary financial data presented below under the captions
"Statement of Operations Data" and "Balance Sheet Data" for and as of the end
of each of the periods indicated are derived from the financial statements of
the Company appearing elsewhere herein. The information set forth below should
be read in conjunction with such financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------------
1996 1997
------------- ----------------
<S> <C> <C>
Statements of Operations Data:
Revenue .................................................... $1,208,000 $ 1,262,000
Cost of sales .............................................. 1,036,000 976,000
---------- ------------
Gross profit ............................................... 173,000 286,000
Operating expenses:
Selling and marketing .................................... 83,000 315,000
General and administrative ............................... 207,000 900,000
---------- ------------
Total operating expenses ................................... 290,000 1,215,000
---------- ------------
Loss from operations ....................................... (118,000) (929,000)
Net loss ................................................... $ (88,000) $ (1,010,000)
========== ============
Net loss per common share -- basic and diluted ............. $ (0.03) $ (0.36)
========== ============
Shares used in computing net loss per common share ......... 2,839,000 2,843,000
========== ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------
Pro Forma
Actual Pro Forma(1) As Adjusted(1)(2)
------------ -------------- ------------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash ......................... $ 375,000 $2,875,000 $12,158,000
Working capital .............. 416,000 2,916,000 12,199,000
Total assets ................. 1,268,000 3,768,000 12,912,000
Stockholders' equity ......... 475,000 2,836,000 12,119,000
</TABLE>
- -------------
(1) Pro forma to give effect to the exercise in February 1998 of an option to
purchase 587,500 shares of Convertible Preferred Stock for an aggregate
exercise price of $2,500,000 issued in the Private Placement. See "Certain
Transactions."
(2) Pro forma, as adjusted to give effect to the sale by the Company of the
1,600,000 shares of Common Stock offered hereby at the assumed initial
offering price of $7.00 per share and receipt of the estimated net
proceeds therefrom ($139,000 of related expenses have been paid prior to
December 31, 1997). See "Use of Proceeds."
8
<PAGE>
RISK FACTORS
The shares of Common Stock offered hereby involve substantial risks and
should be purchased only by persons who can afford to sustain the loss of their
entire investment. The following risk factors, in addition to the other
information and financial data set forth elsewhere in this Prospectus, should
be considered carefully in evaluating the Company and its business before
making an investment in the Common Stock. The risks described below and
elsewhere in this Prospectus are not intended to be an exhaustive list of the
general or specific risks involved, but merely to identify certain risks that
are now foreseen by the Company. It must be recognized that other risks, not
now foreseen, might become significant in the future and that the risks, which
are now foreseen, might affect the Company to a greater extent than now
foreseen or in a manner not now contemplated. Furthermore, this Prospectus
contains certain forward-looking statements that are based on current
expectations, estimates and projections about the business of the Company and
the industry in which the Company operates, management's beliefs and
assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks" and "estimates," variations on such
words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. The Company's actual results could differ materially from those
expressed or forecasted in these forward-looking statements as a result of
certain factors, including those set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and
elsewhere in this Prospectus. Each prospective investor should carefully
consider all information contained in this Prospectus and should give
particular consideration to the following risk factors before deciding to
purchase the Common Stock offered hereby.
Limited Operating History
The Company was formed in 1989 and has a limited operating history. The
Company's activities to date have primarily related to: (i) the identification
and licensing of, and research and materials development related to, its
MicroPCM technology, the rights to which were initially licensed to the Company
in 1991; (ii) the arrangement of the contract manufacturing of MicroPCMs by
third-party suppliers; (iii) identification of initial target markets and entry
into strategic partnerships in those markets; and (iv) the limited
commercialization by the Company's first strategic partners of thermal
management products incorporating the Company's Thermasorb(R) additives and
ComforTemp(R) foams. The Company commenced producing and selling its products
commercially in mid-1996 and, as of December 31, 1997, the Company had entered
into seven agreements with strategic partners. The Company intends to rely
extensively upon the "co-branding" of its products with the products of its
strategic partners. The Company's co-branding strategy involves requiring its
strategic partners to display the Company's trademarks, Thermasorb(R) and
ComforTemp(R), on or in conjunction with end-use products incorporating its
products and in all advertising relating to those products. There can be no
assurance that the Company, alone or with its strategic partners, will be able
to create awareness of, and demand for, the Company's products through their
respective marketing efforts. The failure of the Company's co-branding approach
to marketing would require the Company to develop its marketing capabilities at
a potentially higher cost to the Company. Further, there can be no assurance
that the Company's co-branding strategy will be successful or, if successful,
that such program will lead to increased sales of the Company's products and
services. If the Company's co-branding strategy is not successful, there can be
no assurance that the Company will have sufficient resources to develop its own
marketing program or, if developed, that such program will be successful. See
"Business -- Strategy" and "-- Sales and Marketing."
Additionally, the Company's business and its operations are subject to
unanticipated expenses, uncertain market acceptance, competition, government
regulation, increases in costs, delays and risks inherent in the establishment
of a new business enterprise, including limited capital, and delays in product
development by the Company or its strategic partners. There can be no assurance
that the Company will succeed in addressing any or all of these risks, and
failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Products" and "-- Technology Overview."
Accumulated Losses; Possible Need for Additional Financing
For the years ended December 31, 1996 and 1997, the Company had net losses
of $88,000 and $1,010,000, respectively. The Company had working capital of
$416,000 at December 31, 1997, and an accumulated deficit
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of $1,068,000 through December 31, 1997. The Company anticipates that it will
continue to sustain losses through the third quarter of 1999, principally as a
result of expenses associated with the Company's continuing product development
efforts and anticipated selling, marketing and general administrative expenses.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company believes that the net proceeds from the Offering will be
sufficient to satisfy the Company's working capital requirements for a period
of approximately 24 months following completion of the Offering. No assurance
can be given that the Company will become profitable in such time or
thereafter. In the event that the Company's plans change, its assumptions prove
to be inaccurate (due to unanticipated expenses, difficulties, delays or
otherwise) or the proceeds of the Offering otherwise prove to be insufficient
to fund the implementation of the Company's business strategy and working
capital requirements, the Company could be required to seek additional
financing. The Company has no commitments for any future funding, and there can
be no assurance that the Company will be able to obtain additional capital in
the future. The type, timing and terms of such funding, if available, will be
determined by prevailing conditions in the financial markets and the Company's
financial condition, among other factors. If the Company requires additional
capital and is unable to obtain such capital, it may be required to
significantly curtail its activities which would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Reduction in Government Funded Development; No Assurance of Continued
Government Contracts
A significant portion of the $5,558,000 in total revenues earned by the
Company since its inception through December 31, 1997 was generated from
performing contracts and providing engineering services directly or indirectly
for the United States government. Revenue from these contracts accounted for
92.7% and 38.6% of the Company's total revenues for the years ended December
31, 1996 and 1997, respectively, and substantially funded the Company's
development efforts. Except for four of these contracts which provide for
future development payments to the Company totalling approximately $361,000,
these contracts were fully or substantially completed as of December 31, 1997.
The Company does not believe that it is materially dependent on a continued
flow of revenue from existing or future government related contracts. The
Company currently expects to continue to solicit approximately $500,000 per
year of government related contracts and to fund any remaining development
efforts through license fees, product sales and royalties. There can be no
assurance that the United States government and the related contracting parties
will not curtail or eliminate their expenditures for services of the type
provided by the Company, or if not curtailed or eliminated, that the Company
will be successful in obtaining contracts to perform such services in the
future. See "Business -- Research and Development."
Market Acceptance
Since its inception, the Company has focused its product development
efforts on research and development with respect to its Thermasorb(R) and
ComforTemp(R) products and market applications incorporating Thermasorb(R)
additives and ComforTemp(R) foams which the Company believes will be superior
to similar applications utilizing currently available non-MicroPCM
technologies. As with any new technology, there is a risk that the market may
not appreciate the benefits of or recognize the potential applications for the
technology. See "Business -- Strategy."
In order for the Company to achieve broad market acceptance of its thermal
management products, the Company must demonstrate to potential consumers and
strategic partners that its additives or its products made therefrom are useful
in addition to or as replacements for existing thermal management technology.
The Company's strategy is to achieve and capitalize upon brand recognition of
its thermal management technologies in high profit markets. However, there can
be no assurance that the Company's existing or future products will be
commercially accepted. The Company's targeted strategic partner base may not
change the established thermal management technologies incorporated in their
products and may not make the necessary investment to purchase the Company's
products. If market acceptance of the Company's products does not develop, the
Company's prospects would be materially adversely affected.
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Dependence Upon Intellectual Property
The Company's business is dependent on the continued validity of the
patents that it licenses and the effectiveness of its licenses to such patents.
The Company holds licenses under nine issued and one pending United States
patent and one European patent and believes that its rights under these
licenses together with the Company's proprietary techniques adequately protect
its MicroPCM technology. The Company's rights under the licenses and in the
proprietary techniques have not been tested in any court proceeding and there
can be no assurance that these rights, if tested, will in fact be adequate to
protect its technology. The Company has a license agreement (the "TRDC
License") with TRDC for the exclusive worldwide right to develop and
commercialize all patented and proprietary bulk PCMs and MicroPCM technologies
owned presently or in the future by TRDC ("TRDC Technology") with the exception
of MicroPCMs relating to fibers and fabrics with reversible enhanced thermal
storage properties ("MicroPCM Fibers and Fabrics"). TRDC's principal, Dr. David
P. Colvin, Ph.D., is a member of the Company's Innovation Advisory Board. The
TRDC Technology currently includes nine issued and one pending United States
patent and one European patent. TRDC or its licensees have applied for
international patent protection for two of the issued United States patents.
The TRDC License also grants to the Company the exclusive right and license to
sublicense, to manufacture bulk PCMs, MicroPCMs, end-use products, and any
improvements thereto based on the TRDC Technology, and to market, sell, use,
lease or distribute all applications of such products worldwide, with the
exception of MicroPCM Fibers and Fabrics. The Company has been advised that
TRDC has assigned its right to receive payments under the TRDC License to an
affiliated entity. See "Management -- Innovation Advisory Board."
The rights to the portion of the TRDC Technology relating to MicroPCM
Fibers and Fabrics were licensed by TRDC to Outlast Technologies, Inc.
("Outlast") prior to the Company's licensing all of the other rights to the
TRDC Technology under the TRDC License. In order to further expand its rights
in the TRDC Technology, in January 1998, the Company entered into an agreement
with Outlast (the "Outlast Agreement"). The Outlast Agreement expands the
rights of the Company to include combinations of the Company's products with
fibers and fabrics. Under the Outlast Agreement, the Company has exclusive
rights, for most applications, to manufacture, sub-license and sell
ComforTemp(R) foams that are attached to fibers and fabrics or intended to be
attached to fibers or fabrics so long as the foam is greater than 2mm in
thickness. The Company also may sell Thermasorb(R) additives for use in such
foams to be attached to fibers and fabrics. The Company agreed to pay Outlast a
royalty if its products are used in certain combinations with fibers and
fabrics, with minimum annual payment requirements in effect for as long as the
Company desires the agreement to be exclusive (including exclusive of Outlast).
Pursuant to the Outlast Agreement, Outlast will not sell fabrics or fibers
attached to ComforTemp(R)-type foams greater than 2mm in thickness for ten
years, unless the Company elects to permit its agreement to become
non-exclusive.
The Company intends to seek TRDC's acknowledgment that Thermasorb(R) and
ComforTemp(R) products, on which royalties are paid under the Outlast
Agreement, will not be claimed to be royalty-bearing under the Company's TRDC
License. No assurance can be given that the Company will receive TRDC's
acknowledgment, and even if obtained, that claims will not be made or, if made,
will not be successful. In the event of any dispute as to which products of the
Company fall under the TRDC License and which, if any, fall under the Outlast
Agreement, the Company believes that it would avoid paying royalties to both
TRDC and Outlast on the same products by instituting an interpleader action and
depositing the higher royalty into court for distribution to the appropriate
licensor. No assurance can be given that such a procedure will be approved by
any court, if it becomes necessary. The Outlast Agreement further provides,
that if the scope of Outlast's license is restricted by agreement or court
decision in a challenge by any third party, the Outlast Agreement is
automatically restricted to the same extent. No assurance can be given that
under circumstances not presently foreseen the Company could not be required to
pay royalties to both TRDC and Outlast on certain product sales.
There can be no assurance that any steps taken by the Company to protect
its intellectual property will be adequate to prevent misappropriation, that
any patents or copyrights issued to the Company or its licensors will not be
invalidated, circumvented or challenged, or that the rights granted thereunder
will provide a competitive advantage. TRDC and the Company are jointly
responsible for the protection of the intellectual property licensed
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by the Company from TRDC. Both Outlast and the Company are responsible for the
protection of the intellectual property sublicensed from Outlast. In addition,
laws of certain countries in which the Company's products are, or may be
developed, manufactured or sold, may not provide the Company's products and
intellectual property rights with the same degree of protection as the laws of
the United States. Furthermore, there can be no assurance that others will not
independently develop technologies similar or superior to the Company's
technology and obtain patents, trademarks or copyrights thereon. In such event,
the Company may not be able to license such technologies on reasonable terms,
or at all. Although the Company believes that its products and technology do
not infringe upon proprietary rights of others, there can be no assurance that
third parties will not assert infringement claims in the future. Moreover,
litigation may be necessary in the future to enforce the Company's rights under
licensed patents, copyrights and other intellectual property rights, to protect
the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation, regardless of the outcome, could result in
substantial cost and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business -- Patents/Intellectual Property."
In addition to patent protection, the Company seeks to protect its
proprietary information through confidentiality and non-competition agreements
with its employees, directors, licensees, customers, strategic partners,
consultants, advisors and collaborators. There can be no assurance that such
agreements will not be breached, that the Company will have adequate remedies
for any such breach or that the Company's proprietary information will not
otherwise become known to, or be independently developed by, the Company's
competitors. See "Business -- Patents/Intellectual Property."
The Company holds federal registrations of the trademarks Thermasorb(R)
and ComforTemp(R), Canadian registration for the trademark ComforTemp(R) and
has applied for trademark registration for Comfort in the Extreme(TM) in the
United States. The Company has also filed for international registrations for
ComforTemp(R) in the European Community. There can be no assurance that the
registered or unregistered trademarks of the Company do not infringe upon the
rights of third parties or that third parties will not assert claims of
infringement. The cost to defend such claims or the requirement to change any
trademark (which would result in the loss of any goodwill associated with that
trademark) could entail significant expense and have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Patents/Intellectual Property."
Dependence on Small Number of Strategic Partners; Limited Sales and Marketing
Experience
The Company received approximately 45% of its total revenue for the year
ended December 31, 1997 from product sales, royalties and license fees from two
strategic partners. While its agreements with its strategic partners require
minimum annual purchases of Thermasorb(R) additives and ComforTemp(R) foams and
royalty payments on the sale of goods utilizing Thermasorb(R) additives and
ComforTemp(R) foams for such strategic partners to retain the exclusivity of
their rights within specified product categories, there can be no assurance
that these strategic partners will not seek to terminate their agreements, or
fail to purchase such minimum quantities and/or fail to pay any royalties to
the Company. There can be no assurance that these or any other strategic
partners will renew or enter into such agreements with the Company in the
future. To the extent that the Company's current strategic partners fail to
renew their agreements, the Company will be forced to find new strategic
partners to replace them. To the extent that the Company is unable to
successfully replace such strategic partners or to enter agreements with
additional strategic partners, the Company's business, financial condition and
results of operations would be materially adversely affected. See "Business --
Strategic Partnerships."
In the event that sales by the Company's strategic partners of products
incorporating the Company's products cease or are curtailed for any reason, the
Company will experience a significant adverse effect on its cash flow. No
assurance can be given that the Company's existing strategic partners will be
able to generate sufficient sales of products incorporating the Company's
products, immediately or within a reasonable time after entering into
agreements with the Company, to enable the Company to achieve its business
plan.
The present management of the Company has limited experience with respect
to the sales and marketing of thermal management products to retail and
industrial markets. To date, the Company has only two employees dedicated to
sales and marketing. From the time the Company began to commercialize its
products in 1996 through December 31, 1997, the Company generated $488,000 from
sales of its Thermasorb(R) and ComforTemp(R) products.
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Dependence on Single Source Providers for Manufacturing
The Company currently outsources the manufacture of all of its products,
including Thermasorb(R) additives and ComforTemp(R) foams to a limited number
of manufacturers. For the year ended December 31, 1997, all of the Company's
Thermasorb(R) additives were manufactured under a purchase order with Minnesota
Mining and Manufacturing, Inc. ("3M"). Prior to October 23, 1997, all of the
Company's ComforTemp(R) foams were manufactured under a purchase order with
Lendell Manufacturing, Inc. ("LMI"). On October 23, 1997, the Company entered
into a memorandum of understanding with LMI that grants LMI the exclusive
license to manufacture a specific hydrophilic polyurethane version of the
Company's ComforTemp(R) foams. The Company and 3M have entered into an
arrangement that provides firm, fixed pricing for all of the Company's
anticipated Thermasorb(R) requirements, as well as favorable pricing and
delivery terms for short run and prototype production volumes. Pursuant to the
arrangement, the Company placed a blanket purchase order for all of its 1998
anticipated requirements of Thermasorb(R). The Company has also received
written assurances from 3M regarding 3M's desire to enter into a long-term
supply agreement for the manufacture of the Company's Thermasorb(R) additive.
The Company also has executed a non-binding agreement with Foamex
International, Inc. ("Foamex") for the manufacture of certain foam products not
manufactured by LMI and the right to sell, co-exclusively with the Company,
ComforTemp(R) polyurethane foams. While the Company believes that its
relationship with Foamex will provide the Company with an additional, high
capacity, source of supply for polyurethane foams and access to as yet untapped
areas for new strategic partnerships, there can be no assurance that the
Company and Foamex will finalize a definitive agreement or that any of the
perceived benefits will materialize. No assurance can be given that the Company
will be able to procure long-term supply contracts with either 3M, LMI, Foamex
or any of its other suppliers. To date, the Company has not experienced
difficulty in connection with the delivery of Thermasorb(R) additives or
ComforTemp(R) foams. If for any reason the Company is unable or unwilling to
procure long-term supply contracts with such suppliers or if any of its
suppliers are unable to meet the Company's requirements, the Company could
experience cost increases, a deterioration of services from its suppliers, or
interruptions, delays or a reduction that may cause the Company to fail to meet
delivery schedules to its strategic partners which in turn may have a material
adverse effect on the Company's business. See "Business -- Sales and Marketing"
and "-- The Manufacturing Process."
Although the Company believes that alternate suppliers exist for the
manufacture of Thermasorb(R) additives and ComforTemp(R) foams in sufficient
quantities and at competitive prices with its current suppliers, any
unanticipated interruption of supply would have, at a minimum, a short-term
material adverse effect on the Company. The Company may outsource the
manufacture of some portion of its products to other domestic or international
manufacturers in the future. The Company has no current arrangement with any
such domestic or international alternative manufacturer, and there can be no
assurance that the Company will be able to negotiate acceptable arrangements,
or if negotiated, that such arrangements will be on terms and conditions
acceptable to the Company. Any difficulties encountered by third-party
manufacturers which result in product defects, production delays, cost overruns
or the inability to fulfill orders on a timely basis could have a material
adverse effect on the Company. See "Business -- The Manufacturing Process."
Alternative Technologies; Technological Obsolescence
The thermal management products industry is characterized by rapid
technological change and frequent introduction of new products and product
enhancements which result in relatively short product life cycles and rapid
product obsolescence. There can be no assurance that the Company will be able
to identify and offer thermal management products necessary to remain
competitive and avoid losses related to obsolete inventory or related drastic
price reductions.
The thermal management products industry presents continuing opportunities
for the development of alternative insulating and protective devices and
technologies. The development and commercialization of alternative thermal
management technologies that are less expensive, more effective or more
efficient than the Company's technologies could place the Company at a
competitive disadvantage. There can be no assurance that the Company will
successfully distinguish itself from its competitors, or that the market will
consider the products incorporating the Company's products to be superior to
its competitors' products or that the Company will be able to adapt to evolving
markets and technologies, develop new products or achieve and maintain
technological advantages. See "Business -- Technology Overview" and "--
Competition."
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Risks Associated With Business Plan and Strategy; Need for Additional Personnel
The Company has formulated its business plan and strategy based upon
certain assumptions regarding the size of the thermal management products
market, the Company's anticipated share of this market, the price at which the
Company believes it will be able to sell its products, and consumer acceptance
of the Company's products. There can be no assurance that the Company's
assumptions will prove to be correct. The Company's ability to operate in the
future will depend upon many factors, including technological advances and
product obsolescence; levels of competition, including the entry into the
market of additional competitors and increased success by existing competitors;
changes in general economic conditions; increases in operating costs including
costs of production, supplies, personnel or equipment; and changes in
requirements and regulations promulgated by applicable federal, state and local
regulatory authorities. There can be no assurance that the Company will
successfully obtain or apply the human, operational and financial resources
needed to manage a developing and expanding business. Failure by the Company to
manage its growth effectively could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Strategy."
In order to meet both the existing and anticipated market demand for the
Company's products, the Company needs to attract and retain additional
personnel. The Company currently has only two full-time sales and marketing
employees, seven product development employees, one quality assurance
specialist and one clerical employee. The Company recently retained a Chief
Financial Officer who is expected to begin working on April 6, 1998. In order
to effectively launch its marketing and sales strategy, the Company will need
to hire additional sales, marketing, technical and operations personnel. The
success of the Company will also be dependent upon its ability to hire, train
and retain new and existing personnel. The Company will compete with other
companies with greater financial and other resources for such qualified
personnel. There can be no assurance that the Company will be able to hire and
retain additional personnel to support the Company's marketing, sales, research
and product development efforts. See "Business -- Employees."
Broad Discretion as to Use of Proceeds
An estimated $1,544,000, or 16.9%, of the net proceeds of the Offering
have been allocated to working capital and will be used for such purposes as
management of the Company may determine. Management will have broad discretion
with respect to the expenditure of that portion of the net proceeds of the
Offering. In addition, the Company's estimated allocation of the remaining net
proceeds of the Offering is subject to reapportionment among the purposes set
forth under "Use of Proceeds" including working capital. The amount and timing
of expenditures will vary depending upon a number of factors, including the
progress of the Company's product development and marketing efforts, changing
competitive conditions and general economic conditions. See "Use of Proceeds."
Fluctuations in Operating Results
The Company's operating results may vary significantly from quarter to
quarter or year to year, depending on various factors such as the timing of
product development, the timing of increased research and development, the
timing of sales and marketing expenses, the timing and size of orders and the
introduction of new products by the Company or its strategic partners.
Consequently, revenues or profits may vary significantly from quarter to
quarter or year to year, and revenues or profits in any period will not
necessarily be predictive of results in subsequent periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Dependence on Key Personnel; Salary Increases to Management
The Company's growth and development is dependent upon the continued
services of Gregory S. Frisby, Chairman of the Board, President and Chief
Executive Officer of the Company, and Douglas J. McCrosson, Vice President of
Market Development and Secretary of the Company and the retention and continued
services of a qualified Chief Financial Officer. The Company currently has key
man insurance on the life of Gregory S. Frisby in the amount of $2.5 million.
The Company has retained a Chief Financial Officer who is expected to begin
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working on April 6, 1998. Although the Company has been able to hire and retain
other qualified and experienced personnel, the loss of the services of either
Gregory S. Frisby or Douglas J. McCrosson, for any reason, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management."
The Company has entered into employment agreements with both Gregory S.
Frisby and Douglas J. McCrosson that will expire on December 31, 2002 and
December 31, 2000, respectively. The employment agreements effect increases of
$148,000 and $13,000 for Gregory S. Frisby and Douglas J. McCrosson for 1998,
respectively, from their respective 1997 salaries. The increases in base
salary were intended to enable the Company to retain its key managers and were
approved by the Board of Directors of the Company at a time when the Company
had no independent compensation committee and at a time when the Company
continues to experience losses. The agreements contain confidentiality,
non-competition, and non-solicitation provisions. No assurance can be given
that such agreements will effectively enable the Company to retain key
management employees or that the agreements will not be violated, or if
violated, that such provisions will be enforced in accordance with their
terms, if at all. See "Management -- Employment Agreements."
Competition
The markets for thermal management products are widely diversified and
highly competitive. The Company will compete against current and future
competitors that manufacture, produce and sell natural and synthetic thermal
management products. Certain of the companies with which the Company competes
have substantially greater technical, financial, research and development, and
marketing resources than the Company. There can be no assurance that the
Company will be able to compete successfully with existing or new competitors.
See "Business -- Competition."
Product Liability Exposure and Availability of Insurance
The development, testing, manufacturing, marketing and sale of the
Company's products involve risks of allegations of product liability. While no
product liability claims have been made against the Company to date, if such
claims were made and adverse judgments obtained, whether directly against the
Company or against one of the Company's strategic partners in connection with
an end-use product incorporating the Company's products, such claims could have
a material adverse effect on the Company's business, financial condition and
results of operations. Although the Company has taken and intends to continue
to take what it believes to be appropriate precautions to minimize exposure to
product liability claims, there can be no assurance that it will be able to
avoid significant liability. The Company presently maintains product liability
insurance in the amount of $1,000,000 per claim with an annual aggregate limit
of $2,000,000 and is seeking proposals to increase its coverage. There can be
no assurance that such coverage is, or any new coverage will be, adequate or
will continue to be available at an acceptable cost, if at all. A product
liability claim, product recall or other claim with respect to uninsured
liabilities or in excess of insurance coverage could have a material adverse
effect on the Company's business, operating results and financial condition.
Government Regulations
As the licensor and supplier of the MicroPCMs and a licensor for their use
in certain applications, the Company relies upon its strategic partners to
incorporate the MicroPCM materials into final products, such as boots, gloves,
outerwear, helmets and automotive and industrial components. Each strategic
partner is responsible for determining that its final products conform to
applicable governmental health and safety regulations. The Company has not
undertaken all necessary tests or analyses to determine if end-products that
contain its thermal additives will conform to applicable health and safety
regulations. In the event that end-products incorporating the Company's
products fail to conform to such regulations, the Company may have to conduct
additional research and development to reformulate its products. There can be
no assurance that the products could be reformulated, nor can the Company make
any estimate of the time or expense involved in such additional research and
development, if it were to become necessary.
The Company may be subject to a variety of federal, state and local
environmental laws relating to the storage, discharge, handling, emission,
generation, manufacture, use and disposal of chemicals, solid and hazardous
waste and other toxic and hazardous materials related to its products. All of
the manufacture of the Company's products is outsourced to third-party
suppliers, and the Company maintains only a minimal amount of chemicals in its
own facility in order to support its internal development activity. The Company
believes that it has been
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operating its facilities in substantial compliance in all material respects
with existing laws and regulations. Nevertheless, the failure to comply with
current or future regulations could result in substantial fines being imposed
on the Company, suspension of production, alteration of its manufacturing or
cessation of its operations. Such regulations could require the Company to
acquire expensive remediation equipment or to incur substantial compliance
expenses. The Company cannot predict the nature, scope or effect of legislation
or regulatory requirements that could be imposed or how existing or future laws
or regulations will be administered or interpreted with respect to products or
activities to which they have not previously applied. Compliance with more
stringent laws or regulations, as well as more vigorous enforcement policies of
regulatory agencies, could require substantial expenditures by the Company and
could adversely affect the results of operations of the Company.
In addition, the Company's local facilities and all of its operations are
subject to the plant and laboratory safety requirements of various federal,
state and local occupational safety and health laws. The Company believes it
has complied in all material respects with regard to governmental regulations
applicable to it. There can be no assurance, however, that the Company will
continue to comply with applicable government regulations or that such
regulations will not materially restrict or impede the Company's operations in
the future.
No Prior Market for the Common Stock; Determination of Offering Price;
Potential Volatility of Stock Price
Prior to the Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained or that the Common Stock will be resold at or above the
initial public offering price. The Company has applied for listing of the
Common Stock on the Nasdaq SmallCap Market and the BSE, subject to approval and
notice of issuance. The initial public offering price of the Common Stock
offered hereby will be determined by negotiations between the Company and the
Underwriter and does not bear any relationship to the Company's book value,
assets, past operating results, financial condition and other established
criteria for value. Among the factors to be considered in determining the
initial public offering price will be the history of, and the prospects for,
the Company's business and the industry in which it competes, an assessment of
the Company's management, its past and present operations, the prospects for
earnings of the Company, the general condition of the securities market at the
time of the Offering, the market prices and earnings of similar securities of
comparable companies at the time of the Offering and prevailing market and
economic conditions. See "Underwriting."
After the Offering, the market price of the Common Stock may be subject to
significant fluctuations in response to numerous factors, including but not
limited to, fluctuations or uncertainties in the Company's quarterly operating
results (including losses), delays with respect to entering new licensing
agreements, length of time required for the Company's strategic partners to get
their products to market, announcements of technological innovations of new
products, patents and technology of other suppliers, governmental regulations,
conditions in the markets in which the Company and its competitors compete,
changes by financial analysts in their estimates of the earnings of the
Company, and the economy in general. From time to time, the stock market
experiences significant price and volume volatility which may affect the market
price of the Company's Common Stock for reasons unrelated to the performance of
the Company. In addition, it is expected that there will be a relatively small
number of shares of Common Stock trading publicly following the Offering.
Accordingly, stockholders may experience difficulty selling or otherwise
disposing of shares of Common Stock at favorable prices, or at all. See "Shares
Eligible for Future Sale" and "Underwriting."
Control by Principal Stockholders
Upon completion of the Offering, Gregory S. Frisby, Chairman of the Board,
President and Chief Executive Officer of the Company and his brother, Jeffry D.
Frisby, who is not involved in the day-to-day operations of the Company, will
continue to own approximately 26.0% each of the aggregate of the Company's
outstanding Common Stock (24.9% each if the Over-Allotment Option is exercised
in full). Pursuant to a Shareholders Agreement between Gregory S. Frisby and
Jeffry D. Frisby, Gregory S. Frisby controls the voting of all of Jeffry D.
Frisby's shares giving Gregory S. Frisby control of over 51.9% of the aggregate
of the Company's outstanding Common Stock and Convertible Preferred Stock after
the Offering (49.7% if the Over-Allotment Option is exercised in full) and the
power to control the outcome of matters submitted to a vote of the Company's
16
<PAGE>
stockholders, including the election of at least a majority of the members of
the Company's Board of Directors and to direct the future operations of the
Company. Such concentration may have the effect of discouraging, delaying or
preventing a change in control of the Company. See "Certain Transactions" and
"Principal Stockholders."
In addition, MUSI Investments S.A. ("MUSI") owns 441,327 shares of the
Company's outstanding Common Stock and 587,500 shares of Convertible Preferred
Stock that are convertible into an equal number of shares of Common Stock under
certain circumstances. MUSI, Gregory S. Frisby and Jeffry D. Frisby are parties
to a Stockholders Agreement which requires the Company to use its best efforts
to elect a designee of MUSI as a director of the Company (the "MUSI Designee").
MUSI owns 100% of the Convertible Preferred Stock. Except as otherwise required
by law, shares of Convertible Preferred Stock have the same voting rights and
vote together with the Common Stock. See "Certain Transactions," "Principal
Stockholders," "Description of Securities" and "Underwriting."
Participation in Affiliate's Pension Plan
Until January 1, 1997, the Company's employees participated in a multiple
employer pension plan administered for the Company and its affiliate, Frisby
Aerospace, Inc. ("Frisby Aerospace"), by LaSalle National Bank. The plan was a
401(k) plan (the "Old Plan") and was funded by employee contributions. Although
the Company believes that the Old Plan was administered in accordance with all
applicable laws and regulations, the Company could be liable to employees of
Frisby Aerospace as well as employees of the Company if it were alleged and
proven that the Old Plan was not administered in accordance with all applicable
laws and regulations. If imposed, such liability could have a material adverse
effect on the Company.
Year 2000 Compliance
The Company has implemented Year 2000 compliance programs designed to
ensure that its computer systems and applications will function properly beyond
1999. The Company believes that adequate resources have been allocated for this
purpose and expects its Year 2000 date conversion programs to be completed on a
timely basis. The Company does not expect to incur significant expenditures to
address this issue. However, there can be no assurance that the Company will
identify all Year 2000 problems in its computer systems in advance of their
occurrence or that the Company will be able to successfully remedy any problems
that are discovered. The expenses of the Company's efforts to address such
problems, or the expenses or liabilities to which the Company may become
subject as a result of such problems, could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the revenue stream and financial stability of existing customers may
be adversely impacted by Year 2000 problems, which could cause fluctuations in
the Company's revenues and operating profitability.
No Assurance of Continued Nasdaq SmallCap Market or BSE Listing; Risk of
Application of Penny Stock Rules
The trading of the Company's stock in the Nasdaq SmallCap Market and the
BSE, if approved, will be conditioned upon the Company's meeting certain asset,
capital and surplus earnings and stock price tests. To maintain eligibility for
trading on the Nasdaq SmallCap Market, the Company will be required to
maintain, among other things, net tangible assets of at least $2,000,000; a
minimum bid price for the listed securities of $1.00 per share; a market value
of the public float of at least $1,000,000; and at least two market makers for
its securities. To maintain eligibility on the BSE, the Company is required,
among other matters, to maintain total net tangible assets in excess of
$1,000,000. There can be no assurance that the Company will be approved for
listing or, if approved, will continue to satisfy the requirements for
maintaining a Nasdaq SmallCap Market or a BSE listing. If the Common Stock were
to be delisted from the Nasdaq SmallCap Market and/or the BSE, the prices and
the holders' ability to sell such securities would be adversely affected. If
the Common Stock were delisted and the Company desired to have it relisted, the
Company would be required to satisfy the more stringent initial listing
requirements of the Nasdaq SmallCap Market and the BSE.
If the Company is delisted from the Nasdaq SmallCap Market and the BSE and
the price per share dropped below $5.00, then unless the Company satisfied
certain net assets tests, the Common Stock would become subject to certain
penny stock rules promulgated by the Securities and Exchange Commission (the
"Commission").
17
<PAGE>
The penny stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules require that prior to a transaction in a penny stock not
otherwise exempt from such rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for stock that becomes subject to the penny
stock rules. If the Common Stock becomes subject to the penny stock rules,
investors in the Offering may find it more difficult to sell their Common
Stock.
Shares Eligible for Future Sale
Immediately after completion of the Offering, the Company will have
4,880,613 shares of Common Stock and 587,500 shares of Convertible Preferred
Stock outstanding, of which the 1,600,000 shares of Common Stock (1,840,000
shares of Common Stock if the Over-Allotment Option is exercised in full) sold
pursuant to the Offering, will be freely tradable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), by persons other than "affiliates" of the Company, as
defined under the Securities Act. The remaining 3,280,613 shares of Common
Stock and the 587,500 shares of Convertible Preferred Stock are deemed
"restricted securities" as defined by Rule 144 under the Securities Act and may
not be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemption provided by
Rule 144. All of the restricted shares of Common Stock will be eligible for
trading under Rule 144 commencing 90 days following the date of this
Prospectus, subject to certain limitations and other restrictions, including
volume restrictions, prescribed by such rule, and to the contractual "lock-up"
restrictions described below. The Company, its officers, directors and current
stockholders have agreed to enter into lock-up agreements (the "Lock-Up
Agreements") under which they will agree not to sell or otherwise dispose of
any of their shares of Common Stock and Convertible Preferred Stock of the
Company for a period of 24 months commencing upon the date of this Prospectus,
or 18 months in certain circumstances, unless certain criteria are met or prior
written consent is obtained from the Underwriter. Sales of substantial amounts
of Common Stock, or the perception that these sales could occur, could
adversely affect the prevailing market price for the Common Stock and could
impair the ability of the Company to raise additional capital through the sale
of its securities or through debt financing. See "Shares Eligible for Future
Sale" and "Underwriting."
Effect of Options and Underwriter's Option on Stock Price
The Company has reserved 250,000 shares of Common Stock for issuance to
key employees, officers, directors and consultants upon the exercise of options
available for grant under the Stock Option Plan. The Company also will sell to
the Underwriter in connection with the Offering, the Underwriter's Option to
purchase an aggregate of 160,000 shares, subject to adjustment as provided
therein. Issuance of the Underwriter's Option and options issuable under the
Stock Option Plan could adversely impact future financings. In addition,
certain holders of such securities have certain registration rights, and the
sale of shares of Common Stock upon exercise of such rights or the availability
of such shares for sale could adversely affect the market price of the Common
Stock. See "Description of Securities" and "Underwriting."
The Underwriter's Option is exercisable for up to 160,000 shares of Common
Stock for a five year period commencing one year from the date of the Offering,
at an exercise price equal to 165% of the initial public offering price. The
exercise of the Underwriter's Option and any options issued under the Stock
Option Plan may dilute the book value per share of Common Stock. The holders of
such options may exercise them at a time when the Company would otherwise be
able to obtain additional equity capital on terms more favorable to the Company
and have the opportunity to benefit from increases in the price of the Common
Stock without risk of an equity investment. The Company has agreed to grant
certain demand and "piggyback" registration rights to the holders of the
Underwriter's Option. Such registration rights could involve substantial
expenses to the Company and may adversely affect the terms upon which the
Company may obtain additional financing. See "Shares Eligible for Future Sale"
and "Underwriting."
18
<PAGE>
Dilution
As of December 31, 1997, the pro forma net tangible book value of the
Common Stock was $0.73 per share. Upon completion of this Offering, the net
tangible book value will be approximately $2.22 per share, representing
immediate and substantial dilution to the public investors of approximately
$4.78 or 68.3%. See "Dilution."
No Dividends
The Company currently anticipates that it will retain all of its future
earnings, if any, for use in the operation and expansion of its business, and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. See "Dividend Policy" and "Description of Securities."
Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation, By-Laws
and Delaware law may be deemed to have an anti-takeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
consider in its best interests, including attempts that might result in a
premium over the market price for the shares held by the stockholders and could
make it more difficult to remove incumbent management. The Company's
Certificate of Incorporation or By-Laws provide that: (i) directors may
authorize the issuance of preferred stock (the "Preferred Stock") having rights
and preferences established by the Board of Directors without further approval
by the stockholders; (ii) except as otherwise required by law, vacancies in the
Board of Directors may be filled only by the remaining directors; and (iii) all
nominations for candidates for election as directors, other than nominations by
or at the discretion of the Board of Directors or a committee of the Board of
Directors and all stockholder proposals to be considered at annual or special
meetings of the stockholders be presented to the Company pursuant to an advance
notice procedure set forth in the Certificate of Incorporation. In general,
notice of an intent to nominate a director or to make a stockholder proposal to
be considered at a meeting must be received by the Company not less than 60 nor
more than 90 days before the meeting and must contain certain information
concerning the nominee for director or the proposal to be brought before the
meeting and concerning stockholders submitting the proposal. The affirmative
vote of at least a majority of the directors or the holders of at least
two-thirds of the voting power of the Company's stock is required to alter,
amend, repeal or adopt any provision inconsistent with the provisions described
in this paragraph. See "Description of Securities -- Preferred Stock" and "--
Directors' Limitation of Liability and Indemnification."
In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the General Corporation Law of the State of Delaware (the
"DGCL"). In general, this statute restricts a corporation from entering into
certain business combinations with an interested stockholder (defined as any
person or entity that is the beneficial owner of at least 15% of a
corporation's voting stock) or its affiliates for a period of three years after
the date of the transaction in which the person became an interested
stockholder unless: (i) the transaction is approved by the Board of Directors
of the corporation prior to such business combination; (ii) the interested
stockholder acquires 85% of the corporation's voting stock in the same
transaction in which it exceeds 15%; or (iii) the business combination is
approved by the Board of Directors and by a vote of two-thirds of the
outstanding voting stock not owned by the interested stockholder. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder.
Indemnification and Limitation on Liability of Directors and Officers
The Company's Certificate of Incorporation provides for the
indemnification of the Company's directors and officers to the fullest extent
permitted under the DGCL. As permitted by the DGCL, the Company's Certificate
of Incorporation provides that directors of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except: (i) for any breach of the director's duty
of loyalty to the Company or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or violation of law;
(iii) for acts or omissions relating to prohibited dividends or distributions
or the purchase or redemption of stock; or (iv) for any transaction from which
the director derives an improper personal benefit. However, insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable. See "Description of
Securities -- Directors' Limitation of Liability and Indemnification."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby at the assumed initial offering price of $7.00 per share,
after deducting underwriting discounts and commissions and other expenses of
the Offering estimated to be $2,056,000 ($2,274,000 if the Over-Allotment
Option is exercised in full), will be approximately $9,144,000 ($10,606,000 if
the Over-Allotment Option is exercised in full).
The Company intends to use the net proceeds of the Offering as follows:
Approximate Percentage of
Use Amount Net Proceeds
- --- ------------- --------------
Sales and marketing .............. $4,400,000 48.1%
Product development .............. 2,400,000 26.2
Capital expenditures ............. 600,000 6.6
Research and development ......... 200,000 2.2
Working capital .................. 1,544,000 16.9
---------- -----
TOTAL ......................... $9,144,000 100.0%
========== =====
The Company intends to use an estimated $4,400,000 of the net proceeds of
the Offering to expand its sales and marketing efforts. Of this amount,
approximately $3,200,000 is expected to be used to increase brand awareness of
the Company's products through implementation of a comprehensive advertising
and public relations campaign and increased expenditures on trade shows, and
the remaining $1,200,000 is expected to be used for hiring of additional
marketing and technical sales personnel and wages and benefits for current
sales and marketing personnel. The additional marketing and technical
personnel are expected to support the Company's sales and marketing efforts in
industries where the Company's products are currently being marketed
(including apparel, footwear and sporting goods products), as well as its near
term (including home furnishings, shipping and packaging, and healthcare) and
long term (including automotive, aerospace, and computers and electronics)
target industries. The additional amounts allocated to trade show
participation will be used to design and construct trade show displays that
can be adapted for use in each of the industries in which the Company
currently competes. See "Business -- Strategy" and "--Sales and Marketing."
The Company intends to use an estimated $2,400,000 of the net proceeds of
the Offering for product
development for current and potential customers and strategic partners,
including the development of additional and improved end-use products to be
sold by strategic partners utilizing the Company's Thermasorb(R) and
ComforTemp(R) products and the establishment of customer and technical support
service teams. See "Business -- Product Development Services and Support."
The Company intends to use approximately $600,000 of the net proceeds of
the Offering to fund capital expenditures necessary to support the sales and
marketing, research and development, improved quality control and product
development expansion described above, including but not limited to, the
acquisition of certain testing and analysis equipment for use in connection
with the Company's product development, research and development and improved
quality assurance efforts.
To date, the Company has funded its research and development efforts (and
anticipates that it will continue to fund the majority of such efforts) through
funding obtained from government and related private sources. Accordingly, the
Company intends to use an estimated $200,000 of the net proceeds of the
Offering for research and development, including, hiring additional technical
personnel and developing new products and technologies. In the event the
Company is unable to obtain government or private industry funding for research
and development, the Company will be required to pay any future research and
development costs from its own resources which would increase the amount of net
proceeds allocated to research and development efforts thereafter. See
"Business -- Research and Development."
The balance of the net proceeds of approximately $1,544,000 ($3,006,000 if
the Over-Allotment Option is exercised in full), will be employed for working
capital, including hiring other management personnel. The Company may also from
time to time utilize a portion of such proceeds to acquire or enter into
licensing arrangements with respect to complementary businesses, products,
services or technologies.
20
<PAGE>
The table above represents the Company's best estimate of its allocation
of the uses of the net proceeds of the Offering based upon the current state of
its business operations, its current business plan and strategy, and current
economic and industry conditions. The amount and timing of expenditures will
vary depending upon a number of factors, including, among other things, the
progress of the Company's product development and marketing efforts, changing
competitive conditions and general economic conditions. The allocation of the
net proceeds of the Offering is subject to reapportionment among the purposes
listed above. Management has broad discretion as to the actual allocation of
the net proceeds. The actual allocation of the net proceeds cannot be predicted
with any degree of certainty. See "Risk Factors -- Broad Discretion as to Use
of Proceeds."
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds of the Offering in short-term,
interest-bearing, investment-grade debt securities, money market accounts,
certificates of deposit, or direct or guaranteed obligations of the United
States government.
DIVIDEND POLICY
The Company intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent upon, among other things, earnings, capital requirements, financing
agreement covenants, the financial condition of the Company and applicable
law. There is a dividend preference of $1.00 per share on the Convertible
Preferred Stock, if, as and when declared by the Board of Directors. See
"Description of Securities."
21
<PAGE>
DILUTION
As of December 31, 1997, the Company had a pro forma net tangible book
value of approximately $2,836,000, or $0.73 per share of Common Stock
outstanding, after giving effect to the exercise in February 1998 of an option
to purchase 587,500 shares of Convertible Preferred Stock at $4.26 per share
and assuming the conversion of such shares into 587,500 shares of Common Stock.
Net tangible book value equals the tangible net worth of the Company (total
tangible assets less total liabilities) divided by the number of shares of
Common Stock outstanding. After giving effect to the sale by the Company of
1,600,000 shares of Common Stock in this Offering at an assumed initial public
offering price of $7.00 per share, after deducting the estimated underwriting
discounts and Offering expenses (of which $139,000 of related expenses have
been paid prior to December 31, 1997), the pro forma net tangible book value of
the Company as of December 31, 1997 would have been approximately $12,119,000
or $2.22 per share. This represents an immediate increase in pro forma net
tangible book value of $1.49 per share to current stockholders and an immediate
dilution of $4.78 or 68.3% per share to new investors. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share (1) ............ $ 7.00
Pro forma net tangible book value before the Offering ......... $ 0.73
Increase attributable to new investors ........................ 1.49
------
Pro forma net tangible book value after the Offering ........... 2.22
------
Dilution per share to new investors ............................ $ 4.78
======
</TABLE>
- ------------
(1) Represents the assumed initial public offering price per share of Common
Stock, before deducting underwriting discounts and Offering expenses
payable by the Company.
The following table summarizes, immediately prior to the Offering, the
difference between existing stockholders and investors in the Offering with
respect to the number and percentage of shares of Common Stock and Convertible
Preferred Stock purchased from the Company, the amount and percentage of
consideration paid and the average price paid per share of Common Stock and
Convertible Preferred Stock, before the deduction of offering expenses and
underwriting discounts:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent Per Share
------------ --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 3,868,113 71% $ 5,000,500 31% $ 1.29
New investors ................. 1,600,000 29 11,200,000 69 $ 7.00
--------- -- ----------- --
Total ...................... 5,468,113 100% $16,200,500 100%
========= === =========== ===
</TABLE>
The foregoing table reflects the exercise in February 1998 of an option to
purchase 587,500 shares of Convertible Preferred Stock at $4.26 per share and
assumes the conversion of such shares into 587,500 shares of Common Stock. The
table does not include: (i) 250,000 shares of Common Stock reserved for
issuance upon exercise of options which may be granted under the Stock Option
Plan; (ii) up to 240,000 shares of Common Stock issuable upon exercise of the
Over-Allotment Option; or (iii) 160,000 shares of Common Stock issuable upon
exercise of the Underwriter's Option. See "Management -- Stock Option Plan,"
"Certain Transactions," "Description of Securities" and "Underwriting."
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) as
of December 31, 1997; (ii) on a pro forma basis to give effect to the exercise
in February 1998 of an option to purchase 587,500 shares of Convertible
Preferred Stock at $4.26 per share; and (iii) on a pro forma, as adjusted basis
to give further effect to the sale by the Company of 1,600,000 shares of Common
Stock at an assumed public offering price of $7.00 per share, after deducting
underwriting discounts and commissions and estimated Offering expenses. This
table should be read in conjunction with the financial statements, including
the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------
Pro Forma
Actual Pro Forma (1) As Adjusted (2)
--------------- ----------------- ----------------
<S> <C> <C> <C>
Stockholders' equity:
Preferred Stock, 1,000,000 shares authorized; shares issued
and outstanding: none actual; 587,500 pro forma and pro
forma as adjusted ........................................ $ -- $ 2,500,000 $ 2,500,000
Common Stock, $.001 par value, 10,000,000 shares autho-
rized; shares issued and outstanding: 3,280,613 actual and
pro forma; 4,880,613 pro forma, as adjusted (3) .......... 3,000 3,000 5,000
Additional paid-in-capital ................................. 1,541,000 1,541,000 10,683,000
Accumulated deficit ........................................ (1,068,000) (1,068,000) (1,068,000)
------------ ------------ ------------
Total stockholders' equity .................................. 475,000 2,975,000 12,119,000
------------ ------------ ------------
Total capitalization ..................................... $ 475,000 $ 2,975,000 $ 12,119,000
============ ============ ============
</TABLE>
- ------------
(1) Pro forma to give effect to the exercise in February 1998 of an option to
purchase 587,500 shares of Convertible Preferred Stock at $4.26 per share.
See "Summary Financial Data," "Certain Transactions" and "Description of
Securities."
(2) Pro forma, as adjusted to give effect to the sale by the Company of the
1,600,000 shares of Common Stock offered hereby at the assumed initial
offering price of $7.00 per share after deducting underwriting discounts
and commissions and estimated offering expenses.
(3) Does not include: (i) 587,500 shares of Common Stock issuable upon the
conversion of the Convertible Preferred Stock; and (ii) 250,000 shares of
Common Stock reserved for issuance under the Stock Option Plan. See
"Certain Transactions," "Description of Securities" and Note 10 of notes
to financial statements.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to assist the reader in
understanding and assessing the significant changes and trends relating to the
results of operations and financial condition of the Company. This discussion
and analysis should be read in conjunction with the Company's financial
statements and notes thereto included elsewhere in this Prospectus.
Overview
The Company was formed in 1989 to identify, acquire, manage, and
commercialize innovative technologies. Since its inception, the Company's focus
has been on developing thermal management products utilizing a proprietary and
patented MicroPCM technology, the rights to which the Company has licensed
under the TRDC License and the Outlast License. This technology centers around
a thermal additive material that the Company markets under the trade name
Thermasorb(R). To date, this additive material has been applied primarily to a
family of cooling and insulating foams under the trade name ComforTemp(R), as
well as to other materials. The license agreements give the Company the
exclusive worldwide right to develop and commercialize this technology with
respect to certain applications in exchange for royalties that range from one
percent to five percent of product sales revenue and 12.5% to 50% of license
fees and royalty revenues, as defined. The TRDC License also requires the
Company to make minimum annual payments each year if the royalties do not
exceed certain annual minimums that increase from $15,000 to $150,000 over the
first eight years of the TRDC License and remain at $150,000 thereafter. The
Company is expensing these minimum annual payments to cost of sales on a
straight-line basis over the first eight years of the agreement. Under the
Outlast License, the Company is required to make minimum annual payments in
order to maintain the exclusivity of its license. The annual minimum payments
increase incrementally from $150,000 to $600,000 per year from 1998 through
2002 and will be $1,000,000 per year thereafter. See "Business --
Patents/Intellectual Property."
The Company has incurred cumulative losses since inception through
December 31, 1997 of approximately $1,068,000. This is primarily due to the
efforts of the Company to develop a supply infrastructure and to identify and
test applications of its thermal management products with only limited
commercialization prior to 1997. During 1997, the Company began to bring its
products to market, as a result of which, approximately 61.4% of the Company's
revenue during the year ended December 31, 1997 was attributable to product
sales and licensing fees related to its thermal management technology. The
Company is following a strategy of positioning its products as high performance
products that will be sold in specialty retail or industrial markets. This will
be accomplished primarily through strategic partnerships with selected market
leaders within targeted industries.
After the conclusion of this Offering, the Company anticipates that it
will generate revenues from two principal sources: (i) sales of its
Thermasorb(R) and ComforTemp(R) products for use in the products of its
strategic partners; and (ii) royalties from the use of the Thermasorb(R) and
ComforTemp(R) trademarks by its strategic partners based on a percentage of its
strategic partners' sales of products containing the Company's products to end-
users. The Company may also receive license fees and development fees from some
strategic partners for the grant of exclusive rights within a specific product
category and for development services provided by the Company.
Management anticipates that the Company will continue to incur operating
losses until the fourth quarter of 1999, when it expects to begin realizing
greater revenues from the increased introduction of its products into the
marketplace by its strategic partners. The Company plans to use the net
proceeds of the Offering for sales and marketing, product development, capital
expenditures, research and development, and for working capital. See "Use of
Proceeds."
The Company utilizes software and related technologies throughout its
business that will be affected by the date change in the year 2000. System
modifications or replacements are underway or planned which should make all
significant computer systems at the Company compliant with the year 2000
requirement. Anticipated spending for these modifications will be expensed as
incurred and is not expected to have a material impact on the Company's ongoing
results of operations.
24
<PAGE>
Results of Operations
The following table sets forth certain operating data in dollars and
percentage of total revenues for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997
--------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales ............................. $ 14,000 1.2% $ 474,000 37.5%
Research and development projects ......... 1,120,000 92.6 487,000 38.6
Licenses and royalties .................... 75,000 6.2 301,000 23.9
---------- ----- ------------ -----
Total revenues ............................. 1,208,000 100.0 1,262,000 100.0
Cost of sales:
Products .................................. 12,000 1.0 452,000 35.8
Research and development projects ......... 1,004,000 83.1 258,000 20.4
Licenses and royalties .................... 20,000 1.7 265,000 21.0
---------- ----- ------------ -----
Total cost of sales ........................ 1,036,000 85.8 976,000 77.3
---------- ----- ------------ -----
Gross profit ............................... 173,000 14.3 286,000 22.7
Selling and marketing expense .............. 83,000 6.9 315,000 25.0
General and administrative expense ......... 207,000 17.1 900,000 71.3
---------- ----- ------------ -----
Loss from operations ....................... (118,000) ( 9.8) (929,000) (73.6)
Interest expense ........................... 19,000 1.6 37,000 2.9
---------- ----- ------------ -----
Loss before income taxes ................... (136,000) (11.3) (965,000) (76.5)
Income tax (benefit) provision ............. (49,000) ( 4.1) 45,000 3.6
---------- ----- ------------ -----
Net loss ................................... $ (88,000) ( 7.3)% $ (1,010,000) (80.0)%
========== ===== ============ =====
</TABLE>
Years ended December 31, 1997 and 1996
Revenues. The Company generates revenue from three primary sources: (i)
sales of its Thermasorb(R) and ComforTemp(R) products for use in its strategic
partners' products; (ii) revenue from research and development contracts
related to the United States Government; and (iii) license fees and royalties
from the use of Thermasorb(R) and ComforTemp(R) trademarks by strategic
partners in end-user products, as well as other fees earned in connection with
its agreements with strategic partners. Total revenues for the year ended
December 31, 1997 increased by $54,000 to $1,262,000 from $1,208,000 for the
year ended December 31, 1996.
Product sales. Product sales for the year ended December 31, 1997 increased
by $460,000 to $474,000 from $14,000 for the year ended December 31, 1996.
The increase was primarily the result of the Company bringing its
ComforTemp(R) foams to market in 1997.
Research and development projects. Revenues from research and development
projects for the year ended December 31, 1997 decreased by $633,000 to
$487,000 from $1,120,000 for the year ended December 31, 1996. This
decrease resulted primarily from completion of several long-term contracts
during the year ended December 31, 1997 and the shift in the Company's
focus from obtaining and performing funded research and development
contracts to commercialization of its products.
Licenses and royalties. Revenues from license fees and royalties for the
year ended December 31, 1997 increased by $226,000 to $301,000 from $75,000
for the year ended December 31, 1996. This increase resulted primarily from
the Company's entry into three additional strategic partnership agreements
during 1997. These arrangements provided for payments to the Company of
certain license fees, at signing, in consideration for exclusive use of the
Company's technology in particular product categories. In addition, the
Company received $155,000 in royalties based upon sales of end-use products
by its strategic partners.
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Cost of sales. Total cost of sales for the year ended December 31, 1997
decreased by $60,000 to $976,000 from $1,036,000 for the year ended December
31, 1996. The Company's cost of sales consists of: (i) direct and indirect
costs incurred in connection with product sales; (ii) direct and indirect costs
incurred in connection with revenue from research and development contracts
relating to the United States government programs; and (iii) royalty payments
required to be made to TRDC in accordance with the TRDC License.
Cost of sales -- Products. Cost of sales related to products for the year
ended December 31, 1997 increased by $440,000 to $452,000 from $12,000 for
the year ended December 31, 1996. This increase reflected the
commercialization of the Company's products during the last three months of
1996 and the year ended December 31, 1997.
Cost of sales -- Research and development projects. Cost of sales related
to research and development projects for the year ended December 31, 1997
decreased by $746,000 to $258,000 from $1,004,000 for the year ended
December 31, 1996, primarily due to a decrease in projects during the year
ended December 31, 1997. This decrease reflected a shift of personnel to
work on the Company's product development effort, the cost of which is
classified as general and administrative expenses. This shift reflected the
Company's general strategy of shifting its focus to commercialization of
its products and away from funded research and development. The related
gross profit of such projects increased to 47.0% for the year ended
December 31, 1997 from 10.4% for the year ended December 31, 1996.
Approximately 65% of this increase was attributable to the Company's
overall development contract mix consisting of more cost plus fixed-fee
contracts during 1996 as opposed to more fixed priced contracts during 1997
which fixed price contracts proved to be more profitable. The balance of
this increase was attributable to losses incurred during 1996 relating to
cost sharing contracts which the Company performed during 1996.
Cost of sales -- Licenses and royalties. Cost of sales related to license
fees and royalties for the year ended December 31, 1997 increased by
$245,000 to $265,000 from $20,000 for the year ended December 31, 1996.
Approximately 59% of this increase was the result of the increase in
license fees and royalties which required increased licensing payments to
be made by the Company in accordance with the terms of the TRDC License.
The balance of the increase was due to a $100,000 charge related to prior
periods incurred upon the execution of the Outlast Agreement.
Selling and marketing expense. Selling and marketing expenses for the year
ended December 31, 1997 increased by $232,000 to $315,000 from $83,000 for the
year ended December 31, 1996. This increase was primarily the result of the
Company increasing its marketing activity with respect to its thermal
management technology as its products were ready for market and the pursuit of
additional exclusive and non-exclusive licenses with potential strategic
partners.
General and administrative expense. General and administrative expenses
for the year ended December 31, 1997 increased by $693,000 to $900,000 from
$207,000 for the year ended December 31, 1996. This increase was primarily due
to the shift in personnel and related costs from funded research and
development to product development, which are classified as general and
administrative expenses. This shift reflected the Company's general strategy of
shifting its focus to commercialization of its products and away from funded
research and development. The product development expenses consisted primarily
of personnel and related costs in connection with the adaptation of the
Company's existing thermal management technologies for use by the Company's
strategic partners which personnel and related costs are characterized as
general and administrative expenses.
Interest expense. Interest expense for the year ended December 31, 1997
increased by $18,000 to $37,000 from $19,000 for the year ended December 31,
1996. The increase was primarily the result of increased average borrowings
outstanding under the Company's line of credit.
Income tax provision (benefit). The Company recorded an income tax
provision for the year ended December 31, 1997 of $45,000 compared to an income
tax benefit of $49,000 for the year ended December 31, 1996. The loss before
income taxes for the year ended December 31, 1997 was $965,000 compared to
$136,000 for the year ended December 31, 1996. The income tax provision for the
year ended December 31, 1997 arose from providing a valuation allowance against
all deferred tax assets due to uncertainties relating to expected future
taxable income that would have to be generated to realize such assets. The
income tax benefit for the year ended December 31, 1996 resulted primarily from
recognition of a net operating loss carryback and a deferred tax asset.
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Net loss. As a result of the foregoing, the net loss for the year ended
December 31, 1997 increased to $1,010,000 from $88,000 for the year ended
December 31, 1996.
Liquidity and Capital Resources
From its inception through December 31, 1997, the Company incurred
cumulative losses of approximately $1,068,000. The Company has financed its
operations to date through research and development contracts relating to
United States government programs, loans from an affiliated company and bank
borrowings. During 1997, the Company received non-interest bearing advances
from Frisby Aerospace, certain stockholders of which are also stockholders of
the Company, aggregating $517,000. Frisby Aerospace provided the Company with
certain facilities at terms that the Company believes to be substantially
equivalent to those available from unaffiliated third parties. These facility
charges, which are non-interest bearing, are based upon estimates of square
footage and include charges for actual expenses incurred by Frisby Aerospace on
behalf of the Company. Management believes that such allocations are
reasonable. Frisby Aerospace has charged the Company approximately $51,000, and
$57,000 for such facilities and related services during the years ended
December 31, 1996 and 1997, respectively. In addition, Frisby Aerospace
provided the Company with certain facilities, accounting, clerical and office
services without charge, the value of which services are not considered
material and accordingly, have not been recorded in the accompanying financial
statements. The Company has also funded its operations through bank borrowings
in the amount of $500,000. Both the bank debt and the advances due to Frisby
Aerospace were subsequently repaid with a portion of the proceeds of the
Private Placement. See "Risk Factors -- Accumulated Losses; Possible Need for
Additional Financing," "-- Reduction in Government Funded Development; No
Assurance of Continued Government Contracts" and "Certain Transactions."
At December 31, 1997, the Company had working capital of $416,000,
including accounts receivable-billed of $358,000 and inventory of $248,000,
offset by accounts payable of $353,000 and license fees payable of $185,000.
The Company's liquidity during the year ended December 31, 1997 was
significantly impacted by its increasing development of its thermal management
products and increasing related sales and marketing efforts. In addition, the
increases in inventory and accounts receivable arising from product sales have
increased the Company's working capital needs. Net cash used in operating
activities for the years ended December 31, 1996 and 1997 was $70,000 and
$832,000, respectively. The principal factor contributing to the cash used in
operating activities for each of the years ended December 31, 1996 and 1997 was
the net loss for each of the respective periods.
Management anticipates that the Company will continue to incur losses
until the fourth quarter of 1999, when it expects to begin realizing greater
revenues from increased introduction of its products into the marketplace by
its strategic partners.
The Company has a $500,000 line of credit with a bank. The line of credit
bears interest at 0.5% above the bank's prime rate and will expire on June 30,
1998. The amount outstanding under the line of credit was repaid in full in
December 1997 with a portion of the proceeds from the Private Placement and,
accordingly, the full amount is currently available.
The Company has incurred cumulative losses since its inception, and
therefore, has not been subject to significant federal income taxes. Through
December 31, 1997, the Company has generated net operating loss carryforwards
of approximately $848,000 which may be available to reduce future available
taxable income and future tax liabilities. These carryforwards expire
principally in the year 2012. The Tax Reform Act of 1986 provides for an annual
limitation on the use of net operating loss carryforwards (following certain
ownership changes) that could significantly limit the Company's ability to
utilize these carryforwards. Upon the completion of the Offering, the exercise
of the Over-Allotment Option, or the subsequent exercise of options or warrants
in connection with other future sales of equity, the Company's ability to
utilize the aforementioned carryforwards may be limited. Additionally, because
the United States tax laws limit the time during which these carryforwards may
be applied against future taxes, the Company may not be able to take full
advantage of these attributes for federal tax purposes.
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On December 29, 1997 the Company consummated the Private Placement
pursuant to which it sold 441,327 shares of its Common Stock and an option to
purchase 587,500 shares of Convertible Preferred Stock to an unaffiliated
foreign investor for an aggregate purchase price of $2,500,000 and net proceeds
of approximately $1,600,000, after the payment of related issuance costs. The
Option was exercised at an exercise price of $4.26 per share on February 27,
1998, resulting in proceeds to the Company of $2,500,000. See "Certain
Transactions" and "Description of Securities."
Of the $9,144,000 of estimated proceeds of the Offering, the Company
intends to use approximately $4,400,000 for sales and marketing, $2,400,000 for
product development of current and potential licensees, $600,000 for capital
expenditures, $200,000 for research and development, and $1,544,000 for working
capital. See "Use of Proceeds."
Based on the Company's current operating plan, the Company believes that
the net proceeds of the Offering, together with its existing resources and
revenues from continuing operations, will be sufficient to satisfy its capital
requirements for at least 24 months following the consummation of the Offering.
Such belief is based upon certain assumptions, and there can be no assurance
that such assumptions are correct. In the event that the Company's plans
change, or the proceeds of the Offering are insufficient to fund operations due
to unanticipated delays, problems, expenses or otherwise, the Company would be
required to seek additional financing sooner than anticipated. Further,
depending on the Company's progress in marketing its product line, gaining
acceptance of its thermal management technology and its other products and
services among the business community, the Company may determine that it is
advisable to raise additional capital sooner than was anticipated.
Inflation
The impact of general inflation on the Company's business has been
insignificant to date and the Company believes that it will continue to be
insignificant for the foreseeable future.
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BUSINESS
General
The Company is engaged in the development and commercialization of
innovative advanced thermal management products for use in a broad range of
consumer and industrial products such as gloves, boots, athletic footwear,
apparel, protective and temperature retardant equipment, electronics cooling
systems, packaging materials, and coating substances. The Company's
Thermasorb(R) and ComforTemp(R) products utilize licensed patents and the
Company's proprietary MicroPCM technology to enhance thermal characteristics
(i.e., insulation, cooling or temperature control properties) of these as well
as a variety of other consumer and industrial products. For example, when
Thermasorb(R) additives and ComforTemp(R) foams are incorporated into ski
gloves, the skier's hands would remain within a constant, pre-set temperature
range without the typical accumulation of moisture. Also, if a firefighter were
to wear flame retardant clothing incorporating ComforTemp(R) foam, the
firefighter would remain cooler and be able to fight fires longer and more
safely than a firefighter wearing flame retardant clothing without
ComforTemp(R) foam.
The Company's marketing strategy is based on penetrating large select
markets for its thermal management technology through relationships with
strategic partners. The Company works closely with its strategic partners
within each market to develop commercially viable product applications. To
date, the Company has entered into such strategic partnerships with, among
others, Wells Lamont Division of Marmon Holdings, Inc., LaCrosse Footwear, Inc.
and Bell Sports Corp.
Thermal management is the process by which the temperature of various
materials can be controlled or manipulated. The thermal management materials
industry consists primarily of a wide variety of non-phase change materials
such as Thinsulate(R) brand insulation for use in apparel, flexible and rigid
polyurethane foams for use in footwear, sporting goods, automotive and
transportation industries, specialized chemical additives for use in
temperature resistant paints and coatings, and liquid coolants for use in
aerospace, automotive and computer/electronics cooling systems. Phase change
thermal management materials are comprised of materials that have the ability
to absorb and reject large amounts of heat by changing from solid to liquid and
back, thereby greatly enhancing the ability to heat or cool a particular
object.
The Company's products offer impressive and cost-effective thermal
management solutions for a broad range of industries. The Company's current
MicroPCM based products consist of a series of thermal additives and a series
of foams in which the thermal additives are embedded. The Company currently
markets its thermal additives and foams under the trademarks Thermasorb(R) and
ComforTemp(R), respectively.
The Company's thermal management technology utilized in Thermasorb(R)
additives and ComforTemp(R) foams provides the following unique
characteristics:
o Intelligent thermal management -- provides pre-selected temperature
control;
o Versatile -- may be incorporated into a wide variety of end-use
products;
o Lightweight -- lighter and less bulky than conventional insulating
materials;
o Durable -- typically outlasts product to which it is applied;
o Rechargeable -- continuous automatic thermal management;
o Customizable -- may be engineered to meet the requirements of
applications across a wide temperature range;
o Maintenance free -- no maintenance or power source required; and
o Complementary -- may be used to enhance other insulating products.
After the conclusion of this Offering, the Company anticipates that it
will generate revenues from two principal sources: (i) sales of its
Thermasorb(R) and ComforTemp(R) products for use in the products of its
strategic
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partners; and (ii) royalties from the use of the Thermasorb(R) and
ComforTemp(R) trademarks by its strategic partners based on a percentage of its
strategic partners' sales to end-users of products containing the Company's
products. The Company also may receive license fees and development fees from
some strategic partners for the grant of exclusive rights within a specific
product category and for development services provided by the Company.
To date, the Company's products have been incorporated into and are
currently being sold to consumers of products such as HotFingers(TM) ski gloves
by Wells Lamont, ski and snowboard helmets by Bell Sports Corp., hiking boots
and snowboots by Cove Shoe Company and Genfoot, Inc. and fishing waders by Fly
Technologies, Inc. In addition, the Company's products are currently being
incorporated into products such as snowboots by LaCrosse Footwear, Inc. and
personal hydration systems by FasTrak Systems, Inc., which are expected to
first be made available for sale to consumers in 1998.
Industry Overview
Thermal management is the process by which the temperature of various
materials is controlled or manipulated. The thermal management materials
industry consists primarily of a wide variety of non-phase change materials
such as Thinsulate(R) brand insulation for use in apparel; flexible and rigid
polyurethane foams for use in footwear, sporting goods, automotive and
transportation industries; specialized chemical additives for use in
temperature resistant paints and coatings; and liquid coolants for use in
aerospace, automotive and computer/electronics cooling systems. Phase change
thermal management materials are comprised of materials that have the ability
to absorb and reject large amounts of heat by changing from solid to liquid and
back, thereby greatly enhancing the ability to heat or cool a particular
object.
The Company believes that its products are the first to combine the two
distinct technologies of thermal management and microencapsulation to effect
meaningful thermal performance improvements within applications across broad
markets. Microencapsulation is the enclosing of materials inside a microscopic
shell to maintain the integrity of the enclosed material. The combination of
PCM technology with microencapsulation technology overcomes many of the
inherent shortcomings of non-encapsulated PCMs, such as the tendency of non-
encapsulated PCMs to lose their integrity, and to dissipate, evaporate or
exhaust themselves over time. Microencapsulation permits PCMs to be imbedded
into a variety of host materials, while maintaining the integrity and thermal
functionality of the core PCMs. Microencapsulation is a proven technology and
has been used extensively in the pharmaceutical industry (time release
medication) and the paper industry (carbon-less copy paper). Since its advent,
microencapsulation has been increasingly utilized across diverse applications.
Management believes that the technology will continue to gain further
penetration and usage in different fields, including thermal management.
Strategy
Through mid-1996, the Company focused its efforts on acquiring,
identifying and testing potential applications for its innovative thermal
management products and developing its supply chain infrastructure. Having now
obtained licenses to its technology and identified select applications in which
to initially market its thermal management products and having completed
testing and development of products with manufacturers in several fields, the
Company's primary objective is to increase acceptance and usage of its thermal
management products in select high performance applications within high-volume
targeted industries through strategic partnerships with leaders in such
industries while continuously introducing new products in response to the
demands of the marketplace.
Most of the Company's marketing and brand promotion efforts are
coordinated through its strategic partners. The Company's agreements with its
strategic partners typically obligate the strategic partner to display and
promote the Company's trademarks, including, Thermasorb(R) and ComforTemp(R) in
all promotional materials, point of sale displays, and direct product
advertising with respect to products incorporating the Company's products. The
Company refers to these efforts as "co-branding."
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The Company's products are currently being marketed commercially in
apparel, footwear and sporting goods products. Three additional fields in which
it believes applications of its products are most likely to become commercially
feasible in the near term are home furnishings, shipping and packaging and
healthcare. In the future, the Company's plans include developing products and
establishing strategic partnerships in the automotive, aerospace and computers
and electronics industries.
The Company is following a deliberate strategy of positioning its products
as high performance products that will be sold in specialty retail or
industrial markets. In the near term the Company intends to focus its attention
on building high-quality, well-recognized brand names for its ComforTemp(R)
foams and Thermasorb(R) additives within niche markets such as the athletic
footwear and outdoor apparel market.
The Company evaluates prospective products by utilizing a four part
criteria. The Company's strategy is to pursue prospective product applications
which it determines can: (i) offer significant growth potential within large,
established and/or growing markets; (ii) generate attractive margins and
enhanced brand recognition while having low capital requirements; (iii) meet a
significant unmet market need; and (iv) provide a strong proprietary
opportunity for industry leaders entering into strategic partnerships with the
Company. Once a specific market or product is identified, the Company seeks to
introduce that product by: (i) targeting a market leader in that specific
industry; (ii) establishing a strategic relationship with that market leader;
(iii) working closely with its strategic partners to develop the optimal
characteristics and marketing efforts for each product incorporating the
Company's products; and (iv) coordinating with its strategic partners to
maximize market penetration including penetration of the mass market.
Products
The Company's product portfolio currently consists of its Thermasorb(R)
additives and ComforTemp(R) foams. These products offer advanced thermal
management solutions for a broad range of industries. In addition, these
products address the expanding need for improved thermal management
capabilities in a wide variety of commercial products. In response to the
requirements of its strategic partners, the Company will work to develop
applications of its products in other base materials such as epoxy resins,
paints and composite materials.
Thermasorb(R) additives are a series of thermal management additives
developed using the latest advances in microencapsulation technology.
Thermasorb(R) MicroPCMs are micron-sized particles in the form of a dry
free-flowing powder, consisting of a heat absorbing core material encapsulated
within a proprietary, durable shell wall. Thermasorb(R) additives can improve
the thermal storage capacity of a variety of host materials, including liquid,
foam, epoxy and composite materials. Thermasorb(R) additives are currently
commercially available in a variety of transition temperature settings ranging
from 43oF to 190oF. The variety of the Company's Thermasorb(R) additives allows
for an engineered solution for a multitude of thermal requirements.
ComforTemp(R) foams are a series of foam products containing embedded
Thermasorb(R) additives. ComforTemp(R) foams can be fabricated in different
ways to have the ability to retain or exclude heat thereby maintaining a more
constant temperature. Thermasorb(R) and ComforTemp(R) products have impressive
and cost-effective thermal management properties. For example, Thermasorb(R)
additives incorporated into solid materials enable those materials to absorb up
to ten times more heat than traditional insulating materials. In tests
performed for the United States Air Force by TRDC, liquid coolants containing
Thermasorb(R) additives have been shown to remove up to 40 times more heat than
traditional coolants. ComforTemp(R) foams are currently available in a light,
breathable polyurethane which has the added capability of wicking away moisture
while maintaining comfort in extreme hot or cold climates. For cold weather
apparel products, the greatest asset of ComforTemp(R) foam is its ability to
retain body heat during periods of activity and to release the heat back to the
individual during periods of inactivity, when the body is most in need of
warmth. ComforTemp(R) foams can be "recharged" repeatedly, as it recharges
depending on the individual level of physical activity or other external
conditions. For hot weather products, ComforTemp(R) foams can be used as a thin
thermal barrier or heat shield to provide protection against extreme heat as
well as to facilitate the regulation of body heat generated during activity
thereby providing a cooling effect. ComforTemp(R) foams can also be used as a
therapeutic or "climate controlled" wrap for comfort or medical purposes.
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The Company's thermal management technology utilized in Thermasorb(R)
additives and ComforTemp(R) foams provides the following unique
characteristics:
o Intelligent thermal management -- provides pre-selected temperature
control;
o Versatile -- may be incorporated into a wide variety of end-use
products;
o Lightweight -- lighter and less bulky than conventional insulating
materials;
o Durable -- typically outlasts product to which it is applied;
o Rechargeable -- continuous automatic thermal management;
o Customizable -- may be engineered to meet the requirements of
applications across a wide temperature range;
o Maintenance free -- no maintenance or power source required; and
o Complementary -- may be used to enhance other insulating products.
Product Development Services and Support
The Company offers its strategic partners a broad range of applied
engineering and application support services. The Company's application and
thermal engineers specialize in the design, use and application of PCMs and
MicroPCMs. The Company works with all of its strategic partners to tailor
applications of its product solutions to the strategic partner's specific
thermal management needs. These services include:
Prototype Fabrication: Development of prototypes providing MicroPCM
thermal management solutions for custom designed products and systems.
Thermal Analysis: Analysis and testing of the thermal management
characteristics of existing and prototype products and systems.
Program Management: From initial concept to final product, the Company's
engineers work towards providing a complete thermal management product or
system.
Technology Assessment and Product Development: Performance of market
research and product assessments as well as reviews of competing products
and technologies.
End-Use Product and Systems Design: Design of thermal management
solutions for temperature control systems and specific components to
ensure optimal thermal management.
These design, application and support services enable the Company to work
closely with its strategic partners and potential strategic partners early in
the product development and design process in an effort to reduce the time from
product conception to market.
Initial Target Markets
Apparel Market -- The Company's ComforTemp(R) foams and Thermasorb(R) additives
can enhance the thermal characteristics of a multitude of end-products in the
apparel industry. People working in extreme hot or cold conditions or who are
required to wear protective garments, including firefighters, utility workers,
construction workers, police officers or individuals who spend significant
amounts of time outdoors, will benefit from apparel manufacturers' use of
Thermasorb(R) additives and ComforTemp(R) foams in their products. Such
products may alleviate the discomfort, fatigue and impaired coordination caused
by heat stress or prolonged exposure to heat or cold. During 1997, one of the
Company's strategic partners, Wells Lamont, a large U.S. glove manufacturer,
launched the worldwide roll-out of gloves incorporating ComforTemp(R) foam in
its line of HotFingers(TM) ski gloves.
Footwear Markets -- ComforTemp(R) foam is well suited for use as an insulating
or temperature management material in boots and shoes. During 1997, the
Company's strategic partners, Cove Shoe Company and Genfoot, Inc., launched the
worldwide roll-out of cold weather footwear including hunting boots and rubber
bottom boots. The Company, in January 1998, signed a binding Memorandum of
Understanding with LaCrosse Footwear, Inc., America's largest manufacturer of
rubber bottom boots, pursuant to which LaCrosse Footwear, Inc. is to introduce
three styles of snow boots containing the Company's ComforTemp(R) insulation
for sale during 1998.
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Sporting Goods Equipment -- The Company believes that many athletic goods could
be improved if the Company's products were incorporated into products for
climbing/mountaineering, cycling, hiking/backpacking, racquet sports,
canoeing/kayaking, running, cross training, sailing, skiing, snowboarding,
fishing, hunting, walking and racing. During 1997, the Company's strategic
partners, Fly Technologies, Inc. and Bell Sports Corp., launched the worldwide
roll-out of products incorporating ComforTemp(R) foam in fishing and hunting
waders, and ski and snowboarding helmets, respectively. FasTrak Systems, Inc.
is currently developing a thermally managed personal hydration system under the
CamelBak(TM) line for introduction in 1998.
Home Furnishings -- The Company has identified applications for incorporating
its ComforTemp(R) foams into home furnishings and home products including
mattresses, mattress covers, comforters and pillows. The Company is working
with a leading home furnishings manufacturer to develop a line of home
furnishing products incorporating its ComforTemp(R) foam.
Shipping and Packaging -- Thermasorb(R) and ComforTemp(R) products have
applications in the packaging and shipping industries. The Company is currently
working with a strategic partner to develop enhanced insulating packages
designed to keep foods hot or frozen longer without the need for portable
heaters, refrigeration systems or dry ice. Currently under development is a
soft-sided delivery bag that will be used for fast food and home delivery
applications. These thermally-enhanced bags will ensure that products remain
hot until orders are received by customers. The bags are designed to keep food
at cooking temperatures for up to 90 minutes. The Company sees significant
market potential for this type of product due to the number of people ordering
prepared food for home delivery.
Other potential shipping and packaging applications for the Company's
products include pharmaceutical packaging, flower/seed transport, produce
transport, organ transplant containers, blood/plasma containers, retrofitting
of insulated truck bodies, thermal blankets, speedwalls and electronic
component packaging.
Healthcare Industry -- The Company's Thermasorb(R) and ComforTemp(R) products
may be incorporated into many products useful in the healthcare industry,
including hot and cold packs. Cold packs containing the Company's Thermasorb(R)
additives are being developed to maintain temperatures as low as -30oF, while
hot packs containing the Company's Thermasorb(R) additives are being developed
to maintain temperatures as high as 190oF and can be heated using a microwave
oven. Other healthcare applications include wraps, braces and blankets.
Automotive Industry -- The Company has identified many applications for
incorporating its Thermasorb(R) additives into automotive components, including
seating systems, heat shields, interior and exterior trim, foams and foam
laminates, engine cooling systems, thermal grease, epoxies, lubricants and
oils, and adhesives. The Company's strategy is to work with end-product
manufacturers to identify, test, and provide product solutions to existing and
future thermal management problems. The Company is currently working with
automotive industry participants on the development of prototypes for interior
trim, heat shields, slurry engine coolants, battery insulation and oil coolers,
as well as for cooling the next generation of electric and hybrid motor
vehicles.
Aerospace Industry -- The Company continues to be involved with government
sponsored research and development efforts on avionics, computer and
electronics cooling systems. In this regard, the Company has developed or is
currently in the process of developing prototypes utilizing its proprietary
thermal management products in conjunction with heat sinks, slurry coolants,
thermal capacitors and power supplies. In addition, the Company has identified
applications of its products which can be used in the manufacture of insulating
coatings and paints, which have historically been targeted and tested for the
commercial aircraft industry because it can provide a decrease in the overall
weight of commercial aircraft through more efficient insulation systems.
Aircraft skin protected with a coating impregnated with Thermasorb(R) additives
permit manufacturers to use lighter and less expensive composite materials to
replace premium-priced exotic metals that are capable of withstanding high
temperatures. This not only reduces the weight of the aircraft, but greatly
reduces maintenance costs and has the added benefit of protecting underlying
materials from thermal shock.
Electronics/Computer Industry -- As computers, electronic systems and
components become smaller and more powerful, the amount of heat generated
increases as does the need for thermal management solutions. Excessive heat
degrades system performance and reliability and can cause system failure. The
Company has recognized and is addressing these thermal management opportunities
by developing products that use Thermasorb(R) based solutions to safeguard
electronic components from system failure by utilizing the ability of
Thermasorb(R) additives to absorb large amounts of heat.
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Sales and Marketing
Currently the Company's sales strategy consists of working with its
strategic partners to increase the number of end-use products incorporating
Thermasorb(R) and ComforTemp(R) offered for sale. The Company leverages the
existing sales, marketing and distribution systems of its strategic partners to
maximize exposure of its products to retailers around the world. This strategy
permits the Company to support a large volume of end-use sales through a small
in-house sales staff servicing a small number of strategic partners. The
combined sales forces of the Company's strategic partners comprise an extensive
network of salespersons and sales representatives.
The Company's sales process with respect to prospective strategic partner
is as follows:
o A market leader for a particular niche is identified by the Company's
marketing group.
o A relationship is established with a technical point of contact within
the target company to achieve "buy in" of the Company's product concept by
the technology experts within the prospective strategic partner.
o The Company and the prospect enter into a reciprocal secrecy agreement
ensuring mutual confidentiality and prohibiting "reverse engineering" of
the Company's products and requiring the prospect to enter into a license
with the Company should it ever decide to place the MicroPCM technology
into production.
o The Company's product development personnel (application engineers)
evaluate the prospective strategic partners' needs and recommend a course
of action.
o Upon receipt of an indication of further interest from the prospective
strategic partner, the parties may elect to enter into a Joint Development
and Option to License Agreement (a "JD/Option to License Agreement") if
further development is needed to determine if the Company's products meet
the requirements of the prospective strategic partner. This permits the
prospective strategic partner to evaluate the technology more closely
while (for a fee) reserving the rights to obtain a license once
development is completed.
o The Company and the strategic partner negotiate and enter into a
Memorandum of Understanding with a view to the finalization of a License
Agreement.
o The Company and the strategic partner enter into a License Agreement.
A significant portion of the Company's marketing and brand promotion
efforts are coordinated through its strategic partners. The Company's
agreements with its strategic partners typically obligate the strategic partner
to display and promote the Company's trademarks, including, Thermasorb(R) and
ComforTemp(R) in all promotional materials, point of sale displays, and direct
product advertising for end-use products incorporating the Company's products.
The Company plans to coordinate the promotion of its Thermasorb(R) additives
and ComforTemp(R) foams with the promotional efforts of its strategic partners
and to implement a scaled-up public relations campaign in order to accelerate
the inclusion of feature stories and references to ComforTemp(R) foams and its
strategic partners in targeted industry and consumer periodicals. The Company
believes that this co-branding strategy will help to minimize its advertising
and marketing costs, thereby allowing the Company to allocate a greater portion
of its financial resources to the identification of new strategic partners and
the development of new product applications in conjunction with its new and
existing strategic partners.
In addition to its own marketing efforts and the efforts of its strategic
partners, the Company entered into a non-binding agreement in December 1997
with Foamex granting to Foamex a co-exclusive license with the Company to sell
ComforTemp(R) polyurethane foams and an exclusive license to manufacture
ComforTemp(R) polyurethane foams (other than certain ComforTemp(R)
formulations, currently supplied to the Company by another supplier). The
agreement contemplates a definitive agreement having a term of five years with
an option for a two year renewal and a worldwide license to sell and to
sublicense the right to develop and sell ComforTemp(R) based products to
selected end-product manufacturers with which Foamex has existing
relationships, subject to the Company's prior written consent. In addition, the
Company intends to provide Foamex with a license to manufacture certain
ComforTemp(R) foams within the Americas. The license would provide the Company
with up-front license fees, technical support payments, minimum purchase
requirements, payment of a percentage of sublicensing revenues to the Company
and co-branding obligations in return for continued exclusive
34
<PAGE>
rights and reciprocal agreements to be the sole source of supply for MicroPCMs
and polyurethane foams (other than certain ComforTemp(R) formulations), as the
case may be. The Company believes that its relationship with Foamex provides
several substantial benefits: (i) an additional, high capacity, source of
supply for polyurethane foams; and (ii) access to as yet untapped areas for new
strategic partnerships. For the fiscal year ended December 31, 1996, Foamex had
total revenues of approximately $926,000,000.
Strategic Partnerships
The Company seeks to enter into agreements with strategic partners that
have very strong brand names, excellent reputations for quality and performance
and extensive and established sales and distribution networks. A typical
agreement with a strategic partner: (i) identifies a narrowly defined end-use
product area in which to develop and commercialize products; (ii) requires the
strategic partner to purchase all of its requirements for ComforTemp(R) and
Thermasorb(R) MicroPCM additives and foams from the Company; (iii) establishes
minimum annual purchases of such additives and foams; and (iv) in exchange for
a royalty, grants to the strategic partner a license, which may or may not be
exclusive, to use the Company's name and trademarks in conjunction with the
products produced.
The Company earns revenues from the sale of its Thermasorb(R) additives
and ComforTemp(R) foams for inclusion in the products of its strategic partners
(including annual minimum purchases to maintain exclusivity), earned royalties,
license fees for exclusive agreements and development fees for development
services. In order to maintain exclusive rights within their respective fields
of use, several of the Company's strategic partners are required to make
minimum purchases of the Company's products. If those already contracted for
minimum purchase requirements are satisfied, the Company will receive
approximately $800,000 from the required minimum product sales and related
royalties during fiscal 1998.
Generally, the Company's strategic partners are required to co-brand the
Company's products by including the Company's trademarks in all their marketing
materials, point of sale displays, and sales promotion efforts for end-use
products incorporating the Company's products. Exclusivity, when granted, is
established within narrowly-defined end-use products intended to maximize the
Company's ability to selectively enter into additional agreements with market
leaders in many different product categories and to focus the strategic partner
on its field of specialization.
The table below lists the Company's current strategic partners and the
product category which is the subject of its current arrangements with such
partners.
<TABLE>
<CAPTION>
Strategic Partner Product
- ----------------- -------
<S> <C>
Wells Lamont Division of Marmon Holdings, Inc. All Hand Apparel and Selected Accessories
Bell Sports Corp. (*) Winter Sports Helmets (Ski/Snowboard)
Cove Shoe Company, Inc. (H.H. Brown) Outdoor Goodyear Welt Construction Boots
Genfoot, Inc. Cold Weather Insulated Rubber Bottom Boots
Fly Technologies, Inc. Fishing and Hunting Waders
LaCrosse Footwear, Inc. (*) Cold Weather Insulated Rubber Bottom Boots
CamelBak/FasTrak Systems, Inc. (*) Personal Hydration Systems
Thermo Solutions, Inc. (*) Temperature Sensitive Food Storage/Transport Containers
</TABLE>
- ------------
*A signed Memorandum of Understanding is in effect.
Wells Lamont Division of Marmon Holdings, Inc. -- All Hand Apparel. The Company
entered into an agreement in January 1997 with Wells Lamont Division of Marmon
Holdings, Inc. ("Wells Lamont"), granting Wells Lamont exclusive rights to use
the Company's products and trademarks with respect to all hand apparel (e.g.,
gloves and mittens) and selected other products (e.g., ear warmers and
industrial gloves) for a period of three years. Pursuant to the agreement,
Wells Lamont is required to purchase all of its requirements (including certain
minimum purchases to maintain its exclusive rights) for Thermasorb(R) additives
and ComforTemp(R) foams from the Company and is required to pay to the Company
an up front fee with respect to its exclusive rights and a royalty based on
sales. The agreement permits Wells Lamont to enter into sub-license agreements
and requires Wells
35
<PAGE>
Lamont to pay the Company a specified percentage of any royalties received
under any such sub-license agreements for the production or sale of the
licensed products. Wells Lamont is a large U.S. glove manufacturer with a
significant market share for gardening gloves and work gloves. Wells Lamont is
also a significant supplier of ski gloves with its HotFingers(TM) brand. Wells
Lamont has been in continuous operation for 90 years and also manufactures ear
warmers, hats, socks, and industrial gloves.
Bell Sports Corp. -- Winter Sports Helmets. The Company has entered into an MOU
in April 1997 with Bell Sports Corp. ("Bell") granting Bell exclusive rights to
use the Company's products and trademarks with respect to winter sports helmets
(skiing and snowboarding) for a period of two years. The Company and Bell are
proceeding to finalize a license agreement. Pursuant to the MOU, Bell is
required to purchase all of its requirements for Thermasorb(R) additives and
ComforTemp(R) foams from the Company and to pay a royalty to the Company based
on sales. The MOU also requires Bell to co-brand products that incorporate the
Company's products, thereby enhancing the name recognition for the Company's
trademarks. For the fiscal year ended June 30, 1997, Bell had total revenues of
approximately $260,000,000.
Cove Shoe Company, Inc. -- Outdoor Boots with Goodyear Welt Construction. The
Company entered into an agreement in February 1997 with Cove Shoe Company, Inc.
("Cove Shoe") granting Cove Shoe exclusive rights to use the Company's products
and trademarks with respect to the manufacture and distribution of outdoor
boots with Goodyear welt construction within certain specific style categories
(e.g., military, outdoor and others) for a period of three years. Pursuant to
the agreement, Cove Shoe is required to purchase all of its requirements
(including certain minimum purchases to maintain its exclusive rights) for
Thermasorb(R) additives and ComforTemp(R) foams from the Company and is
required to pay to the Company an up front fee with respect to its exclusive
rights and a royalty based on sales. The agreement also permits Cove Shoe to
enter into sub-license agreements provided Cove Shoe pays to the Company a
specified percentage of any royalties received under any such sub-license. Cove
Shoe is a division of H.H. Brown Shoe Company, a subsidiary of Berkshire
Hathaway, Inc., and is one of the oldest shoe manufacturers in the United
States. Cove Shoe engages in private label manufacturing for many companies
including L.L. Bean, Cabelas, Orvis, DKNY, Ralph Lauren and Bass Pro Shops.
Cove Shoe is a major supplier to military and army-navy stores and has a
license to market footwear with the Harley-Davidson trademark.
Genfoot, Inc. -- Cold Weather Insulated Rubber Bottom Boots. The Company
entered into an agreement in February 1997 with Genfoot, Inc. ("Genfoot")
granting to Genfoot non-exclusive rights to use the Company's products and
trademarks with respect to the manufacture and distribution of cold weather
insulated rubber bottom boots for a period of two years. The agreement requires
Genfoot to purchase all of its requirements for Thermasorb(R) additives and
ComforTemp(R) foams from the Company. The agreement also requires Genfoot to
co-brand the Company's products in connection with its products incorporating
the Company's products, thereby enhancing the name recognition of the Company's
trademarks. In accordance with the terms of the agreement, Genfoot produced and
displayed ten styles of Kamik brand boots incorporating the Company's products
at the 1997 Outdoor Retailers Show and has advised the Company that it plans to
increase this to 12 styles for 1998 including two children's styles. Genfoot is
one of the largest Canadian boot manufacturers measured in number of pairs of
boots shipped. Genfoot has been in continuous operation for nearly 100 years.
Fly Technologies, Inc. -- Fishing and Hunting Waders. The Company entered into
an agreement in March 1997, with Fly Technologies, Inc. ("Fly Tech") granting
Fly Tech the exclusive right to use the Company's products and trademarks with
respect to the manufacture and distribution of fishing and hunting waders for a
period of 21 months. The agreement requires Fly Tech to purchase all of its
requirements (including certain minimum purchases to maintain its exclusive
rights) for Thermasorb(R) additives and ComforTemp(R) foams from the Company
and provides for an up front fee with respect to its exclusive rights and a
royalty based on sales. The agreement permits Fly Tech to enter into
sub-license agreements that require Fly Tech to pay the Company a specified
percentage of any royalties received under any such sub-license. The agreement
also requires Fly Tech to co-brand the Company's products in connection with
its products incorporating the Company's products, thereby enhancing the name
recognition of the Company's trademarks. In addition to their own Fly Tech
brand, Fly Tech manufactures private label fishing and hunting waders for Bass
Pro Shops.
36
<PAGE>
LaCrosse Footwear, Inc. -- Cold Weather Rubber Bottom Boots. The Company
entered into an MOU in January 1998 with LaCrosse Footwear, Inc. ("LaCrosse")
granting LaCrosse non-exclusive rights to use the Company's products and
trademarks with respect to cold weather, insulated rubber bottom boots other
than welt-constructed boots for a period of two years. The Company and LaCrosse
are proceeding to finalize an agreement. The MOU provides for royalties based
on product sales, requires LaCrosse to purchase all of its requirements of
Thermasorb(R) additives and ComforTemp(R) foams from the Company. The MOU also
requires LaCrosse to design, produce and market at least three styles of rubber
bottom boots incorporating ComforTemp(R) foam in its Fall/Winter 1998 product
line. The MOU also requires LaCrosse to co-brand its products that incorporate
the Company's products thereby enhancing the name recognition for the Company's
trademarks. For the fiscal year ended December 31, 1996, LaCrosse had total
revenues of approximately $122,000,000.
CamelBak/FasTrak Systems, Inc. -- Personal Hydration Systems. The Company
entered into an MOU in July 1997 with CamelBak/FasTrak Systems, Inc.
("CamelBak") granting CamelBak exclusive rights to use the Company's products
and trademarks with respect to cold-weather personal portable hydration
systems for commercial and military use for a period of two years. The Company
and CamelBak are proceeding to finalize an agreement. The agreement is royalty
free but requires CamelBak to purchase all of its requirements (including
certain minimum purchases) of Thermasorb(R) additives and ComforTemp(R) foams
from the Company and requires CamelBak to design, produce and market at least
one style of winter hydration system incorporating ComforTemp(R) foam which is
expected to first be made available for sale to consumers in 1998. The MOU
also requires CamelBak to co-brand products that incorporate the Company's
products thereby enhancing the name recognition for the Company's trademarks.
Thermo Solutions, Inc. -- Temperature Sensitive Food Storage/Transport
Containers. The Company entered into an agreement in May 1996 that was amended
by an MOU entered into in January 1998 with Thermo Solutions, Inc. ("Thermo
Solutions"), an early stage company specializing in the manufacture, sale and
distribution of packaging containers for food storage and delivery
applications. The Company and Thermo Solutions are proceeding to finalize an
agreement. As amended, the agreement is expected to grant Thermo Solutions the
exclusive right to use the Company's products and trademarks with respect to
temperature sensitive food storage/transport containers of certain sizes
through December 1998 with two, one year options. The amended agreement
requires Thermo Solutions to purchase all of its requirements (including
certain minimum purchases) for Thermasorb(R) additives and ComforTemp(R) foams
from the Company and provides for annual licensing fees and royalties based on
sales. The final agreement is expected to provide that Thermo Solutions, with
the Company's prior consent, may enter into sub-license agreements that require
Thermo Solutions to pay a percentage of any royalties received under any such
sub-license to the Company. The MOU also requires Thermo Solutions to co-brand
products that incorporate the Company's products thereby enhancing the name
recognition for the Company's trademarks.
Research and Development
From its inception in 1989 until mid-1997, the Company's revenues were
largely derived from a variety of government related research and development
contracts which funded the Company's research and development efforts during
that period. Terms and conditions under these government contracts varied from
a cost plus basis to a fixed price basis. Upon completion of research and
development under these contracts, the government may retain some rights to a
royalty-free license to use the newly developed technology for certain of its
own uses, and the Company retains all other rights to use and further
commercialize the newly developed technology.
The Company was awarded its first research and development contract from
McDonnell Douglas Corporation in 1991 to study the benefits of using MicroPCM
technology in avionics cooling systems in military aircraft. Since that time,
the Company has identified many applications for its products in a wide variety
of areas, including both intermediate and end-use products, and across a wide
range of large and/or growing industry segments.
For the fiscal years ended December 31, 1996 and 1997, the Company was
involved in government research and development projects related to technology
that is used to improve the thermal management properties of military aircraft
and protective outerwear. For those periods, the Company's revenues from
research and development were $1,120,000 and $487,000, respectively, and its
costs related to such projects were $1,004,000 and $258,000, respectively.
37
<PAGE>
From time to time, the Company becomes aware of and considers conducting
funded research projects that do not relate to thermal management. The Company
expects to evaluate future funded research and development projects on a case
by case basis and will engage in those projects management considers to offer
complementary opportunities for the Company. Of the total research and
development revenues received during the fiscal years ended December 31, 1996
and 1997, revenues from projects unrelated to thermal management technology
amounted to approximately, $402,000 and $113,000, respectively. To date, the
Company has not developed any non-thermal technologies or products that it
considers ready to commercialize.
As of December 31, 1997, the Company had ongoing research projects
providing engineering services directly or indirectly for the United States
government in the amount of $361,000 and proposals outstanding for research
projects having an aggregate potential value of less than $250,000. The Company
anticipates that it will continue to conduct some funded research projects in
the future. At present the Company would estimate approximately $500,000 per
year will be realized from funded research projects. See "Risk Factors --
Accumulated Losses; Possible Need for Additional Financing," "-- Reduction in
Government Funded Development; No Assurance of Continued Government Contracts"
and "-- Dependence on Small Number of Strategic Partners; Limited Sales and
Marketing Experience."
Technology Overview
Encapsulation technology and traditional PCMs have been separately in
development and use since the early 1970's. Nonencapsulated PCMs have been used
in many energy-related products for heat storage and temperature control.
Microencapsulation has been used extensively in the pharmaceutical industry
(time released medication) and the paper industry (carbonless copy paper). The
Company's technology combines these two sciences to form an entirely new class
of materials that creates heretofore unmatched thermal management solutions.
PCMs have the capacity to absorb and reject large amounts of heat upon a
change of phase (e.g., from solid to liquid, liquid to gas, etc.). The
temperature at which the heat absorption and rejection takes place is known as
the phase change or transition temperature. The amount of heat either rejected
or absorbed is known as the latent heat of fusion.
In the Company's products, the PCM is encapsulated into tiny capsules
ranging in size from one to several hundred microns in diameter. Encapsulating
PCMs within a thin polymer shell, thereby forming a microscopic sphere or
MicroPCM, allows for the melting and freezing of the PCM core to be contained
within this shell. The capsules resemble a fine powder, permitting them to be
mixed into a variety of host materials (e.g., fluids, foams and other solid
structures) while maintaining the integrity and thermal functionality of the
core PCM. The shell wall material used in the Company's MicroPCM additive
Thermasorb(R) is extremely durable and is designed and formulated to perform
under extreme mechanical, chemical, and thermal conditions.
Upon heat absorption, the core material in the MicroPCM melts, changing
from solid to liquid. Upon heat release or at freezing, the core material turns
solid again and is ready for the next melting phase. This unique, reversible
characteristic is referred to as "recharging".
Since the latent heat of fusion of Thermasorb(R) additives is
substantially higher than the heat capacity of a host material, the net effect
of adding a concentration of Thermasorb(R) additives to a host material results
in an increase in the heat capacity of the end product. The choice of core
materials contained in the MicroPCM for any given application depends on the
desired transition temperature and other system level parameters. The Company
has identified dozens of PCMs that are suitable for encapsulation with the
Company's existing processes, ranging in melting points from -65oF to over
225oF.
ComforTemp(R) foams are currently available in a soft hydrophilic version
which is light, breathable, open-cell, polyurethane foam which the Company
believes is best suited to apparel and footwear applications. The Company's
ComforTemp(R) product also has the potential to be produced in at least seven
different foam categories including rubber, closed cell neoprene, latex, soft
hydrophilic, polyurethane soft, polyurethane rigid, silicone and styrofoam.
Each foam category exhibits different thermal, operational and functional
capabilities. Depending upon the thermal management characteristics required
for a strategic partner's end-use application, the appropriate type of foam
(impregnated with Thermasorb(R) additives having the desired transition
temperature) can be used to provide optimal thermal protection.
38
<PAGE>
Test results -- Insulation. Tests performed by the Company for the U.S.
Air Force, as well as by independent third-party testing laboratories,
including Holometrix, Inc. and the Naval Clothing and Textile Research Center
("NCTRF"), have demonstrated that certain ComforTemp(R) foams provided greater
thermal insulation than other existing thermal management materials. The graph
below depicts the results of two such tests. The heavily shaded portion of the
graph shows the inherent thermal insulation value of the materials (including
ComforTemp(R) foam in the uncharged state) as tested by industry standards
while the lightly shaded portion shows the additional insulation value of
ComforTemp(R) foam in the charged state. The information with respect to the
"uncharged" state relates to ComforTemp(R) foam either prior to being charged
by wearer activity or after being de-charged by extended exposure at cold
temperatures. The lightly shaded portion of the graph relates to the additional
insulative benefit derived from the ComforTemp(R) foam as a result of the heat
release characteristic of the embedded Thermasorb(R) capsules in their
"charged" state.
Insulating Value of ComforTemp(R) Foam in Charged and Uncharged States Compared
to Other
Commercially Available Insulating Materials
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
I |
|
N |
|
S |
|
U 10 --| *
| *
L 9 --|
|
A 8 --|
|
T 7 --|
|
I 6 --| X
| X X
N 5 --|
|
G 4 --| X X X
|
3 --|
|
V 2 --|
|
A 1 --|
|
L |
|
U |
|
E |---------------------------------------------------------------------------------------------------------------
ColorTemp ColorTemp name brand fabric typical foam typical felt name brand fabric
from(LX) foam(DX) insulation "A" insulation insulation insulation "B"
</TABLE>
39
<PAGE>
Test results -- Heat protection. The following graph depicts the results
of a test conducted on ComforTemp(R) by the Air Force Fire Research Lab at
Tyndall Air Force Base. This test demonstrated the extended period of
protection that would be provided to a firefighter as a result of incorporating
a layer of ComforTemp(R) foam in a conventional fire suit when exposed to a
temperature simulating the intense heat of a jet fuel fire. By measuring the
temperature increase inside the fire-suit material, with and without
ComforTemp(R) foam, the skin temperature of a firefighter is simulated.
Relative Heat Shielding Capability of a Fire-Suit
With and Without ComforTemp(R) Foams
200 |
|
|
|
T 180 |
E |
M | *
P |
E |
R 160 |
A |
T |
U | X
R |
E 140 |
, |
|
D |
E |
G 120 |
R |
E |
E |
S |
100 |
F |
|
|
|
80 |
|----------------------------------------------------------------------
0 50 100 150 200 250 300
seconds
* = standard material
X = ComforTemp foam
The "*" and "X" each represent the end point of a line originating at the
intersection of the vertical and horizontal axes of the graph and extending to
such points. Although neither line maintains a perfectly constant slope, overall
the straight lines described above fairly approximate the slope of the lines
produced from the actual data.
The Manufacturing Process
The Company currently outsources all of its production needs and
anticipates that it will continue to do so for the foreseeable future. The
Company currently has informal agreements and is negotiating definitive supply
agreements with companies involved in each stage of the manufacturing process.
In the event that any of those companies were unable to continue to supply the
Company with materials or services, the Company believes that it would be able
to arrange for other sources available on similar terms and at competitive
prices. See "Risk Factors -- Dependence on Single Source Providers for
Manufacturing."
40
<PAGE>
The chart below illustrates the manufacturing and quality assurance
processes for the Company's products:
The flow chart shows the flow of the Company's manufacturing process from
(level 1) raw phase change materials to (level 2) Thermasorb(R) additives to
(level 3) ComforTemp(R) foam in slab form to (level 4) ComforTemp(R) foam in
thin sheets, with corresponding quality assurance at each stage of the
process. Sales are indicated, after quality assurance reviews of finished
Thermasorb(R) additive (level 2) and of ComforTemp(R) foam in thin sheets
(level 4).
Currently, all of the Company's requirements for Thermasorb(R) additives
are manufactured by the Minnesota Mining and Manufacturing Company ("3M"). The
Company and 3M are parties to a Reciprocal Secrecy Agreement pursuant to which
each agrees to maintain the confidence of the others' proprietary information
and to not use or divulge that information except with the written consent of
the other. The Company and 3M have entered into an arrangement that provides
firm fixed pricing for all of the Company's anticipated 1998 requirements for
Thermasorb(R) additives, as well as favorable pricing and delivery terms for
short run and prototype production volumes. Pursuant to the arrangement the
Company placed a blanket purchase order for all of its 1998 anticipated
requirements of Thermasorb(R). Prior to October 23, 1997, the Company obtained
all of its requirements for ComforTemp(R) foams under purchase orders with LMI.
The Company has relationships with other suppliers for each of the other steps
of the production process. On October 23, 1997, the Company entered into a
memorandum of understanding with LMI granting LMI the exclusive licence to
manufacture a specific hydrophilic polyurethane version of the Company's
ComforTemp(R) foams. Foamex is an additional supplier for the production of
ComforTemp(R) polyurethane foams. The Company has agreed to permit Foamex to
sell ComforTemp(R) polyurethane foams for applications specifically consented
to by the Company. Foamex is a major manufacturer of foam products, having
significant manufacturing capacity both within and outside of the United
States. For the fiscal year ended December 31, 1996, Foamex had total revenues
of approximately $926,000,000. See "Business -- Sales and Marketing."
The Company monitors and tests its products during each step of the
manufacturing process for quality assurance purposes. Raw PCM, identified by
lot number, is delivered to the Company to ensure that the quantity of heat the
PCM can hold at different temperature levels adheres to the Company's product
specifications. After encapsulation, the Company tests and verifies the quality
of the shell wall and validates that the product satisfies its thermal
requirements. The Company verifies and tests the foam products prior to
shipment to its strategic partners. All testing is performed by the Company's
quality assurance team based in its North Carolina facility.
Patents/Intellectual Property
In 1991, the Company secured exclusive rights under a Joint Development
Agreement and subsequently entered into the TRDC License with TRDC. Pursuant to
the TRDC License, TRDC granted to the Company perpetual exclusive worldwide
rights with respect to all applications of bulk PCMs and MicroPCMs covered by
TRDC's patents and proprietary intellectual property other than MicroPCM Fibers
and Fabrics which previously
41
<PAGE>
had been licensed to Outlast. Pursuant to the terms of the TRDC License, the
Company has the exclusive right to manufacture bulk PCMs and MicroPCMs, end-use
products and improvements and the right to market, sell, use, lease and
distribute all applications except MicroPCM Fibers and Fabrics, and to
sublicense such rights. The Company is required to pay TRDC a royalty based on
gross product sales revenues and a percentage of any royalties the Company
receives from its strategic partners and sublicensees. The TRDC License
establishes minimum annual royalties payable over the term of the TRDC License
which are offset to the extent of any actual earned royalties paid to TRDC and
a percentage of any research and development contracts accepted by TRDC from
the Company. Pursuant to the terms of the TRDC License, the Company is required
to pay all of the patent expenses with respect to inventions that exclusively
benefit the Company and a portion of the patent expenses with respect to
inventions in which the Company shares the benefits with others. Effective
January 3, 1997, TRDC assigned its rights under the TRDC License to an
affiliated entity. TRDC is obligated under the TRDC License to notify the
Company and to give the Company the benefit of any future developments for bulk
PCM and MicroPCM technologies other than MicroPCM Fibers and Fabrics.
The TRDC License granted to the Company broad exclusive rights in the
MicroPCM Technology. Even so, the Company wanted to secure exclusive rights to
a significant portion of the rights granted earlier by TRDC to Outlast,
especially in light of the Company's initial successes with strategic partners
in the fields of apparel and footwear where there exists a high likelihood of
some combination of the Company's Thermasorb(R) and ComforTemp(R) products with
some type of fiber or fabric. In order to expand the scope of the Company's
rights in the MicroPCM Technology, in January 1998, the Company entered into
the Outlast Agreement. The Outlast Agreement, among other things, secures
additional exclusive rights for the Company and limits Outlast's rights with
respect to the combination of MicroPCM foams with fibers and fabrics. Under the
Outlast Agreement, the Company has exclusive rights, for most applications, to
manufacture, sub-license and sell ComforTemp(R) foams that are attached to
fibers and fabrics or intended to be attached to fibers or fabrics so long as
the foam is greater than 2mm in thickness. The Company also may sell
Thermasorb(R) additives for use in foams attached to fibers and fabrics. The
Company agreed to pay Outlast a royalty for its products if its products are
used in such combinations with fibers and fabrics, with minimum annual payment
requirements in effect for as long as the Company desires the agreement to be
exclusive (including exclusive of Outlast). Pursuant to the Outlast Agreement,
Outlast will not sell ComforTemp(R)-type foams greater than 2mm in thickness
attached to fibers and fabrics for ten years, unless the Company elects to
permit its agreement to become non-exclusive. See "Risk Factors -- Dependence
Upon Intellectual Property."
Currently, TRDC's intellectual property relating to MicroPCMs includes
nine issued United States patents, one pending United States patent and one
European patent which expire from 2006 to 2013. TRDC or its licensees are in
the process of applying for international patent protection for the TRDC
patented technology. The Company believes that its MicroPCM technology is
adequately protected by its existing licenses of the TRDC patents and by its
proprietary know-how, although the validity of the patents underlying the
licenses and the limits of the licenses have never been contested in any legal
proceeding. See "Risk Factors -- Dependence Upon Intellectual Property."
42
<PAGE>
The following table sets forth information regarding the patents currently
licensed to the Company.
<TABLE>
<CAPTION>
Patent
Date of Expiration
Patent Patent Number Description Industry (Year)
- ----------- ---------------- ---------------------------------------- ------------------------ -----------
<S> <C> <C> <C> <C>
2/28/89 4,807,696 Thermal Energy Storage Apparatus Automotive, Aerospace, 2006
Using Encapsulated PCMs Electronics
3/27/90 4,911,232 Heat Transfer Using MicroPCM Slurries Automotive, Computers, 2007
Electronics
8/25/92 5,141,079 Cutting/Cooling Fluid All Industries 2009
7/6/93 5,224,356 Thermal Energy Absorbing and Electronics 2010
Conducting Potting Materials
3/1/94 5,290,904 Thermally Enhanced Heat Shields Protective Apparel 2011
11/22/94 5,366,801 Coated Fabric With Reversible Enhanced Protective Apparel 2011
Properties
5/16/95 5,415,222 Microclimate Cooling Garments Protective Apparel 2012
3/19/96 5,499,460 Moldable Foam Insole with Footwear 2013
Reversible Enhanced Thermal Storage
6/10/97 5,637,389 Thermally Enhanced Foam Insulation All Industries 2012
Patent Pending Thermal Insulating Coating using All Industries --
MicroPCMs*
1/14/98 0611330** Coated Fabric With Reversible All Industries 2013
Enhanced Properties
</TABLE>
- ------------
*A Notice of Allowance has been issued and a patent number is expected by the
Company to be issued shortly.
**European Patent granted with respect to the invention covered by United
States Patent No. 5,366,801
The Company has registered the trademarks Thermasorb(R) and ComforTemp(R)
with the United States Patent and Trademark Office (the "PTO") and has applied
for registration of the trademark Comfort in the Extreme(TM) which application
has been allowed by the PTO. Effective September 10, 1997, the Company received
a registered Canadian trademark for ComforTemp(R). Trademark applications have
also been submitted for ComforTemp(R) in the European Community. See "Risk
Factors -- Dependence Upon Intellectual Property."
In addition to its licenses and trademarks, the Company is developing
considerable proprietary technology and trade secrets with respect to the
selection of the raw material(s) to be used for the capsules' core material,
shell wall materials and the composition of the capsule which the Company
believes accords it a considerable competitive advantage. The Company believes
that significant barriers have been created for potential competitors by
securing licenses under patents which grant and protect its rights to a wide
variety of applications, spanning a broad spectrum of industries and end-use
products. In order to further protect its proprietary trade secrets and
know-how, the Company generally requires any person having access to such
confidential information to execute an agreement whereby such person agrees to
keep such information confidential.
Competition
The Company's Thermasorb(R) additives and ComforTemp(R) foams compete with
a wide variety of natural and synthetic insulating products, including other
applications of MicroPCMs and bulk PCMs, open and closed cell foams, synthetic
insulators (e.g., Thinsulate(R), Polar Guard(R)), wool and down. The Company
believes that its ComforTemp(R) foams offer significant benefits over natural
and synthetic insulation materials and foams not containing MicroPCMs because
of (i) the ability of the ComforTemp(R) foam to absorb heat and release it when
cooling occurs; (ii) its lightweight, low bulk characteristics; (iii) its
durability; (iv) its rechargeability; (v) its ability to be customized to a
particular temperature within a wide range of temperatures in a wide variety of
applications; (vi) its minimal maintenance requirements; and (vii) its ability
to be combined with other available heat management materials. The Company's
products also have the capacity to function reversibly. Depending on the
placement of the ComforTemp(R) foam, it may be engineered to absorb, reject or
regulate heat.
43
<PAGE>
The Company competes directly with Outlast in certain applications. The
license granted to Outlast by TRDC permits it to market applications of
MicroPCM Fibers and Fabrics. The Company believes that the principal area of
competition with Outlast involves applications where MicroPCM Fibers or Fabrics
less than 2mm thick may be used instead of combinations including the Company's
ComforTemp(R) foam. The Company believes that products incorporating its
ComforTemp(R) foam will offer significant advantages over such fabric
application because fabrics will not have sufficient volume of MicroPCMs to
provide a significant thermal management solution. See "Business --
Patents/Intellectual Property."
The Company will also compete with other companies, including R.G. Barry
Company and Phase Change Laboratories, Inc., companies utilizing bulk PCMs
primarily for heat retention products. The Company believes Thermasorb(R)
additives and ComforTemp(R) foams offer superior performance characteristics
because microencapsulation obviates the need for containment of the PCM in a
sealed bag or other packaging which may tear or leak resulting in contamination
and rendering the end product useless.
The Company's products also compete with active mechanical and solid
cooling alternatives (e.g., fans, conductive heat sinks) currently utilized for
selected electronics and computer cooling applications and certain medical
products. For these applications, Thermasorb(R) will compete within a
fragmented market comprised of specialty firms, including Aavid Thermal
Technologies, Inc. and various smaller companies, including Advanced Ceramics
Corporation, Thermacore, Inc., Chipcoolers, Inc. and Marlow Industries, Inc.
The Company believes that Thermasorb(R) would be an effective means to enhance
the performance of thermal solutions being provided by these and other firms,
resulting in a fertile area for strategic partnerships within this segment of
the industry.
The Company's products will also compete with actively cooled liquid
solutions (e.g., automobile radiator circulating water to cool an engine) which
the Company believes is inferior in technical performance to
Thermasorb(R)-based cooling solutions. The Company recognizes, however, that
there is a significant price differential between existing water-based systems
and cooling solutions incorporating the Company's Thermasorb(R) additives. The
Company believes that based upon its current technology the additional cost
involved in utilizing a Thermasorb(R) solution will not be justified in such a
price sensitive market, therefore, the Company will not target this area in the
near term.
Facilities
The Company currently has three facilities. The Company occupies its
current headquarters located in Freeport, New York, consisting of approximately
500 square feet under a rent free arrangement with an affiliated company,
Frisby Aerospace. The Company expects to vacate its current space in April 1998
and take occupancy of approximately 2,000 square feet of space located at 77
East Main Street, Bay Shore, New York. This space will be occupied by the
Company pending completion of its permanent space also to be located in Bay
Shore. The landlord for both the temporary and the permanent space in Bay Shore
is the Town of Islip. The Company anticipates taking occupancy of the permanent
space in Bay Shore by January 1999. The temporary space in Bay Shore is
currently occupied on a rent free basis and the Company believes it will
continue to be occupied on a rent free basis until the Company takes occupancy
of the permanent space in Bay Shore. The Company is currently negotiating the
lease for the new headquarters space in the newly renovated facility in Bay
Shore, New York. See "Certain Transactions."
The Company currently sub-leases its development and laboratory facilities
in Clemmons, North Carolina, consisting of approximately 8,000 square feet from
Frisby Aerospace. The existing sublease expired on November 30, 1997 and has
been extended on a month-to-month basis at a monthly rent of $2,520. On March
2, 1998, the Company entered into a lease with Piedmont Institute for Research
& Technology II, LLC ("Piedmont") to lease space in a facility in Winston
Salem, North Carolina (the "Piedmont Lease") which will better suit the
Company's near and long-term requirements for expansion space. The Piedmont
Lease has a 20 year term with a monthly lease payment beginning at $10,462.00
and increasing to $11,612.00 per month over the term of the lease. The rental
payments for the facility will increase by an additional $1,046.00 per month if
the Company elects not to lease the basement of the building, at the rate of
$5.00 per square foot per month, after occupying the premises for 24 months
which is proportionate to the space occupied by the Company. In addition, the
Company will pay approximately 26% of the operating expenses of the building
containing the leased premises. The
44
<PAGE>
Company expects to take possession of approximately 25,100 square feet of new
space and to vacate its Clemmons facility by June 1998. The Company has also
reserved two condominium units in the Winston-Salem facility for a purchase
price of $80,000 and $78,000, respectively. The Company plans to use the
condominium units as accommodations for visiting employees, directors and
strategic partners which the Company believes will provide more cost effective
lodging for such visitors. See "Certain Transactions."
The Company also leases approximately 5,000 square feet from a
non-affiliate in Aiken, South Carolina. The Company uses the Aiken facility to
perform some of its research and development activities. The facility is
expected to remain in use until June 1998. The monthly rent for the facility is
$1,250.
The Company does not consider any of the facilities it currently occupies
suitable for its future needs and is negotiating a new lease in New York and
has executed a lease for a new facility in North Carolina as described above.
The Company believes that the new space in North Carolina will be sufficient
for the Company's product development efforts for the foreseeable future. Upon
taking occupancy of the new North Carolina facility, the Company will move the
operations currently conducted at its South Carolina facility into the new
North Carolina facility.
Employees
As of December 31, 1997, the Company had 13 full-time employees of which
two are executives, seven are product development personnel, two are engaged in
sales and marketing, one is a quality assurance specialist and one is clerical.
The Company has also retained the services of a Chief Financial Officer who is
expected to begin working on April 6, 1998. The Company has no collective
bargaining agreements and believes its relations with its employees are good.
Legal Proceedings
The Company is not involved in any legal proceedings. In the ordinary
course of its business, the Company, from time to time, may be subject to
litigation.
45
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth the names and ages of the Company's
directors, executive officers and significant employees and the positions they
hold with the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gregory S. Frisby(1) .......... 38 Chairman of the Board of Directors, President, Chief
Executive Officer and Treasurer
Jeffry D. Frisby(1) ........... 42 Director
Douglas J. McCrosson .......... 35 Vice President of Market Development and Secretary
Stephen P. Villa(2) ........... 34 Chief Financial Officer
Pietro A. Motta ............... 60 Director
</TABLE>
- ------------
(1) Gregory S. Frisby and Jeffry D. Frisby are brothers.
(2) Stephen P. Villa will begin working for the Company on April 6, 1998.
Gregory S. Frisby has been the Chairman of the Board of Directors,
President and Chief Executive Officer of the Company since its inception in
1989. From 1991 to 1997, Gregory S. Frisby was the Chief Executive Officer of
Frisby Aerospace. He also serves as a member of the Board of Directors of
Applied Technology Center Corporation since 1995 and the Long Island Forum for
Technology since 1994. He is a member of the Scientific and Business Advisory
Board of the Long Island Research Institute. From 1993 to 1994, Gregory S.
Frisby was Chairman of the National Advisory Board for the Small Business
Development Center Program for the Small Business Administration, from 1991 to
1993 he was a member of the advisory panel assessing U.S. technology and the
transition to a peacetime economy for the Congressional Office of Technology
Assessment, and from 1995 to 1996 he was a member of the CEM Task Force on
Privatization at the U.S. Department of Energy and a member of the Economic
Policy Council's Panel on "Economic Adjustment After the Cold War" for the
United Nations Association. Gregory S. Frisby received his Bachelor of Science
degree in Business Administration from Wake Forest University in 1981.
Douglas J. McCrosson has been the Vice President of Market Development and
Secretary of the Company since 1997. Mr. McCrosson became the Vice President of
Technical Operations in 1997 and from 1992 through 1997, he was the Group
Director responsible for all of the Company's thermal product development
programs. From 1988 to 1992, Mr. McCrosson was employed as an engineering
manager at Frisby Aerospace. From 1984 to 1988, Mr. McCrosson was a hydraulic
systems engineer for the Grumman Corporation. Mr. McCrosson received his
Bachelor of Science degree in Mechanical Engineering from the State University
of New York at Buffalo in 1984 and his Masters of Science degree in Management
from Polytechnic University in 1990.
Jeffry D. Frisby is a director of the Company. Since 1986, Jeffry D.
Frisby has been the President and a director of Frisby Aerospace. Jeffry D.
Frisby also serves on the Industrial Advisory Board of the American Society of
Mechanical Engineers. He received his Bachelor of Science degree in Business
Administration from Wake Forest University in 1977.
Stephen P. Villa has been named as the Chief Financial Officer of the
Company and will begin working on April 6, 1998. From January 1997 to March
1998, Mr. Villa was the controller of Harman Consumer Group an operating
company of Harman International, Inc. which sells consumer electronic
products. From 1986 to 1993, Mr. Villa was an audit manager with Price
Waterhouse LLP in New York. From 1993 to mid-1996, Mr. Villa was an audit
senior manager with Befec-Price Waterhouse in Paris, France. From mid-1996
through January 1997, Mr. Villa was an audit senior manager with Price
Waterhouse LLP in New York. Mr. Villa is a certified public accountant. Mr.
Villa received his Bachelor of Science degree in accounting from Babson
College in 1986.
Pietro A. Motta is a director of the Company. Since 1984, he has provided
independent legal and financial advisory services for corporate transactions to
private financial, industrial and real estate groups. He is also
46
<PAGE>
a director of SMEF, the investment banking unit of Compagnie Monegasque de
Banque, and an international advisor to HSBC Investment Banking of Hong Kong &
Shanghai Bank. Mr. Motta received his Bachelors degree from Collegio San Carlo
& Liceo Manzoni in 1956 and his Juris Doctor degree from Universita degli Studi
di Milano in 1960.
Board of Directors
Upon completion of the Offering, the Board of Directors will consist of
five members. There are currently three directors and two vacancies on the
Board. Pursuant to agreements between the Company and the Underwriter and the
Company and MUSI, the Underwriter and MUSI each have the right to designate one
nominee for election as a member of the Board of Directors of the Company. Mr.
Motta is the MUSI designee to the Board. Following completion of the Offering,
the Company expects to appoint two additional members of the Board of Directors
including a designee of the Underwriter. See "Certain Transactions."
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
Board Committees
After completion of the Offering, the Board of Directors will have Audit,
Compensation and Option Committees. The Audit Committee will make annual
recommendations to the Board of Directors concerning the appointment of the
independent public accountants of the Company and will review the results and
scope of the audit and other services provided by the Company's independent
auditors. The Compensation Committee will make recommendations to the Board of
Directors concerning salaries and incentive compensation for employees of the
Company. The Option Committee will make recommendations to the Board of
Directors concerning incentive stock option plans for officers, directors, key
employees and consultants of the Company. After completion of the Offering, the
independent directors to be appointed to the Board of Directors, will be
appointed to the Audit Committee, the Compensation Committee and the Option
Committee.
Director Compensation
Directors who are employees of the Company receive no compensation for
their service as members of the Board. It is expected that directors who are
not employees of the Company will receive options to purchase 7,500 shares of
Common Stock for each year served on the Board of Directors at a price equal to
no less than the fair market value on the date of the grant that will vest one
year after such grant and reimbursement of expenses incurred in connection with
attendance at Board of Directors and committee meetings.
Innovation Advisory Board
The Company is in the process of forming an innovation advisory board (the
"Advisory Board"). The members (the "Advisors") of the Advisory Board will
consult with the Company on developments relating to the scientific, research
and sales and marketing aspects of its business. In selecting the members of
the Advisory Board, the Company's Board of Directors intends to seek expertise
in a variety of areas, including financial, technical and marketing matters
related to the Company's thermal management products as well as the marketing
of products manufactured or sold by the Company's strategic partners and
customers. Currently the Company has identified five members of the Advisory
Board including Dr. David P. Colvin, Ph.D., the inventor of the Company's
MicroPCM technology and principal of TRDC, and representatives of certain of
the Company's current and potential strategic partners including Hannoosh
Industries, Sensormatic Electronics, Nike, Inc. and Sun Microsystems, Inc.
Advisors will devote only a small portion of their time to the affairs of the
Company and will have other commitments to, or consulting or advisory contracts
with, other institutions which may conflict with the Advisors' obligations to
the Company. If any such conflict would adversely effect such Advisor's ability
to perform his or her duties, or cause harm to the Company or its shareholders,
such Advisor would be forced to resign. The Company is not currently aware of
any such conflict. Additionally, the Company will require each of its Advisors
to execute a confidentiality agreement upon the commencement of his or her
relationship with the Company. The agreements generally provide that all
confidential information made known to the individual during the term of the
relationship shall be the exclusive property of the Company and shall be kept
confidential and not disclosed to third parties except under specified
circumstances.
47
<PAGE>
Set forth below are the names and areas of expertise of individuals
currently identified by the Company and agreeing to serve on the Company's
Advisory Board:
<TABLE>
<CAPTION>
Name Area of Expertise
- ---- -----------------
<S> <C>
Dr. David P. Colvin, Ph.D. Thermal Science and medical research
Dr. James Hannoosh, Ph.D. Advanced materials development
Mark Krom Electronics
Mary Ellen Smith Materials research
Marlin R. Vogel Advanced computer cooling
</TABLE>
Advisory Board Compensation
Advisors who are not employees of the Company will receive options to
purchase 2,500 shares of Common Stock for each year served on the Advisory
Board at a price equal to no less than the fair market value on the date of the
grant, and reimbursement of expenses incurred in connection with attendance of
Advisory Board meetings.
Limitation of Liability and Indemnification of Directors and Officers
The Certificate of Incorporation provides for the indemnification of the
Company's directors and officers to the fullest extent permitted under the
DGCL.
As permitted by the DGCL, the Company's Certificate of Incorporation
provides that directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty
as a director, except: (i) for any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions not in good faith
or which involve intentional misconduct or violation of law; (iii) for acts and
omissions relating to prohibited dividends or distributions or the purchase or
redemption of stock; or (iv) for any transaction from which the director
derives an improper personal benefit. As a result of this provision, the
Company and its stockholders may be unable to obtain monetary damages from a
director for breach of his or her duty of care.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Executive Compensation
The following table sets forth the compensation for services in all
capacities awarded to, earned by or paid to the Company's Chief Executive
Officer. There were no other executive officers of the Company whose aggregate
salary and bonus during the fiscal year ended December 31, 1997 exceeded
$100,000.
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Other Annual
Name and Principal Position Year Salary Bonus Compensation
- -------------------------------------- ------ ---------- ------- -------------
<S> <C> <C> <C> <C>
Gregory S. Frisby, Chairman of the 1997 $52,000 -- --
Board of Directors, Chief Executive 1996 $52,000 -- --
Officer, President and Treasurer 1995 $52,000 -- --
</TABLE>
Employment Agreements
Effective January 1, 1998, the Company entered into an employment
agreement with Gregory S. Frisby (the "Frisby Employment Agreement"), pursuant
to which the Company will employ Gregory S. Frisby until December 31, 2002,
unless sooner terminated for death, physical or mental incapacity or cause. The
Frisby Employment Agreement provides for a base salary of $200,000 per year,
with an annual increase of ten percent per year
48
<PAGE>
after the first year, a bonus equal to two percent of the Company's pre-tax
profits, an automobile allowance of $400 per month, five weeks paid vacation
each year and, until the second anniversary of the consummation of the
Offering, a Company provided life insurance policy payable to his named
beneficiaries having a death benefit of $7,500,000.
If the Frisby Employment Agreement is terminated early for death or
physical or mental incapacity by the Company, the Company will pay Gregory S.
Frisby, or his estate, any accrued but unpaid salary, bonus, vacation pay,
reimbursement, benefits due to him as a former employee of the Company pursuant
to any of the Company's benefit plans and he shall continue to receive his then
current salary for a period of three months (or a shorter period ending when
disability insurance payments under the Company's disability insurance policy
are at least 60% of his then current salary).
If following 30 days notice, the Company terminates Gregory S. Frisby for
cause, he shall be entitled only to accrued but unpaid salary and benefits
(excluding any declared but unpaid bonus). "Cause" is defined under the Frisby
Employment Agreement to include (i) any act of fraud or embezzlement in respect
of the Company or its funds, properties or assets; (ii) his conviction of a
felony under the laws of the United States or any state thereof unless such
acts were committed with the knowledge and approval of the Company's
independent members of the Board of Directors and counsel in the reasonable,
good faith belief that such actions were in the best interests of the Company
and its stockholders and would not violate criminal law; (iii) the willful
misconduct or gross negligence by him in connection with the performance of his
duties that has caused or is highly likely to cause a material adverse effect,
to the Company's business or its results of operations; or (iv) the intentional
dishonesty, of Gregory S. Frisby in the performance of his duties hereunder
which has a material adverse effect on the Company.
The Company may terminate the Frisby Employment Agreement without cause
following 30 days notice. Additionally, Gregory S. Frisby may terminate the
Frisby Employment Agreement if the Company has materially breached the Frisby
Employment Agreement and such breach continues for 30 days after notice by
Gregory S. Frisby or five days after notice of any subsequent breach. If the
Frisby Employment Agreement is terminated pursuant to this paragraph, Gregory
S. Frisby will be entitled to any reimbursement due to him, any benefits due to
him as a former employee of the Company and to continue to receive his then
current salary through December 31, 2002.
If the Company does not elect to renew or extend Gregory S. Frisby's
employment arrangement after December 31, 2002, Gregory S. Frisby will be
entitled to a severance payment equal to one year of his then current salary.
However, the Company will not be liable for any payments under this paragraph
if the Company offers to extend the Frisby Employment Agreement for a period of
at least three years on terms at least as favorable to Gregory S. Frisby as
those in the Frisby Employment Agreement but no agreement is reached.
Additionally, pursuant to the Frisby Employment Agreement, Gregory S.
Frisby has agreed (i) both during and after his employment not to disclose or
misappropriate confidential information of the Company; (ii) to disclose and
upon request convey to the Company any intellectual property originated by him
during his employment by the Company or one year thereafter, or with the
Company's time, material or funds; (iii) not to compete (as defined) with the
Company for a period of 12 months from the termination or expiration of the
Frisby Employment Agreement, or such shorter time as may be determined by the
Board of Directors, provided that the Company shall pay to him monthly during
such period an amount equal to the aggregate of his base salary (as in effect
as of the termination or expiration of the Frisby Employment Agreement),
benefits and bonus unless he has received certain severance payments otherwise
due him.
Effective January 1, 1998, the Company entered into an employment
agreement with Douglas J. McCrosson (the "McCrosson Employment Agreement"),
pursuant to which the Company will employ Mr. McCrosson until December 31,
2000, unless sooner terminated for death, physical or mental incapacity or
cause. The McCrosson Employment Agreement provides for a base salary of $88,400
for 1998, $96,200 for 1999 and $105,300 for the year 2000, an automobile
allowance of $400 per month and three weeks paid vacation each year.
If the McCrosson Employment Agreement is terminated early for death or
physical or mental incapacity by the Company, the Company will pay Douglas J.
McCrosson, or his estate, any accrued but unpaid salary (including any declared
but unpaid bonus) and a severance payment equal to two months of his then
current salary.
49
<PAGE>
If, following 30 days notice and opportunity to cure, the Company
terminates Mr. McCrosson for cause, he shall be entitled only to accrued but
unpaid salary and benefits (including any declared but unpaid bonus). "Cause"
is defined under the McCrosson Employment Agreement to include: (i) the
commission of any material breach of any of the provisions or covenants of his
employment agreement; (ii) the commission of any act of willful misconduct or
gross negligence in the performance of his duties or obligations under his
employment agreement, or, without proper cause, the willful refusal or habitual
neglect of the performance of his employment duties or obligations under his
employment agreement; (iii) the commission of any act of dishonesty, breach of
trust, fraud or embezzlement; or (iv) his conviction, or plea of guilty or nolo
contendere to, a felony or indictable offense (unless committed in the
reasonable, good faith belief that the Executive's actions were in the best
interests of the Company and its stockholders and would not violate criminal
law).
The Company may terminate the McCrosson Employment Agreement without cause
following 30 days notice. Following 30 days notice and opportunity to cure, Mr.
McCrosson may terminate the McCrosson Employment Agreement if the Company has
materially breached the McCrosson Employment Agreement. If the McCrosson
Employment Agreement is terminated pursuant to this paragraph, Mr. McCrosson
will be entitled to a severance payment equal to four months of his then
current salary and all accrued and unpaid salary and benefits (including any
declared but unpaid bonus).
The McCrosson Employment Agreement also contains: (i) a non-competition
provision that precludes Mr. McCrosson from competing with the Company for a
period of three years from the date of termination of his employment; (ii) a
non-disclosure and confidentiality provision; and (iii) a non-interference
provision whereby, for a period of three years after the termination of his
employment with the Company, he will not interfere with the Company's
relationship with its strategic partners, customers or employees.
The Company has agreed to employ Stephen P. Villa, as the Company's Chief
Financial Officer at a base salary of $124,800 per year, an automobile
allowance of $400 per month, three weeks paid vacation each year (which will
increase by one day for each two years worked), the receipt of 20,000 stock
options and additional bonuses at the discretion of the Board of Directors of
the Company. Mr. Villa will also be eligible to receive additional stock
options pursuant to any subsequent management incentive program. The terms of
this arrangement also include full tuition reimbursement for continuing
education classes approved by the Company. Mr. Villa will be required to sign
confidentiality and non-competition agreements.
Stock Option Plan
Prior to the completion of Offering, the stockholders will adopt a Stock
Option Plan pursuant to which 250,000 Common Shares will be reserved for
issuance to key employees, officers, directors and consultants of the Company
other than Gregory S. Frisby and Jeffry D. Frisby and to attract, motivate and
retain capable management personnel. At the date of this Prospectus, no stock
options have been granted under the Stock Option Plan. However, concurrently
with the effective date of the Offering, the Company anticipates granting up to
125,000 incentive and non-qualified stock options to its employees and
consultants pursuant to the Stock Option Plan.
The Stock Option Plan will be administered by the Option Committee of the
Board of Directors, which is required to be comprised of at least two
non-employee directors, as defined under Rule 16b-3 under the Exchange Act or,
if no Committee is appointed, by the Board of Directors of the Company. The
Stock Option Plan authorizes the grant of incentive stock options (as defined
in Section 422 of the Code) and non-qualified stock options at the discretion
of the Option Committee.
The option price per share of Common Stock underlying each option granted
under the Stock Option Plan may not be less than 100% (110% in the case of an
incentive stock option granted to a 10% stockholder) of the fair market value
per share of Common Stock on the date of the option grant.
Options may not be exercised after ten years from the option grant date
(five years in the case of an incentive stock option granted to a 10%
stockholder). In the case of any incentive stock option, the option shall
terminate on the date that is three months (one year, in the event that the
termination of employment is by reasonof death or disability) after the date on
which the optionee terminates employment or, if earlier, the date specified in
the agreement relating to the option grant.
50
<PAGE>
Retirement Plan
All eligible employees of the Company have been permitted to participate
in a 401(k)/Profit Sharing Plan (the "Plan") adopted effective January 1, 1997
by Frisby Aerospace as employees of a company that is a member of an affiliated
group with Frisby Aerospace. The Plan is funded from contributions by employees
for their own account and does not provide for any mandatory or matching
contributions by the Company. To date, the Company has not made any
contributions to the Plan. The Plan is administered by LaSalle National Bank,
an independent third-party administrator of pension plans. Funds in each
employee's account will be invested at the employee's direction among the
investment options available under the Plan. All employees of the Company on
the effective date of the Plan immediately became eligible. An employee who
became employed after January 1, 1997 will become entitled to participate in
the Plan after the completion of six months of service and the attainment of 21
years of age. Under the Plan, participants will be permitted to contribute from
their compensation any amount up to the lesser of 20% of their annual gross
salary or the maximum deferral allowed under the Internal Revenue Code. The
Company will be entitled to make optional profit sharing contributions for any
plan year in its discretion. See "Risk Factors -- Participation in Affiliate's
Pension Plan."
51
<PAGE>
CERTAIN TRANSACTIONS
On November 3, 1989, the Company issued 567,857 shares of Common Stock in
equal portions to each of five siblings of the Frisby family, including Gregory
S. Frisby, President, Founder and Chief Executive Officer of the Company for a
nominal amount. Pursuant to Stock Option Agreements entered into in November
1996 by the five siblings, Gregory S. Frisby and Jeffry D. Frisby exercised
options in November 1997 to purchase the outstanding shares not then owned by
them of the Company and two affiliated companies, Frisby Aerospace and Frisby
Industries, from the other siblings for the previously negotiated aggregate
purchase price of $4,078,854. As a result of that transaction, Gregory S.
Frisby and Jeffry D. Frisby each owned 50% of the shares of the Company.
On December 10, 1997, Gregory S. Frisby and Jeffry D. Frisby entered into
a Shareholder Agreement (the "JF/GF Agreement") pursuant to which Jeffry D.
Frisby agreed to vote all of his shares in accordance with Gregory S. Frisby's
direction. As a result, Gregory S. Frisby will have effective control of the
Company and will continue to have the power to control the outcome of matters
submitted to a vote of the Company's stockholders, such as the election of at
least a majority of the members of the Company's Board of Directors and to
direct the future operations of the Company. Such concentration of voting power
may have the effect of discouraging, delaying or preventing a change in control
of the Company. The JF/GF Agreement prohibits the transfer of shares by either
party except in accordance with its terms which include a right of first
refusal to purchase one another's stock on the same terms as any potential
third-party purchaser. Pursuant to the terms of the JF/GF Agreement, upon the
death of Gregory S. Frisby, Jeffry D. Frisby will have voting control of all
shares then owned by Gregory S. Frisby and upon the death of either Gregory S.
Frisby or Jeffry D. Frisby, the Company may, at its election, purchase the
shares of Common Stock then owned by such stockholder for a per share price
equal to the fair market value of the Common Stock as then determined by the
Company's Board of Directors. See "Management -- Board of Directors."
The assets of Frisby Aerospace and Frisby Industries were sold to an
unaffiliated third party on February 10, 1998.
The Company has, since its inception, received non-interest bearing
advances from Frisby Aerospace in order to meet operating expenses and has
received certain facilities, accounting, clerical and office services from
Frisby Aerospace without charge. During 1997, the Company continued to borrow
operating capital from Frisby Aerospace and, as of December 30, 1997, the
Company repaid the entire balance of $517,000 with a portion of the proceeds of
the Private Placement. The Company anticipates that as a result of the sale of
the assets of Frisby Aerospace, Frisby Aerospace will cease providing such
services without charge. The Company believes that it can replace, at
reasonable cost, such facilities, accounting, clerical and office services.
During 1997, the Company exhausted its $500,000 existing line of credit
with European American Bank ("EAB"), which is jointly and severally guaranteed
by Gregory S. Frisby, Jeffry D. Frisby and Frisby Aerospace, which guarantees
the Company expects to have released after the consummation of the Offering.
The EAB loan was repaid in full in December 1997 with a portion of the proceeds
of the Private Placement. From September 30, 1997 until December 29, 1997 the
Company was not in compliance with a convenant under the EAB loan which
required that the Company maintain a positive net worth. On December 29, 1997
the Company restored its compliance with this covenant.
The Company currently occupies a portion of Frisby Aerospace's New York
facility and subleases its North Carolina offices from Frisby Aerospace. No
lease for the New York facility exists between the Company and Frisby Aerospace
and no rental payments are made by the Company to Frisby Aerospace with respect
to such facility. The rental payment for the North Carolina lease is $2,520 per
month. The Company's North Carolina lease with Frisby Aerospace expired on
November 30, 1997 and has been extended on a month-to-month basis. The Company
expects that such arrangement will continue until the Company vacates the New
York facility in April 1998 and the North Carolina facility in June 1998. For
each of the years ended December 31, 1996 and 1997, the Company made aggregate
rental payments of $30,240 to Frisby Aerospace with respect to the North
Carolina facility.
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<PAGE>
The Company entered into the Piedmont Lease with an unrelated third party
for the lease of a new facility in North Carolina. The Company plans to move
its North Carolina and South Carolina facilities into the new North Carolina
facility by June 1998. The Company leased from Piedmont approximately 25,100
square feet, with a monthly lease payment beginning at $10,462.00 and
increasing to $11,612.00 per month over the term of the lease. The rental
payments for the facility will increase by an additional $1,046.00 per month if
the Company elects not to lease the basement of the building, at the rate of
$5.00 per square foot per month, after occupying the premises for 24 months. In
addition, the Company will pay approximately 26% of the operating expenses of
the building containing the leased premises which is proportionate to the space
occupied by the Company. Upon execution of the Piedmont Lease Gregory S. Frisby
and Jeffry D. Frisby each received a five percent equity interest (the "Equity
Interest") in Piedmont. The Equity Interest will vest in ten years from the
date of execution of the Piedmont Lease on the condition that the Company
remains in the premises for ten years from the date the lease is executed.
Notwithstanding the grant of the Equity Interest, the Company believes that the
rental payment represents an arm's-length price for the Piedmont Lease.
Additionally, the Company has reserved two condominium units in the new
North Carolina facility which it plans to purchase at a cost of $80,000 and
$78,000 to be used for accommodating visiting employees, directors and
strategic partners and which the Company believes will provide cost-effective
lodging for such visitors. The Company believes that the cost of the
condominium units approximates the price that would be negotiated on an
arm's-length basis.
The Company was a guarantor of a $350,000 loan made by Long Island
Development Corp. ("LIDC") to Frisby Industries, Inc. ("Frisby Industries"), an
affiliate of the Company, on November 4, 1994. Pursuant to the Other
Stockholder Agreement, as hereinafter described, Gregory S. Frisby agreed to
reimburse the Company for any payments the Company makes to LIDC pursuant to
the guaranty. The LIDC loan was repaid in full on February 23, 1998 at which
time the Company's guarantee was released.
In December 1997, pursuant to a Purchase Agreement (the "Purchase
Agreement") the Company issued to MUSI 441,327 shares of the Company's Common
Stock and the Private Placement Option for an aggregate purchase price of
$2,500,000. MUSI exercised the Private Placement Option on February 27, 1998
for 587,500 shares of the Company's Convertible Preferred Stock at an exercise
price of $2,500,000. The Company paid $300,000 to an entity designated by MUSI
in respect of related transaction costs incurred by MUSI. See "Description of
Securities -- Preferred Stock" and "Shares Eligible for Future Sale -- Lock-Up
Agreements."
In connection with MUSI's purchase of the Common Stock, MUSI, the Company,
Gregory S. Frisby and Jeffry D. Frisby entered into a Stockholders Agreement in
December 1997 (the "Other Stockholders Agreement"). The Other Stockholders
Agreement provides for restrictions on the transfers of shares, rights of first
refusal, the designation by MUSI of one nominee for director (the "MUSI
Designee") and the designation by management of the remaining nominees (the
"Frisby Designees") and prior to the Offering, the requirement that the MUSI
Designee and the Frisby Designees must agree in order for the Company to take
certain actions. Pursuant to the Other Stockholders Agreement, Gregory S.
Frisby and Jeffry D. Frisby agree to use their best efforts to cause the MUSI
Designee to be elected as a director of the Company. See "Management -- Board
of Directors."
Additionally, the Other Stockholders Agreement provides that MUSI, at any
time beginning 18 months after the Company's Offering, may require the Company
to register, on two occasions, at the Company's expense, all or an amount equal
to or exceeding $500,000 of MUSI's Common Stock in a public offering pursuant
to the Securities Act. The Other Stockholders Agreement grants to MUSI, Gregory
S. Frisby and Jeffry D. Frisby the right to "piggyback" their Common Stock in
any registration by the Company of its Common Stock, other than the Offering,
subject to the right of the managing underwriter to restrict or limit the
registration of such shares if the number of such shares requested to be sold
would have an adverse effect on the Offering. The expenses incurred in
connection with a "piggyback" registration, other than underwriter's discounts
and commissions, are to be paid by the Company. In the event MUSI, Gregory S.
Frisby or Jeffry D. Frisby own less than 25% of the number of the Company's
Common Stock owned by them on the date of the Other Stockholders Agreement,
their rights under the Other Stockholders Agreement shall terminate.
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The Company has agreed to indemnify MUSI from all losses, costs, damages,
liabilities and expenses resulting from any misrepresentation or breach of any
representation, warranty, covenant or undertaking made or to be performed by
the Company in accordance with the terms of the Purchase Agreement between the
Company and MUSI.
Upon completion of the Offering, the Underwriter has the right to
designate one nominee for election to the Company's Board of Directors. The
Company has agreed to use its best efforts to effect the election of such
nominee to the Board. See "Management -- Board of Directors."
The Company believes that all of the transactions described above except
for the guaranty of the LIDC loan, which guaranty has been released, is at
least as favorable to the Company as those available on an arms-length basis.
In the future, all material transactions entered into between the Company and
affiliated entities will be on terms no less favorable to the Company than can
be obtained from unaffiliated parties and will not be entered into or
terminated except on the affirmative vote of a majority of the disinterested
directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of the date of this Prospectus, and as adjusted to reflect the
sale of 1,600,000 shares of Common Stock offered hereby by: (i) each person
known to the Company to be the beneficial owner of more than five percent of
the outstanding shares of Common Stock or Convertible Preferred Stock; (ii)
each director and nominee director of the Company; (iii) each named executive
officer of the Company; and (iv) all directors and executive officers of the
Company as a group:
<TABLE>
<CAPTION>
Combined Percentage of
Number of Percentage of Class Beneficial Voting Power
Beneficially Owned (1) Owned (2)
Shares ---------------------- --------------------------
Beneficially Before After Before After
Name and Address Title of Class Owned (1) Offering Offering Offering Offering
- ------------------------------------ ------------------ -------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gregory S. Frisby (3)(4) Common Stock 2,839,286 86.5% 58.2% 73.4% 51.9%
Jeffry D. Frisby (4)(5) ............ Common Stock 1,419,643 43.3 29.1 36.7 26.0
MUSI Investments S.A. (6) .......... Common Stock 441,327 13.5 9.0 --(2) --(2)
Convertible
Preferred Stock 587,500 100.0 100.0 26.6(2) 18.8(2)
Pietro A. Motta (7) ................ Common Stock -- -- -- -- --
All executive officers and directors
as a group (4 persons) ............ Common Stock 2,839,286 86.5% 58.2% 73.4% 51.9%
</TABLE>
- ------------
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Exchange Act, and generally includes voting or investment power with
respect to securities, subject to community property laws, where
applicable. A person is deemed to be the beneficial owner of securities
that can be acquired by such person within 60 days from the date of this
Prospectus upon exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person (but not those held by any other person) and
that are exercisable within 60 days from the date of this Prospectus have
been exercised. Unless otherwise noted, the Company believes that all
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.
(2) Except as otherwise required by law, the Company's Convertible Preferred
Stock is entitled to one vote per share on matters presented to a vote of
the Company's stockholders. The percentages indicated reflect the combined
voting power of the Company's Common Stock and Convertible Preferred
Stock.
(3) The address of Gregory S. Frisby is c/o Frisby Technologies, Inc., 417
South Main Street, Freeport, New York 11520.
(4) Gregory S. Frisby has been granted voting rights with respect to the shares
owned by Jeffry D. Frisby pursuant to a Shareholder Agreement between
Gregory S. Frisby and Jeffry D. Frisby. See "Certain Transactions."
(5) The address of Jeffry D. Frisby is c/o Frisby Aerospace, Inc., 4520 Hampton
Road, Clemmons, North Carolina 27012.
(6) The address of MUSI Investments S.A. is c/o CMB Compagnie Monegasque de
Banque, 23, Avenue de la Costa, BP #167 MC 9800 3 Monaco. MUSI is
beneficially owned by an individual who is not otherwise affiliated with
the Company.
(7) The address of Pietro A. Motta is Motta & Co., Via Bigli, 7, 20121 Milano,
Italy.
55
<PAGE>
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, par value $.001 per share and 1,000,000 shares of Preferred
Stock, par value $.001. As of December 31, 1997, there were 3,280,613 shares of
Common Stock issued and outstanding held of record by three stockholders. No
shares of Preferred Stock were issued and outstanding.
Common Stock
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the stockholders of the Company.
Holders of shares of Common Stock are entitled to receive dividends when, as,
and if declared by the Company's Board of Directors, out of funds legally
available to the Company. The Company currently intends to retain all future
earnings for the use in the operation of its business and therefore does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. See "Dividend Policy." Upon liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in the
assets remaining after payment of all liabilities and liquidation preferences,
if any. Shares of Common Stock are not redeemable and have no preemptive or
similar rights to subscribe for additional shares. All outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby will be, upon
payment and issuance, fully paid and non-assessable.
Preferred Stock
The Board of Directors has the authority to cause the Company to issue
without any further vote or action by the stockholders, up to 1,000,000 shares
of Preferred Stock, in one or more series, and to designate the number of
shares constituting any series, and to fix the rights, preferences, privileges
and restrictions thereof, including dividend rights, voting rights, rights and
terms of redemption, redemption price or prices and liquidation preferences of
such series. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders. The issuance of Preferred Stock with voting and
conversion rights may adversely affect the voting power of the holders of
Common Stock, including the loss of voting control.
The Company has filed a certificate of designation designating 587,500
shares of the Preferred Stock as the Convertible Preferred Stock with the
rights, privileges and designations of the Convertible Preferred Stock which
includes: (i) a dividend preference (the "Dividend Preference") of $1.00 per
share of Convertible Preferred Stock prior to any payment of dividends to
holders of the Common Stock; (ii) the right, following the payment of the
Dividend Preference, for such share of Convertible Preferred Stock to share
equally with each share of Common Stock with respect to any dividend which may
be declared by the Company's Board of Directors; (iii) the right to cast one
vote per share of Convertible Preferred Stock, together with the holders of the
Common Stock, on each matter subject to the vote of the Company's stockholders;
(iv) a liquidation preference (the "Liquidation Preference") of $4.26 per share
of Convertible Preferred Stock in the event the Company shall be liquidated or
dissolved; and (v) the right, following the payment of the Liquidation
Preference, to share equally with each share of Common Stock with respect to
any distribution made to the Company's stockholders upon the Company's
liquidation or dissolution. Each share of Convertible Preferred Stock is
convertible at the election of MUSI into one share of the Company's Common
Stock (subject to adjustments for subdivisions or combinations of the Common
Stock or reclassification of the Common Stock) during the 60-day period
commencing 370 days following the closing by the Company of an initial public
offering. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Certain
Transactions."
Directors' Limitation of Liability and Indemnification
The Certificate of Incorporation provides for the indemnification of the
Company's directors and officers to the fullest extent permitted under the
DGCL. As permitted by the DGCL, the Company's Certificate of Incorporation also
provides that directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty
as a director, except: (i) for any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions not in good faith
or which involve intentional misconduct or violation of law; (iii) for acts and
omissions relating to prohibited dividends
56
<PAGE>
or distributions or the purchase or redemption of stock; or (iv) for any
transaction from which the director derives an improper personal benefit. As a
result of this provision, the Company and its stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Anti-Takeover Provisions; Section 203 of the Delaware General Corporation Law
The Company is governed by Section 203 of the DGCL, an anti-takeover law.
In general, this statute restricts a corporation from entering into certain
business combinations with an interested stockholder (defined as any person or
entity that is the beneficial owner of at least 15% of a corporation's voting
stock) or its affiliates for a period of three years after the date of the
transaction in which the person became an interested stockholder unless: (i)
the transaction is approved by the Board of Directors of the corporation prior
to such business combination; (ii) the interested stockholder acquires 85% of
the corporation's voting stock in the same transaction in which it exceeds 15%;
or (iii) the business combination is approved by the Board of Directors and by
a vote of two-thirds of the outstanding voting stock not owned by the
interested stockholder. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder.
The Company's Certificate of Incorporation and By-Laws include certain
provisions which may have an anti-takeover effect and may delay, defer or
prevent a tender offer or takeover attempt that a stockholder might consider in
its best interests, including attempts that might result in a premium over the
market price for the shares held by the stockholders and could make it more
difficult to remove incumbent management. The Company's Certificate of
Incorporation or By-Laws provides that: (i) directors may authorize the
issuance of Preferred Stock having rights and preferences established by the
Board of Directors without further approval by the stockholders; (ii) except as
otherwise required by law, vacancies in the Board of Directors may be filled
only by the remaining directors; and (iii) all nominations for candidates for
election as directors, other than nominations by or at the discretion of the
Board of Directors or a committee of the Board of Directors and all stockholder
proposals to be considered at annual or special meetings of the stockholders be
presented to the Company pursuant to an advance notice procedure set forth in
the Certificate of Incorporation. In general, notice of an intent to nominate a
director or to make a stockholder proposal to be considered at a meeting must
be received by the Company not less than 60 nor more than 90 days before the
meeting and must contain certain information concerning the nominee for
director or the proposal to be brought before the meeting and concerning
stockholders submitting the proposal. The affirmative vote of at least a
majority of the directors or the holders of at least two-thirds of the voting
power of the Company's stock is required to alter, amend, repeal or adopt any
provision inconsistent with the provisions described in this paragraph. See
"Description of Securities -- Preferred Stock."
The DGCL, the Certificate of Incorporation and the By-Laws may discourage
certain types of transactions involving an actual or potential change in
control of the Company.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 4,880,613 shares of Common
Stock (5,120,613 if the Over-Allotment Option is exercised in full) and 587,500
shares of Convertible Preferred Stock outstanding. Of such shares, all of the
1,600,000 shares sold in the Offering (1,840,000 if the Over-Allotment Option
is exercised in full) will be freely transferable without restriction or
further registration under the Securities Act unless acquired by an "affiliate"
of the Company within the meaning of the Securities Act. Upon completion of the
Offering, the existing stockholders of the Company will own 3,280,613 shares of
Common Stock and 587,500 shares of Con-vertible Preferred Stock. All of these
shares are deemed "restricted securities" as defined by Rule 144 of the
Securities Act ("Rule 144"). Upon expiration of the contractual restrictions
between the Company, its officers and directors and the Underwriter, but not
earlier than one year after the date of this Prospectus, the Common Stock will
be available for sale in the public market, subject to compliance with Rule
144.
Rule 144, as currently in effect, provides that a person (or persons whose
sales are aggregated) who is an affiliate of the Company, or who has
beneficially owned shares for at least one year which were issued and sold in
reliance upon certain exemptions from registration under the Securities Act
("Restricted Shares"), is entitled to sell within any three month period a
number of shares that does not exceed the greater of one percent of the then
outstanding shares of Common Stock or the average weekly trading volume in the
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. However, a person who has beneficially owned Restricted Shares for at
least two years and who is not an affiliate of the Company may sell such shares
under Rule 144 without regard to volume limitations, manner-of-sale provisions,
notice requirements or the availability of current public information about the
Company.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 of the Securities Act ("Rule 701")
may be relied upon with respect to the resale of securities originally
purchased from the Company by its employees, directors, officers, consultants
or advisors prior to the date the issuer becomes subject to the reporting
requirements of the Exchange Act, pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons. In
addition, the Commission has indicated that Rule 701 will apply to typical
stock options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this Prospectus).
Securities issued in reliance on Rule 701 are restricted securities and,
subject to the contractual restrictions described above, beginning one year
after the date of this Prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by Affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirements.
Subject to certain limited exceptions, the holders of shares of Common
Stock and Convertible Preferred Stock, sold by the Company prior to the
Offering, have agreed not to transfer or otherwise dispose of any securities of
the Company for a period following the closing of the Offering, without the
prior written consent of the Underwriter. See "-- Lock-Up Agreements."
Prior to the Offering, there has been no public market for the Common
Stock, and no predictions can be made as to the effect, if any, that market
sales of Restricted Shares or the availability of Restricted Shares for sale
will have on the market price prevailing from time to time. See "Risk Factors
- -- Effect of Options and Underwriter's Option on Stock Price." Nevertheless,
sales of substantial amounts of Restricted Shares in the public market could
adversely affect prevailing market prices.
Up to 160,000 additional shares of Common Stock may be purchased by the
Underwriter through the exercise of the Underwriter's Option during the period
commencing on the closing of the Offering and ending on the fifth anniversary
of such date. The holders of the Underwriter's Option will have certain demand
and "piggyback" registration rights with respect to the shares of Common Stock
underlying such options. Such shares of Common Stock issuable upon exercise of
the Underwriter's Option may be freely tradable, provided that the Company
satisfies certain securities registration and qualification requirements in
accordance with the terms of the Underwriter's Option. See "-- Registration
Rights" and "Underwriting."
58
<PAGE>
Registration Rights
The Company has granted certain demand and "piggyback" registration rights
with respect to the 160,000 shares of Common Stock issuable upon exercise of
the Underwriter's Option. Subject to certain conditions and limitations, the
registration rights granted to such holders give such holders the right to
register all or any portion of the Common Stock held by them or issuable upon
the exercise of the Underwriter's Option (collectively, the "Registrable
Securities"), in connection with any registration by the Company of shares of
Common Stock or securities substantially similar to the Common Stock. The
Underwriter is entitled to exercise demand registration rights to require the
Company to register under the Securities Act the shares issuable upon exercise
of the Underwriter's Option not more than twice. See "Underwriting."
The Other Stockholders Agreement provides that MUSI, at any time following
the 18 month anniversary of the Offering, may require the Company to register,
on two occasions, at the Company's expense, all, or an amount exceeding
$500,000, of the MUSI's Common Stock in a public offering pursuant to the
Securities Act. The Other Stockholders Agreement grants to MUSI, Gregory S.
Frisby and Jeffry D. Frisby the right to "piggyback" their Common Stock in any
registration by the Company of its Common Stock, other than the Offering,
subject to the right of the managing underwriter to restrict or limit the
registration of such shares if the number of such shares requested to be sold
would have an adverse effect on the Company's offering. The expenses incurred
in connection with a "piggyback" registration, other than underwriters
documents and commissions, are to be paid by the Company. In the event MUSI,
Gregory S. Frisby or Jeffry D. Frisby own less than 25% percent of the number
of the Company's Common Stock owned by them on the date of the Other
Stockholders Agreement, their rights against the Company under the Other
Stockholders Agreement will terminate.
The registration rights described herein are subject to certain notice
requirements, timing restrictions and volume limitations which may be imposed
by the underwriters of an offering. The Company is required to bear the
expenses of all such registrations, except for the expenses associated with the
second of the demand registrations, if applicable, granted to the holders of
the Underwriter's Option, and the underwriting discounts and commissions
relating to the sale of the shares of Common Stock held by such investors.
Lock-Up Agreements
Subject to the limited exceptions described below, and pursuant to the
Underwriting Agreement, the Company and pursuant to lock-up agreements with the
Underwriter, all of the existing stockholders of the Company and all of the
existing option holders of the Company as of the effective date of the
Registration Statement, have agreed not to offer, issue, sell, contract to
sell, grant any option for the sale of or otherwise dispose of any securities
of the Company for a period of 24 months (or, in MUSI's case, 18 months) from
the date of closing of the Offering, without the prior written consent of the
Underwriter. Notwithstanding these lock-up agreements, any stockholder subject
to such agreement may sell his, her or its shares of Common Stock commencing 12
months after the completion of the Offering in the event that the last sale
price for the Common Stock on its principal exchange has been at least 200% of
the initial public offering price for a period of 20 consecutive trading days
ending within five days of the date of such sale, and such sale is completed at
a price in excess of 200% of the initial public offering price or in the event
that the Company has closed a follow-on public offering underwritten by a major
bracket or large regional underwriting firm which raises at least $20 million
in gross proceeds (and, in MUSI's case, 12 months have passed since the date of
this Prospectus). The Underwriter currently has no plans, proposals,
arrangements or understandings to modify, shorten or waive the lock-up
agreements. In addition, the Underwriter has agreed with the Nasdaq Stock
Market, Inc. not to release MUSI from MUSI's lock-up agreement for a period of
12 months from the date of this Prospectus.
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<PAGE>
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement (the form of which has been filed as an exhibit to the
Registration Statement on Form SB-2, of which this Prospectus forms a part), to
purchase from the Company all of the shares of Common Stock offered hereby. The
Underwriting Agreement provides that the obligations of the Underwriter are
subject to certain conditions precedent and that the Underwriter shall be
obligated to purchase all of the shares of Common Stock if any are purchased by
the Underwriter.
The Underwriter has advised the Company that it proposes to offer the
shares of Common Stock offered hereby to the public at the offering price set
forth on the cover page of this Prospectus. The Underwriter may allow to
certain dealers, who are members of the National Association of Securities
Dealers (the "NASD"), concessions not in excess of $______ per share of Common
Stock, of which not in excess of $______ may be reallowed to other dealers who
are members of the NASD. After the commencement of this Offering, the Offering
price, the concessions and the reallowance may be changed.
The Company has granted the Over-Allotment Option to the Underwriter,
exercisable during the 45-day period after the closing date of the Offering, to
purchase up to an aggregate of 240,000 additional shares of Common Stock at the
Offering price, less underwriting discounts and commissions. The Underwriter
may exercise such option only for the purpose of covering over-allotments made
in connection with the sale of the Common Stock offered hereby.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of three percent of the aggregate offering price of the shares of
Common Stock offered hereby (including any shares of Common Stock purchased
pursuant to the Over-Allotment Option), of which $40,000 has been paid to date.
The Company also has agreed to sell to the Underwriter, or its designees,
the Underwriter's Option to purchase 160,000 shares at a price of $.001 per
option. The Underwriter's Option will be exercisable for a period of five
years, commencing on the closing date of the Offering, at an initial per share
exercise price equal to 165% of the initial public offering price per share.
The Underwriter's Option cannot be transferred, assigned or hypothecated for
one year from the effective date of the Registration Statement of which this
Prospectus forms a part, except that it may be assigned in whole or in part, to
any successor, officer or partner of the Underwriter (or to officers or
partners of any such successor or partner). The Underwriter's Option may be
exercised on one or a number of occasions as to all or a portion of the shares
covered by the option, and will contain certain registration rights and
anti-dilution provisions providing for appropriate adjustment of the exercise
price and number of shares which may be purchased upon exercise, upon the
occurrence of certain events. See "Risk Factors -- Effect of Options and
Underwriter's Option on Stock Price."
The Company has granted to the Underwriter two "demand" registration
rights for the sale of the shares of Common Stock underlying the Underwriter's
Option, for a period of five years after the effective date of the Registration
Statement of which this Prospectus forms a part, of which one registration will
be at the Company's expense. The Company also has granted to the Underwriter,
for a period of seven years after the effective date of the Registration
Statement of which this Prospectus forms a part, unlimited "piggyback"
registration rights for the sale of the shares of Common Stock underlying the
Underwriter's Option. See "Shares Eligible for Future Sale."
The Company also has agreed that for a period of three years following the
completion of the Offering, it will use its best efforts (including the
solicitation of proxies) to elect one designee of the Underwriter to the Board
of Directors of the Company.
The foregoing discussion of the material terms and provisions of the
Underwriting Agreement is qualified in its entirety by reference to the
detailed provisions of the Underwriting Agreement.
Pursuant to the Underwriting Agreement, the Company and all of the
existing stockholders of the Company as of the effective date of the
Registration Statement, have agreed not to offer, issue, sell, contract to
sell, grant any option for or otherwise dispose of any securities of the
Company for a period of 24 months from the date of closing of the Offering
(MUSI may sell its shares after 18 months), without the prior written consent
of the Underwriter except for: (i) options granted pursuant to the Employee
Stock Option Plan and the issuance of Common Stock upon the exercise of such
options; (ii) the issuance of securities in connection with any merger or
acquisition approved by a majority of the independent directors of the Company;
and (iii) the issuance of
60
<PAGE>
shares of Common Stock to unaffiliated third parties at fair market value
pursuant to a Private Placement approved by a majority of the independent
directors of the Company, commencing 12 months after the Offering has closed.
Notwithstanding these lock-up arrangements, any stockholder subject to such
arrangement may sell shares of Common Stock commencing 12 months after the
completion of the Offering in the event that the last sale price for the Common
Stock on its principal exchange has been at least 200% of the Offering price
for a period of 20 consecutive trading days ending within five days of the date
of such sale, and such sale is completed at a price in excess of 200% of the
initial public offering price or upon the closing of a follow-up public
offering underwritten by a major bracket or large regional underwriting firm
and which raises at least $20 million in gross proceeds. The Underwriter has no
current or future plans, proposals, arrangements or understandings to modify,
shorten or waive the lock-up arrangements. In addition, the Underwriter agreed
with the Nasdaq Stock Market, Inc. not to release MUSI from MUSI's lock-up
agreement for a period of 12 months from the date of this Prospectus. The
Company will file a post-effective amendment to the registration statement of
which this Prospectus constitutes a part, in the event that the Underwriter
waives the lock-up agreements with respect to ten percent or more of the shares
held by existing stockholders of the Company, or will revise the Prospectus if
the lock-up is waived with respect to five percent to ten percent of the shares
held by existing stockholders of the Company.
The Underwriter may engage in certain transactions which may stabilize,
maintain or otherwise affect the price of the Common Stock. Such transactions
may include over-allotments of Common Stock and purchases of the Common Stock.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the Offering price of the shares of Common Stock offered
and sold in the Offering has been determined by arms length negotiation between
the Company and the Underwriter and does not necessarily bear any relationship
to the Company's book value, assets, past operating results, financial
condition, or other established criteria of value. Factors considered in
determining such price include an assessment of the Company's recent financial
results and current financial condition, future prospects of the Company, the
qualifications of the Company's management and other relevant factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Ruskin, Moscou, Evans & Faltischek, P.C., Mineola, New
York. Certain legal matters in connection with the Offering will be passed upon
for the Underwriter by Kramer, Levin, Naftalis & Frankel, New York, New York.
EXPERTS
The financial statements of the Company at December 31, 1997 and for each
of the two years in the period ended December 31, 1997 appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
in this Prospectus, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
CHANGE IN INDEPENDENT AUDITORS
In December 1996, after the completion of the audit of the Company's 1995
financial statements, the Company dismissed KPMG Peat Marwick LLP ("KPMG") as
its independent auditors. The report of KPMG on the Company's financial
statements for 1995 contained no adverse opinion or disclaimer of opinion, and
was not qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with its audit for the year ended December 31, 1995,
there have been no disagreements with KPMG on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of KPMG
would have caused them to make reference thereto in their report on the
financial statements for such year. The decision to change firms was approved
by the Company's Board of Directors.
The Company engaged Ernst & Young LLP as its new independent auditors in
December 1996.
61
<PAGE>
During the year ended December 31, 1995 and until completion of the audit
of the Company's 1995 financial statements, the Company did not consult with
Ernst & Young LLP on items which (i) were or should have been subject to
Statement on Auditing Standards No. 50 or (ii) concerned the subject matter of
a disagreement or reportable event with KPMG.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (the "Registration Statement") under the Securities Act with respect to
the shares of Common Stock offered hereby. This Prospectus, which forms a part
of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and such exhibits and
schedules, which may be inspected without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Northwestern Atrium Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511 or Seven World Trade Center, New York, New York
10048. Copies of such material may also be obtained at prescribed rates from
the Public Reference Section of the Commission in Washington, D.C. 20549.
Statements contained in the Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
Company, the address of such site is http://www.sec.gov.
62
<PAGE>
Frisby Technologies, Inc.
Financial Statements
Contents
<TABLE>
<S> <C>
Report of Independent Auditors ........................................................... F-2
Balance Sheet as of December 31, 1997 .................................................... F-3
Statements of Operations for the Years Ended December 31, 1996 and 1997 .................. F-4
Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1996 and F-5
1997
Statements of Cash Flows for the Years Ended December 31, 1996 and 1997 .................. F-6
Notes to Financial Statements ............................................................ F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Stockholders
Frisby Technologies, Inc.
We have audited the accompanying balance sheet of Frisby Technologies,
Inc. as of December 31, 1997, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Frisby Technologies, Inc.
at December 31, 1997, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Melville, New York
February 27, 1998
F-2
<PAGE>
Frisby Technologies, Inc.
Balance Sheet
<TABLE>
<CAPTION>
December 31,
1997
---------------
<S> <C>
Assets
Current assets:
Cash ................................................................................... $ 375,222
Accounts receivable--billed ............................................................ 358,452
Accounts receivable--unbilled .......................................................... 52,150
Inventory .............................................................................. 247,686
Recoverable and prepaid income taxes ................................................... 26,902
Other current assets ................................................................... 7,192
------------
Total current assets .................................................................... 1,067,604
Property and equipment, net ............................................................. 61,323
Deferred transaction costs .............................................................. 138,908
------------
Total assets ............................................................................ $ 1,267,835
============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable ....................................................................... $ 353,427
Accrued expenses and other current liabilities ......................................... 63,143
License fees payable ................................................................... 184,640
Deferred license revenues .............................................................. 50,000
------------
Total current liabilities ............................................................... 651,210
Accrued license agreement costs ......................................................... 101,250
Deferred license revenues ............................................................... 40,000
------------
Total liabilities ....................................................................... 792,460
Commitments
Stockholders' equity:
Preferred Stock, 1,000,000 shares authorized; no shares issued or outstanding .......... --
Common Stock, $.001 par value; 10,000,000 shares authorized; 3,280,613 shares issued and
outstanding .......................................................................... 3,281
Additional paid-in capital ............................................................. 1,540,575
Accumulated deficit .................................................................... (1,068,481)
------------
Total stockholders' equity .............................................................. 475,375
------------
Total liabilities and stockholders' equity .............................................. $ 1,267,835
============
</TABLE>
See accompanying notes.
F-3
<PAGE>
Frisby Technologies, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year ended
December 31
--------------------------------
1996 1997
------------- ----------------
<S> <C> <C>
Revenues:
Product sales ......................................... $ 13,638 $ 474,179
Research and development projects ..................... 1,119,549 486,700
Licenses and royalties ................................ 75,000 300,960
---------- ------------
Total revenues ......................................... 1,208,187 1,261,839
---------- ------------
Cost of sales:
Products .............................................. 11,581 452,377
Research and development projects ..................... 1,004,457 257,843
Licenses and royalties ................................ 19,553 265,350
---------- ------------
Total cost of sales .................................... 1,035,591 975,570
---------- ------------
Gross profit ........................................... 172,596 286,269
Selling and marketing expense .......................... 82,995 315,169
General and administrative expense ..................... 207,263 899,620
---------- ------------
Loss from operations ................................... (117,662) (928,520)
Interest expense ....................................... 18,636 36,666
---------- ------------
Loss before income taxes ............................... (136,298) (965,186)
Income tax (benefit) provision ......................... (48,642) 44,792
---------- ------------
Net loss ............................................... $ (87,656) $ (1,009,978)
========== ============
Net loss per common share -- basic and diluted ......... $ (.03) $ (.36)
========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
Frisby Technologies, Inc.
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Common Stock Additional Retained
--------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
----------- -------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ................. 2,839,286 $ 500 $ -- $ 29,153 $ 29,653
Net loss ................................... -- -- -- (87,656) (87,656)
--------- ------ ---------- ------------ ------------
Balance at December 31, 1996 ............... 2,839,286 500 -- (58,503) (58,003)
Sale of common stock and option, net of
$956,644 of related costs and expenses..... 441,327 2,781 1,540,575 -- 1,543,356
Net loss ................................... -- -- -- (1,009,978) (1,009,978)
--------- ------ ---------- ------------ ------------
Balance at December 31, 1997 ............... 3,280,613 $3,281 $1,540,575 $ (1,068,481) $ 475,375
========= ====== ========== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
Frisby Technologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended
December 31
--------------------------------
1996 1997
------------- ----------------
<S> <C> <C>
Operating activities
Net loss ................................................ $ (87,656) $ (1,009,978)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ......................................... 15,065 15,121
Deferred income tax (benefit) provision .............. (21,740) 44,792
Changes in assets and liabilities:
Accounts receivable ................................. 16,813 (226,656)
Inventory ........................................... (32,204) (199,712)
Recoverable and prepaid income taxes ................ (26,902) --
Other current assets ................................ 269 (2,269)
Accrued license agreement costs ..................... 39,509 --
Accounts payable .................................... 74,108 260,190
Accrued expenses and other current liabilities 16,408 29,965
License fees payable ................................ 7,446 177,194
Deferred license revenues ........................... -- 90,000
Payments to related party ........................... (43,655) (10,550)
Income taxes payable ................................ (27,872) --
--------- ------------
Net cash used in operating activities ................... (70,411) (831,903)
--------- ------------
Investing activities
Capital expenditures .................................... (26,072) --
--------- ------------
Net cash used in investing activities ................... (26,072) --
--------- ------------
Financing activities
Net proceeds from private placement ..................... -- 1,543,356
Net proceeds from (repayments of) notes payable ......... 110,000 (250,000)
Borrowings from related party ........................... -- 517,000
Repayment to related party .............................. -- (517,000)
Payment of transaction costs ............................ -- (138,908)
Principal payments of capital lease obligation .......... (10,186) --
--------- ------------
Net cash provided by financing activities ............... 99,814 1,154,448
--------- ------------
Net increase in cash .................................... 3,331 322,545
Cash--beginning of year ................................. 49,346 52,677
--------- ------------
Cash--end of year ....................................... $ 52,677 $ 375,222
========= ============
Supplemental information
Interest paid ........................................... $ 18,636 $ 36,666
Income taxes paid ....................................... $ 25,179 --
</TABLE>
See accompanying notes.
F-6
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements
1. Organization and Business
The Company is a technology development company engaged in the development
and commercialization of thermal management products for use in a broad range
of consumer and industrial products. The Company's Thermasorb(R) and
ComforTemp(R) products utilize licensed patents and the Company's proprietary
MicroPCM technology to enhance thermal characteristics (i.e., insulation,
cooling or temperature control properties) in a variety of consumer and
industrial products.
On December 19, 1997, the Board of Directors authorized and the
stockholders ratified an amendment to the Company's certificate of
incorporation increasing the number of authorized shares of Common Stock to
10,000,000 shares, changing the par value of the Common Stock to $.001 and
authorizing 1,000,000 shares of "blank check" preferred stock, having such
rights and preferences and issuable in such series as may from time to time be
determined by the Company's Board of Directors. On December 23, 1997, the Board
of Directors authorized: (i) a 5,679-for-1 stock split of the outstanding
shares of common stock; and (ii) the reservation of 250,000 shares of common
stock for issuance upon exercise of options which may be granted under the
Company's Stock Option Plan. Effect has been given to the stock split as if it
occurred on January 1, 1996. All common share data has been restated to reflect
the stock split.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company accounts for long-term contracts based on the
percentage-of-completion method based on the relationship of total costs
incurred to date to estimated total costs at completion. Adjustments to cost
estimates are made periodically and related changes reflected in operations
cumulative to the date of change. Revenue on cost-plus-fixed-fee contracts is
recognized to the extent of costs incurred plus a proportionate amount of the
fee earned. Revenue recognized on uncompleted contracts in excess of amounts
billed is presented as "Accounts receivable -- unbilled" in the accompanying
balance sheet. Billings are made in accordance with the respective terms of
such contracts. Provisions for estimated losses, if any, on uncompleted
contracts are made in the period in which such losses are determined.
Revenues from sales of products are recognized upon shipment. License
revenues are recorded ratably over the license period which generally ranges
between two and three years. Royalty revenues are recorded when the Company's
strategic partners report sales of products containing Thermasorb(R) and
ComforTemp(R) to their customers.
Depreciation and Amortization
The Company's fixed assets are stated at cost. Depreciation is provided
over the estimated useful lives (three to ten years) of the assets under the
straight-line method. Leasehold improvements are amortized on a straight-line
basis over the shorter of the lease term or the estimated useful life of the
asset.
Loss Per Share
Shares used in the computation of both the basic and diluted loss per
share for the years ended December 31, 1996 and 1997 were 2,839,286 and
2,842,913, respectively, representing the weighted-average shares outstanding
for each year. There were no dilutive securities for either 1996 or 1997.
Fair Value of Financial Instruments
The book values of the cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair values principally because of the
short-term maturities of these instruments.
F-7
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Inventories
Inventories consist substantially of finished goods and are stated at the
lower of cost or market. Cost is determined by the weighted average method.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
approximately $33,000 and $212,000 of advertising costs for the years ended
December 31, 1996 and 1997, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Significant Concentrations
The Company currently outsources the manufacture of all of its products,
including Thermasorb(R) and ComforTemp(R) to a limited number of manufacturers.
The Company and its Thermasorb(R) supplier have entered into an arrangement
that provides firm, fixed pricing for all of the Company's anticipated
requirements for Thermasorb(R) additives, as well as favorable pricing and
delivery terms for short run and prototype production volumes. Pursuant to the
arrangement, the Company has placed a blanket purchase order for all of its
1998 requirements of Thermasorb(R). The Company has also received written
assurances from the supplier regarding its desire to enter into a long-term
supply agreement for the manufacture of the Company's Thermasorb(R) additive.
All of the Company's ComforTemp(R) will be manufactured by a different vendor
pursuant to a memorandum of understanding.
The Company does a significant amount of business with the United States
government and a limited number of strategic partners. Total revenues from the
United States government comprised approximately 93% of the Company's total
revenues for the year ended December 31, 1996. Total revenues from the United
States government and two strategic partners comprised approximately 84% (39%,
34% and 11%) of the Company's total revenues for the year ended December 31,
1997.
At December 31, 1997, the United States government and two strategic
partners accounted for approximately 81% (22%, 45%, and 14%) of the Company's
accounts receivable. Consistent with industry standards, receivables are
payable in accordance with the terms of the underlying contracts and collateral
is not required.
4. Property and Equipment
Property and equipment consist of the following:
December 31,
1997
-------------
Leasehold improvements ................................. $ 36,336
Furniture .............................................. 14,247
Equipment .............................................. 56,340
--------
106,923
Less accumulated depreciation and amortization ......... 45,600
--------
$ 61,323
========
F-8
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements -- (Continued)
5. Note Payable
During 1997, the Company's available line of credit for $250,000 with a
bank (the "Line"), was increased to $500,000 and on December 30, 1997, the
Company repaid all amounts outstanding with a portion of the proceeds from the
Private Placement (see Note 10). The Line is maintained for working capital
purposes. The Line bears interest at .5% above the bank's prime rate and
expires on June 30, 1998.
Substantially all of the Company's assets are pledged as security for any
outstanding borrowings under the Line. The Line is also secured by a joint
guaranty from the chief executive officer, a member of the Board of Directors
and Frisby Aerospace, Inc. (see Note 7).
6. Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Significant components of
the Company's deferred tax assets are as follows:
December 31,
1997
-------------
License agreement costs ............................. $ 42,000
Deferred license revenues ........................... 35,000
Net operating loss carryforward ..................... 331,000
Other ............................................... (2,000)
----------
Total deferred tax assets ........................ 406,000
Valuation allowance for deferred tax assets ......... (406,000)
----------
Net deferred tax assets .......................... $ --
==========
As a result of losses from operations, at December 31, 1997, the Company
has available a net operating loss carryforward ("NOL") of approximately
$848,000 for Federal income tax purposes that expires in 2012.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
period in which the NOL can be utilized and the temporary differences become
deductible. Since the Company has incurred losses in previous years and it
anticipates additional losses through the third quarter of 1999, the Company
has established a valuation allowance for deferred tax assets at December 31,
1997.
Significant components of the income tax provision (benefit) are as
follows:
Year Ended
December 31,
-------------------------
1996 1997
------------- ---------
Current:
Federal ...................................... $ (25,541) $ --
State ........................................ (1,361) --
--------- -------
(26,902) --
--------- -------
Deferred:
Federal ...................................... (19,081) 36,000
State ........................................ (2,659) 8,792
--------- -------
(21,740) 44,792
--------- -------
Total ......................................... $ (48,642) $44,792
========= =======
F-9
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements -- (Continued)
6. Income Taxes -- (Continued)
The income tax benefit differs from the amounts computed by applying the
statutory United States Federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------
1996 1997
------------- --------------
<S> <C> <C>
Benefit for Federal income taxes at the statutory rate ......... $ (46,341) $ (328,163)
State income taxes, net of Federal income tax benefit .......... (2,653) (33,061)
Other .......................................................... 352 214
Valuation allowance for deferred tax assets .................... -- 405,802
--------- ----------
$ (48,642) $ 44,792
========= ==========
</TABLE>
7. Related Party Transactions
Frisby Aerospace, Inc. ("Frisby Aerospace"), certain stockholders of which
are also stockholders of the Company, charges the Company for space and related
services. These charges, which are non-interest bearing, are based upon
estimates of square footage used for facilities and actual expenses incurred by
Frisby Aerospace on behalf of the Company. Management believes that such
allocations are reasonable. These charges aggregated approximately $51,000 and
$57,000 for the years ended December 31, 1996 and 1997, respectively, and are
included in cost of sales in the accompanying statement of operations. The
Company also received unsecured, non-interest bearing advances from Frisby
Aerospace aggregating $517,000 during the year ended December 31, 1997. In
addition, Frisby Aerospace provides the Company with certain facilities,
accounting, clerical and office services without charge. The value of such
services are not deemed material and accordingly, have not been recorded in the
accompanying financial statements.
The assets of Frisby Aerospace were sold to an unrelated third party on
February 10, 1998. The Company anticipates that the loss of the facilities and
services it has received from Frisby Aerospace can be replaced at a reasonable
cost.
A portion of the proceeds received from the Private Placement (See Note
10) was used to repay the amounts owed to Frisby Aerospace in full on December
30, 1997.
8. License Arrangements and Other Commitments
(a) The Company signed an Exclusive License Agreement (the "TRDC License")
in 1995 with a research and development corporation which holds innovative
proprietary technology in microencapsulated and thermal management technologies
and with which the Company had an existing agreement since 1991. The TRDC
License gives the Company the exclusive worldwide right to develop and
commercialize this technology with respect to certain applications in exchange
for royalties that range from 1% to 5% of product sales revenue and 12.5% to
50% of license fees and royalty revenues, as defined. Minimum annual payments
are required in accordance with the TRDC License and are payable as follows:
1998 $ 54,000
1999 78,000
2000 102,000
2001 126,000
2002 and thereafter 150,000
The Company is expensing such minimum annual payments on a straight-line
basis over the period in which such payments fluctuate. Accordingly, the charge
was approximately $73,000 for each of the years ended December 31, 1996 and
1997.
(b) The rights to the TRDC Technology relating to MicroPCM Fibers and
Fabrics were licensed by TRDC to Outlast Technologies, Inc. ("Outlast") prior
to the Company obtaining the TRDC License. In order to expand its rights in the
TRDC Technology, in January 1998, the Company entered into an agreement with
Outlast which
F-10
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements -- (Continued)
8. License Arrangements and Other Commitments -- (Continued)
expands the rights of the Company to include the combination of the Company's
products with fibers and fabrics. Under the terms of the agreement, the Company
paid Outlast $100,000 as a license payment related to periods prior to the
execution of the agreement and such amount has been charged to cost of sales
for the year ended December 31, 1997. In addition, the agreement provides for
the Company to meet minimum annual payments of $150,000 to $600,000 per year
from 1998 through 2002, provided that the Company elects to maintain the
exclusivity granted by the license. If subsequent to the initial licensing
period the Company elects to extend the exclusivity granted by the license, the
minimum annual payment for the five years thereafter will be $1,000,000.
(c) The Company is obligated under several operating leases for its
operating facility and equipment expiring at various dates in 1998. The
operating facility is leased from Frisby Aerospace (see Note 7). This lease
expired on November 30, 1997 and the Company continues to lease the facility
from Frisby Aerospace on a month to month basis. Total rental expense for the
years ended December 31, 1996 and 1997, was approximately $45,000, and $61,000,
respectively.
(d) The Company entered into an operating lease agreement with an
unrelated entity for a facility in North Carolina. The lease term is for 20
years and monthly payments are expected to commence in June 1998. Future
minimum payments under the lease are as follows:
1998 $ 63,000
1999 126,000
2000 126,000
2001 132,000
2002 138,000
Thereafter 2,203,000
----------
$2,788,000
==========
Upon execution of the North Carolina lease, two shareholders of the
Company each received a five percent equity interest in the lessor which vests
over a ten year period. Notwithstanding the equity interest, the Company
believes that the rental payments represent an arms-length price for the lease.
(e) The Company utilizes software and related technologies throughout its
business that will be affected by the date change in the year 2000. System
modifications or replacements are underway or planned which should make all
significant computer systems at the Company compliant with the year 2000
requirement. Anticipated spending for these modifications will be expensed as
incurred and is not expected to have a material impact on the Company's ongoing
results of operations.
9. Retirement Plan
All eligible employees of the Company have been permitted to participate
in a 401(k)/Profit Sharing Plan (the "Plan") adopted effective January 1, 1997
by Frisby Aerospace. The Plan is funded from contributions by employees for
their own account and does not provide for any mandatory or matching
contributions by the Company. All employees of the Company on the effective
date of the Plan immediately became eligible. An employee who became employed
after January 1, 1997 will become entitled to participate in the Plan after
the completion of six months of service and the attainment of 21 years of age.
Under the Plan, participants will be permitted to contribute from their
compensation any amount up to the lesser of 20% of their annual gross salary
or the maximum deferral allowed under the Internal Revenue Code. The Company
will be entitled to make optional profit sharing contributions for any plan
year in its discretion. During the year ended December, 1997, the Company did
not make any contributions to the Plan.
F-11
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements -- (Continued)
10. Private Placement
On December 29, 1997, the Company sold 441,327 shares of its Common Stock
and an option to purchase 587,500 shares of the Company's Convertible Preferred
Stock at an exercise price of $4.26 per share until February 27, 1998 to a
foreign investor for an aggregate purchase price of $2,500,000. The Company has
allocated $353,000 of the purchase price as the estimated fair value of the
option. This transaction resulted in net proceeds of approximately $1,600,000,
after the payment of related costs and expenses. The Convertible Preferred
Stock is convertible into Common Stock at the election of the investor for a
60-day period commencing on the 370th day following the anticipated initial
public offering. On February 27, 1998, the foreign investor exercised the
Convertible Preferred Stock Option.
F-12
<PAGE>
================================================================================
No person has been authorized in connection with any offering made
hereby to give any information or to make any representation other than those
contained in this Prospectus in connection with the Offering made hereby, and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company or any Underwriter. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
security other than the shares of Common Stock offered hereby, nor does it
constitute an offer to sell or a solicitation of any offer to buy any of the
securities offered hereby to any person in any jurisdiction in which it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that the information contained herein is correct as of any time
subsequent to the dates as of which such information is furnished or that there
has been no change in the affairs of the Company since such date.
-----------------------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary ....................... 3
Risk Factors ............................. 9
Use of Proceeds .......................... 20
Dividend Policy .......................... 21
Dilution ................................. 22
Capitalization ........................... 23
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ............................ 24
Business ................................. 29
Management ............................... 46
Certain Transactions ..................... 52
Principal Stockholders ................... 55
Description of Securities ................ 56
Shares Eligible for Future Sale .......... 58
Underwriting ............................. 60
Legal Matters ............................ 61
Experts .................................. 61
Change in Independent Auditors ........... 61
Additional Information ................... 62
Index to Financial Statements ............ F-1
-----------------------------------
Until _____, 1998 (25 days after the date hereof), all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as Underwriter
and with respect to their unsold allotments or subscriptions.
================================================================================
<PAGE>
================================================================================
1,600,000 Shares
[GRAPHIC OMITTED]
Common Stock
----------------------------------------
Prospectus
----------------------------------------
BARINGTON CAPITAL GROUP
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers provided that this provision
shall not eliminate or limit the liability of a directors: (i) for any breach
of the director's duty of loyalty to the Company or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law; (iii) arising under Section 174 of the DGCL; or
(iv) for any transaction from which the director derived an improper personal
benefit.
The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the Company's By-Laws, any agreement, vote of
stock or otherwise.
The Company's Certificate of Incorporation eliminates the personal
liability of directors to the fullest extent permitted by Section 102(b)(7) of
the DGCL.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such
persons in their official capacities if such person acted in good faith and in
a manner that he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the applicable provisions, the Company has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
Other Expenses of Issuance and Distribution
The following table sets forth the various expenses payable by the Company
in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and the Underwriter's non-
accountable expense allowance. All of the amounts shown are estimated except
the Securities and Exchange Commission registration fee and the NASD filing
fee.
Total
---------------
SEC registration fee ........................ $ 4,965.44
Nasdaq SmallCap Market listing fee .......... 9,880.61
NASD filing fee ............................. 2,125.00
BSE application fee ......................... 7,750.00
Printing and engraving expenses ............. 120,000.00
Legal fees and expenses ..................... 225,000.00
Accounting fees and expenses ................ 145,000.00
Transfer agent and registrar fee ............ 3,500.00
Miscellaneous ............................... 109,778.95
------------
Total ..................................... $628,000.00
============
II-1
<PAGE>
Exhibits
<TABLE>
<S> <C>
** 1.1 Form of Underwriting Agreement
** 1.2 Form of Underwriter's Option Agreement
** 3.1.1 Articles of Incorporation (North Carolina)
** 3.1.2 Articles of Amendment to Articles of Incorporation dated December 23, 1997 (North Carolina)
3.1.3 Form of Certificate of Incorporation (Delaware)
** 3.2.1 By-Laws (North Carolina)
3.2.2 Form of By-Laws (Delaware)
p4.1 Form of Common Stock Certificate
** 4.2 Option Agreement dated December 29, 1997 between MUSI Investments, S.A. and the Company
5.1 Opinion of Ruskin, Moscou, Evans & Faltischek, P.C.
10.1 Stock Option Plan
10.2 Amended Employment Agreement dated as of December 8, 1997 between the Company and
Gregory S. Frisby
**10.3 Employment Agreement dated December 6, 1997 between the Company and Douglas J.
McCrosson
10.4 Shareholder Agreement dated December 10, 1997 between Gregory S. Frisby and Jeffry D. Frisby
**10.5 Stockholders Agreement dated December 29, 1997 between Gregory S. Frisby, Jeffry D. Frisby and
MUSI Investments, S.A.
**10.6 Line of Credit Agreement with European American Bank
c10.7.1 License Agreement dated May 1, 1995 between the Company and TRDC
**10.7.2 Assignment of License Agreement effective January 3, 1997 from TRDC to Delta Thermal Systems,
Inc.
c10.8 License Agreement effective January 1, 1998 between the Company and Outlast Technologies, Inc.
c10.9 License Agreement dated March 31, 1997 between the Company and Fly Technologies, Inc.
c10.10 License Agreement dated January 23, 1997 between the Company and Wells Lamont Division, Mar-
mon Holdings, Inc.
c10.11 License Agreement dated February 1, 1997 between the Company and Cove Shoe Company, Inc.
c10.12.1 License Agreement dated May 22, 1996 between the Company and Thermo Solutions, Inc. (f/k/a
Temptop Container Systems, Inc.) ("Thermo Solutions")
c10.12.2 Memorandum of Understanding dated January 22, 1998 between the Company and Thermo Solu-
tions
c10.13 License Agreement dated February 10, 1997 between the Company and Genfoot, Inc. and Genfoot
America, Inc.
p10.14 Contract No. 00178-96-C-3014 between the Company and the United States of America (Naval Sur-
face Warfare Division)
p10.15 Contract No. F08637-97-C-6017 between the Company and the United States of America (325th
Contracting Squadron/LGCX)
p10.16 Contract No. F33615-93-C-3409 between the Company and the United States of America (Depart-
ment of Air Force Material Command (ASC) Wright Laboratory (WL/FLKF))
c10.17 Arrangement dated January 21, 1998 between the Company and Minnesota Mining & Manufactur-
ing, Inc.
c10.18 Memorandum of Understanding dated October 23, 1997 between the Company and Lendell Manu-
facturing, Inc.
c10.19 Memorandum of Understanding dated April 14, 1997 between the Company and Bell Sports Corp.
c10.20 Memorandum of Understanding dated July 9, 1997 between the Company and CamelBak/FasTrak
Systems, Inc.
c10.21 Memorandum of Understanding dated December 11, 1997 between the Company and Foamex Inter-
national, Inc.
c10.22 Memorandum of Understanding dated January 15, 1998 between the Company and LaCrosse Foot-
wear, Inc.
**10.23 Lease dated March 2, 1998 between Piedmont Institute for Research & Technology II, LLC, as land-
lord, and the Company, as tenant
**10.24 Lease dated June 1, 1993 between Frisby Aerospace, as landlord, and the Company, as tenant
**10.25 Lease dated September 1, 1994 between Charles Winburn, as landlord, and the Company, as tenant
**11.1 Statement re: computation of per share earnings
16.1 Letter on change in certifying accountant
24.1 Consent of Ernst & Young LLP
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
24.2 Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (included in Exhibit 5.1)
**25.1 Power of Attorney (included on signature page)
**27.1 Financial data schedule with respect to the Registration Statement filed on January 29, 1998
27.2 Financial data schedule with respect to Amendment No. 1
27.3 Financial data schedule with respect to Amendment No. 2
</TABLE>
- ------------
** previously filed
p filed in paper form
c portions of this exhibit have been omitted and have been separately filed
with the Commission pursuant to Securities Act Rule 406
All other schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedule or because the information required is included in the financial
statements or notes thereto.
Recent Sales of Unregistered Securities
In December 1997, the Company sold 441,327 shares of its Common Stock to
MUSI in a privately negotiated transaction under Section 4(2) of the Securities
Act, the Private Placement for a purchase price of $2,500,000. MUSI is
beneficially owned by a single accredited non-U.S. investor. In connection with
the Private Placement, the Company granted to MUSI an option to purchase up to
587,500 shares of Convertible Preferred Stock for an exercise price of $4.26
per share expiring on February 27, 1998 which MUSI exercised on February 27,
1998. The Convertible Preferred Stock has a preference in dividends and
liquidation and is convertible at the election of MUSI into an equal number of
shares of Common Stock during a 60-day period commencing on the 370th day
following completion of an initial public offering by the Company.
Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of
the Company in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issues.
The undersigned Company hereby undertakes to provide to the Underwriter,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective by the Commission.
(2) For the purpose of determining any liability under the Securities Act,
each Post-Effective Amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the Offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable ground to believe that it meets all of
the requirements of filing on Form SB-2 and authorizes this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned, in
the City of New York, State of New York, on March 30, 1998.
FRISBY TECHNOLOGIES, INC.
By: /s/ Gregory S. Frisby
--------------------------
Gregory S. Frisby, President
Dated: March 30, 1998
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf thereunto duly authorized in the City of New York, State of New York.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gregory S. Frisby Chairman of the Board of Directors, President, March 30, 1998
----------------------- Chief Executive Officer and Principal Financial and
Gregory S. Frisby Accounting Officer
* Director March 30, 1998
-----------------------
Jeffry D. Frisby
* Director March 30, 1998
-----------------------
Pietro A. Motta
</TABLE>
*By: /s/ Gregory S. Frisby
- -----------------------------------------
Gregory S. Frisby, Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Page No.
- ------------------------- ---------
<S> <C> <C>
** 1.1 Form of Underwriting Agreement
** 1.2 Form of Underwriter's Option Agreement
** 3.1.1 Articles of Incorporation (North Carolina)
** 3.1.2 Articles of Amendment to Articles of Incorporation dated December 23, 1997 (North
Carolina)
3.1.3 Form of Certificate of Incorporation (Delaware)
** 3.2.1 By-Laws (North Carolina)
3.2.2 Form of By-Laws (Delaware)
p4.1 Form of Common Stock Certificate
** 4.2 Option Agreement dated December 29, 1997 between MUSI Investments, S.A. and the
Company
5.1 Opinion of Ruskin, Moscou, Evans & Faltischek, P.C.
10.1 Stock Option Plan
10.2 Amended Employment Agreement dated as of December 8, 1997 between the Company and
Gregory S. Frisby
**10.3 Employment Agreement dated December 6, 1997 between the Company and Douglas J.
McCrosson
10.4 Shareholder Agreement dated December 10, 1997 between Gregory S. Frisby and Jeffry D.
Frisby
**10.5 Stockholders Agreement dated December 29, 1997 between Gregory S. Frisby, Jeffry D.
Frisby and MUSI Investments, S.A.
**10.6 Line of Credit Agreement with European American Bank
c10.7.1 License Agreement dated May 1, 1995 between the Company and TRDC
**10.7.2 Assignment of License Agreement effective January 3, 1997 from TRDC to Delta Thermal
Systems, Inc.
c10.8 License Agreement effective January 1, 1998 between the Company and Outlast Technolo-
gies, Inc.
c10.9 License Agreement dated March 31, 1997 between the Company and Fly Technologies, Inc.
c10.10 License Agreement dated January 23, 1997 between the Company and Wells Lamont Divi-
sion, Marmon Holdings, Inc.
c10.11 License Agreement dated February 1, 1997 between the Company and Cove Shoe Com-
pany, Inc.
c10.12.1 License Agreement dated May 22, 1996 between the Company and Thermo Solutions, Inc.
(f/k/a Temptop Container Systems, Inc.) ("Thermo Solutions")
c10.12.2 Memorandum of Understanding dated January 22, 1998 between the Company and Thermo
Solutions
c10.13 License Agreement dated February 10, 1997 between the Company and Genfoot, Inc. and
Genfoot America, Inc.
p10.14 Contract No. 00178-96-C-3014 between the Company and the United States of America
(Naval Surface Warfare Division)
p10.15 Contract No. F08637-97-C-6017 between the Company and the United States of America
(325th Contracting Squadron/LGCX)
p10.16 Contract No. F33615-93-C-3409 between the Company and the United States of America
(Department of Air Force Material Command (ASC) Wright Laboratory (WL/FLKF))
c10.17 Arrangement dated January 21, 1998 between the Company and Minnesota Mining &
Manufacturing, Inc.
c10.18 Memorandum of Understanding dated October 23, 1997 between the Company and Lendell
Manufacturing, Inc.
c10.19 Memorandum of Understanding dated April 14, 1997 between the Company and Bell Sports
Corp.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibits Page No.
- --------------------- ---------
<S> <C> <C>
c10.20 Memorandum of Understanding dated July 9, 1997 between the Company and
CamelBak/FasTrak Systems, Inc.
c10.21 Memorandum of Understanding dated December 11, 1997 between the Company and
Foamex International, Inc.
c10.22 Memorandum of Understanding dated January 15, 1998 between the Company and
LaCrosse Footwear, Inc.
**10.23 Lease dated March 2, 1998 between Piedmont Institute for Research & Technology II, LLC,
as landlord, and the Company, as tenant
**10.24 Lease dated June 1, 1993 between Frisby Aerospace, as landlord, and the Company, as
tenant
**10.25 Lease dated September 1, 1994 between Charles Winburn, as landlord, and the Company,
as tenant
**11.1 Statement re: computation of per share earnings
16.1 Letter on change in certifying accountant
24.1 Consent of Ernst & Young LLP
24.2 Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (included in Exhibit 5.1)
**25.1 Power of Attorney (included on signature page)
**27.1 Financial data schedule with respect to the Registration Statement filed on January 29, 1998
27.2 Financial data schedule with respect to Amendment No. 1
27.3 Financial data schedule with respect to Amendment No. 2
</TABLE>
- ------------
** previously filed
p filed in paper form
c portions of this exhibit have been omitted and have been separately filed
with the Commission pursuant to Securities Act Rule 406
<PAGE>
AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION OF FRISBY TECHNOLOGIES, INC.
Under Sections 242 and 245 of the Delaware General Corporation Law
The undersigned, Gregory S Frisby and Douglas J. McCrosson, being the
President and Secretary, respectively, of FRISBY TECHNOLOGIES, INC. (the
"Corporation") hereby certifies that the original Certificate of Incorporation
was filed by the Department of State of the State of Delaware on February 6,
1998 and the text of the Certificate of Incorporation is hereby amended and
restated as follows:
ARTICLE FIRST: The name of the corporation is FRISBY TECHNOLOGIES,
INC.
ARTICLE SECOND: The address of the Corporation's registered office in
the State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle and the name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
ARTICLE FOURTH: The total number of shares which the Corporation
shall have authority to issue is Eleven Million (11,000,000), consisting of
Ten Million (10,000,000) shares of common stock, par value $.001 per share
(the "Common Stock"), and One Million (1,000,000) shares of preferred stock,
par value $.001 per share (the "Preferred Stock"), issuable as provided
hereinbelow.
A. Preferred Stock
1. The Preferred Stock of the Corporation may be issued from
time to time in one or more series of any number of shares, provided that the
aggregate number of shares issued and not cancelled in any and all such series
shall not exceed the total number of shares of Preferred Stock hereinabove
authorized.
2. Authority is hereby vested in the Board of Directors from
time to time to authorize the issuance of one or more series of Preferred
Stock and, in connection with the creation of such series, to fix by
resolution or resolutions providing for the issuance of shares thereof the
rights, preferences, designations and characteristics of each such series
including, without limitation, the following:
(a) the maximum number of shares to constitute such
series, which may subsequently be increased or decreased
(but not below the number of shares of that series then
outstanding) by resolution of the Board of Directors, the
distinctive designation and the stated value thereof if
different than the par value thereof;
<PAGE>
(b) whether the shares of such series shall have
voting power, full or limited, or no voting power, and if
any, the terms of such voting power;
(c) the dividend rate, if any, with respect to the
shares of such series, the conditions and dates upon which
such dividends shall be payable, the preference or relation
which such dividends shall bear to the dividends payable on
any other class or classes or on any other series of capital
stock and whether such dividend shall be cumulative or
noncumulative;
(d) whether the shares of such series shall be
subject to redemption by the Corporation, and, if made
subject to redemption, the times, prices and other terms,
limitations, restrictions or conditions of such redemption;
(e) the relative amounts, if any, of payment and
the relative rights or preferences to receive such payments
in respect of shares of such series, which the holders of
shares of such series shall be entitled to receive upon the
liquidation, dissolution or winding-up of the Corporation;
(f) whether or not the shares of such series shall
be subject to the operation of a retirement or sinking fund
and, if so, the extent to and manner in which any such
retirement or sinking fund shall be applied to the purchase
or redemption of the shares of such series for retirement or
to other corporate purposes and the terms and provisions
relative to the operation thereof;
(g) whether or not the shares of such series shall
be convertible into, or exchangeable for, shares of any
other class, classes or series, or other securities, whether
or not issued by the Corporation, and if so convertible or
exchangeable, the price or prices or the rate or rates of
conversion or exchange and the method, if any, of adjusting
same;
(h) the limitations and restrictions, if any, to be
effective while any shares of such series are outstanding
upon the payment of dividends or the making of other
distributions on, and upon the purchase, redemption or other
acquisition by the Corporation of, the Common Stock or any
other class or classes of stock of the Corporation ranking
junior to the shares of such series either as to dividends
or upon liquidation, dissolution or winding-up;
2
<PAGE>
(i) the conditions and restrictions, if any, upon
the creation of indebtedness of the Corporation or upon the
issuance of any additional stock (including additional
shares of such series or of any other series or of any other
class) ranking on a parity with or prior to the shares of
such series as to dividends or distributions of assets upon
liquidation, dissolution or winding-up; and
(j) any other preference and relative,
participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, as
shall not be inconsistent with law, this ARTICLE FOURTH or
any resolution of the Board of Directors pursuant hereto.
B. Common Stock
1. The Common Stock of the Corporation may be issued from
time to time in any number of shares, provided that the aggregate number of
shares issued and not cancelled shall not exceed the total number of shares of
Common Stock hereinabove authorized.
2. Unless expressly provided by the Board of Directors of
the Corporation in fixing the voting rights of any series of Preferred Stock,
the holders of the outstanding shares of Common Stock shall exclusively
possess all voting power for the election of directors and for all other
purposes, each holder of record of shares of Common Stock being entitled to
one vote for each share of such stock standing in his name on the books of the
Corporation.
3. Subject to the prior rights of the holders of Preferred
Stock now or hereafter granted pursuant to this ARTICLE FOURTH, the holders of
Common Stock shall be entitled to receive, as and when declared by the Board
of Directors, out of funds legally available for that purpose, dividends
payable either in cash, stock or otherwise.
4. In the event of any liquidation, dissolution or
winding-up of the Corporation, either voluntary or involuntary, after payment
shall have been made in full to the holders of Preferred Stock of any amounts
to which they may be entitled, the holders of Common Stock shall be entitled,
with or without the holders of one or more classes or series of Preferred
Stock in accordance with the rights granted to the class or series of
Preferred Stock held by them, to share, ratably with the holders of Preferred
Stock entitled to participate in such distribution, if any, in all remaining
assets of the Corporation available for distribution to its stockholders.
ARTICLE FIFTH: The Corporation is to have perpetual existence.
ARTICLE SIXTH: The name and mailing address of the incorporator is
Kim K. Schutz, c/o Ruskin, Moscou, Evans & Faltischek, P.C., 170 Old Country
Road, Mineola, New York 11501.
3
<PAGE>
ARTICLE SEVENTH: Whenever a compromise or arrangement is proposed
between the Corporation and its creditors or any class of them and/or between
the Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application in
a summary way of the Corporation or of any creditor or stockholder thereof or
on the application of any receiver or receivers appointed for this corporation
under the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for the Corporation under the provisions of Section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of the Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of the Corporation, as the case may be,
and also on the Corporation.
ARTICLE EIGHTH: For the management of the business and for the
conduct of the affairs of the Corporation, and in further definition,
limitation, and regulation of the powers of the corporation and of its
directors and of its stockholders or any class or series thereof, as the case
may be, it is further provided:
A. 1. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors consisting of such number of
directors as is determined from time to time by resolution adopted by
affirmative vote of a majority of the entire Board of Directors; provided,
however, that in no event shall the number of directors be less than three;
2. Any director, or the entire Board of Directors, may be
removed from office for cause by the Board of Directors, or by the affirmative
vote of a majority of the votes entitled to be cast by the then holders of all
of the then outstanding shares of Voting Stock, with or without cause.
3. Except as otherwise required by law, vacancies in the
Board of Directors may be filled only by the then remaining directors;
4. All nominations for candidates for election as directors,
other than nominations by or at the discretion of the Board of Directors, or a
committee of the Board of Directors, and all stockholder proposals to be
considered at annual meetings of the stockholders shall be presented to the
Corporation pursuant to the advance notice procedure set forth in this Article
VIII Section D (Nominations) or Article IX Section B (Proposals).
B. In furtherance and not limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
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1. To make, alter, amend or repeal the By-Laws of the
Corporation. The holders of shares of Voting Stock, to the extent such power
is at the time conferred upon them by applicable law, also shall have the
power to make, alter, amend or repeal the By-Laws of the Corporation.
2. By a majority of the whole Board of Directors, to
designate one or more committees, each committee to consist of one or more of
the directors of the Corporation. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. The By-Laws may
provide that in the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors, or in the By-Laws of the
Corporation, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to
all papers which may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation (except
that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the Board
of Directors as provided in ARTICLE FOURTH hereof, fix the designations and
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the Corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the Corporation or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), adopting an
agreement of merger or consolidation, recommending to the stockholders the
sale, lease or exchange of all or substantially all of the Corporation's
property and assets, recommending to the stockholders a dissolution of the
Corporation or a revocation of a dissolution, or amending the By-Laws of the
Corporation; and, unless the resolution or By-Laws expressly so provide, no
such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of the State of
Delaware.
3. When and as authorized by the stockholders in accordance
with statute, to sell, lease or exchange all or substantially all of the
property and assets of the Corporation, including its goodwill and its
corporate franchises, upon such terms and conditions and for such
consideration, which may consist in whole or in part of money or property
including shares of stock in, and/or other securities of, any other
corporation or corporations, as the Board of Directors shall deem expedient
and for the best interests of the Corporation.
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C. In addition to any other considerations which the Board of
Directors may lawfully take into account, in determining whether to take or to
refrain from taking corporate action on any matter, including proposing any
matter to the stockholders of the Corporation, the Board of Directors may take
into account the long-term as well as the short-term interests of the
Corporation and its stockholders (including the possibility that these
interests may be best served by the continued independence of the
Corporation), customers, employees and other constituencies of the Corporation
and its subsidiaries, including the effect upon communities in which the
Corporation and its subsidiaries do business. In so evaluating any such
determination, the Board of Directors shall be deemed to be performing their
duties and acting in good faith and in the best interests of the Corporation
within the meaning of Section 145 of the General Corporation Law of the State
of Delaware, or any successor provision.
D. Subject to the rights of holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation,
dissolution or winding-up, nominations for the election of directors may be
made by the Board of Directors or by any holder of Voting Stock. However, any
holder of Voting Stock may nominate one or more persons for election as
directors at an annual meeting only pursuant to the Corporation's notice of
such meeting or if written notice of such stockholder's intent to make such
nomination or nominations has been received by the Secretary of the
Corporation not less than sixty (60) nor more than ninety (90) days prior to
the first anniversary of the preceding year's annual meeting. Each such notice
shall set forth: (a) the name and address of the stockholder who intends to
make the nomination and of the person or person to be nominated; (b) a
representation that the stockholder is a holder of record of Voting Stock and
intends to appear in person or by proxy at the meeting to nominate the person
or persons specified in the notice; (c) a description of all arrangements or
understandings between the stockholder and each nominee and any other person
or persons (naming such person or persons) relating to the nomination or
nominations; (d) the class and number of shares of the Corporation which are
beneficially owned by such stockholder and the person to be nominated as of
the date of such stockholder's notice and by any other stockholders known by
such stockholder to be supporting such nominees as of the date of such
stockholder's notice; (e) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission; and (f) the consent of each nominee to serve as a director of the
Corporation if so elected.
In addition, in the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors, any holder of
Voting Stock may nominate one or more persons for election as directors at a
special meeting only pursuant to the Corporation's notice of meeting or if
written notice of such stockholder's intent to make such nomination or
nominations, setting forth the information and complying with the form
described in the immediately preceding paragraph, has been received by the
Secretary of the Corporation not earlier than the ninetieth (90th) day prior
to such special meeting and not later than the close of business on the later
of the sixtieth (60th) day prior to such meeting.
6
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No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in
this ARTICLE EIGHTH, Section D. The presiding officer of the meeting shall, if
the facts warrant, determine and declare to the meeting that the nomination
was not made in accordance with the procedures prescribed by this ARTICLE
EIGHTH, Section D, and if he or she should so determine, the defective
nomination shall be disregarded.
Elections of directors need not be by written ballot unless the
By-Laws of the Corporation shall so provide.
ARTICLE NINTH:
A. Meetings of the stockholders may be held within or without the
State of Delaware, as the By-Laws may provide. The books of the Corporation
may be kept (subject to any provision contained in the statutes) outside the
State of Delaware at such place or places as may be designated from time to
time by the Board of Directors or in the By-Laws of the Corporation.
Except as otherwise required by law or by this Certificate
of Incorporation, the holders of not less than a majority of the Voting Stock
entitled to vote at any meeting of stockholders, present in person or by
proxy, shall constitute a quorum, and the act of the holders of a majority in
voting power of the shares present in person or by proxy and entitled to vote
on the subject matter shall be deemed the act of the stockholders. If a quorum
shall fail to attend any meeting, the presiding officer or the stockholders
present in person or represented by proxy may adjourn the meeting to another
place, date or time. If a notice of any adjourned special meeting of
stockholders is sent to all stockholders entitled to vote thereat, stating
that it will be held with one-third in voting power of the shares entitled to
vote thereat constituting a quorum, then except as otherwise required by law,
one-third in voting power of the shares entitled to vote at such adjourned
meeting, present in person or by proxy, shall constitute a quorum, and, except
as otherwise required by law or this Certificate of Incorporation, all matters
shall be determined by the holders of a majority in voting power of the shares
present in person or by proxy and entitled to vote on the subject matter,
except that directors shall be elected by a plurality of the votes cast at a
meeting of stockholders by the stockholders entitled to vote in the election.
B. At any meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before such meeting. To be
properly bought before an annual meeting, business must be (1) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors; (2) otherwise properly brought before the meeting
by or at the direction of the Board of Directors; or (3) otherwise properly
brought before the meeting by a stockholder. For business to be properly
brought before an annual meeting by a stockholder, the stockholders must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a stockholder's notice must be received not less than sixty (60)
days nor more than ninety (90) days prior to the anniversary of the prior
year's annual meeting. Each such notice shall set forth as to each matter the
stockholder proposes to bring before the annual meeting: (a) a brief
description of the business desired to be brought before the annual meeting
and the reasons for conducting such business at the meeting; (b) the name and
address, as they appear on the Corporation's books, of the stockholder
proposing such business; (c) the class, series and number of shares of the
Corporation which are beneficially owned by the stockholder; and (d) any
material interest of the stockholder in such business.
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No business shall be conducted at any meeting of the stockholders
except in accordance with the procedures set forth in this ARTICLE NINTH,
Section B. The presiding officer of the meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly bought
before the meeting and in accordance with the provisions of this ARTICLE
NINTH, Section B, and if he or she should so determine, any such business not
properly brought before the meeting shall not be transacted. Nothing herein
shall be deemed to affect the Corporation's proxy statement pursuant to Rule
14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
ARTICLE TENTH: The personal liability of the directors of the
corporation is hereby eliminated to the fullest extent permitted by the
provisions of paragraph (7) of subsection (b) of ss. 102 of the General
Corporation Law of the State of Delaware, as the same may be amended and
supplemented.
ARTICLE ELEVENTH: The Corporation shall, to the fullest extent
permitted by the provisions of ss. 145 of the General Corporation Law of the
State of Delaware, as the same may be amended and supplemented, indemnify any
and all persons whom it shall have power to indemnify under said section from
and against any and all of the expenses, liabilities, or other matters
referred to in or covered by said section, and the indemnification provided
for herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-law, agreement, vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
ARTICLE TWELFTH: The Corporation reserves the right to amend, alter,
change or repeal any provisions contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
ARTICLE THIRTEENTH: The Amended and Restated Certificate of
Incorporation has been duly adopted in accordance with the provisions of the
General Corporation Law of the State of Delaware by the unanimous written
consent of the Board of Directors of the Corporation, all in accordance with
ss.242 and ss.245 of the General Corporation Law of the State of Delaware.
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IN WITNESS WHEREOF, the undersigned have executed this Amended and
Restated Certificate of Incorporation and hereby affirm that the statements
made herein are true under the penalties of perjury, this 25th day of March,
1998.
/s/ Gregory S. Frisby
-------------------------------
GREGORY S. FRISBY, President
/s/ Douglas J. McCrosson
-------------------------------
DOUGLAS J. MCCROSSON, Secretary
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BY-LAWS
OF
FRISBY TECHNOLOGIES, INC.
ARTICLE I
Offices
SECTION 1. Registered Office and Agent. The registered
office and the registered agent of the Corporation shall be located at such
place as the Board of Directors may from time to time designate.
SECTION 2. Other Offices. The Corporation may also have
offices at such other places both within and without the State of Delaware as
the Board of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
Stockholders
SECTION 1. Annual Meeting. The annual meeting of the
stockholders of the Corporation shall be held on such date, at such time and
at such place within or without the State of Delaware as may be designated by
the Board of Directors, for the purpose of electing Directors and for the
transaction of such other business as may be properly bought before the
meeting.
SECTION 2. Special Meetings. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by
statute or the Certificate of Incorporation, may be called by the President,
Board of Directors or fifteen (15%) percent of the stockholders entitled to
vote at such meeting. Any special meeting of the stockholders shall be held on
such date, at such time and at such place within or without the State of
Delaware as the President or Board of Directors may designate.
SECTION 3. Notice of Meetings. Except as otherwise provided
in these By-Laws or by law, a written notice of each meeting of the
stockholders shall be given, either personally or by mail, not less than ten
(10) nor more than sixty (60) calendar days before the date of the meeting, to
each stockholder of the Corporation entitled to vote at such meeting at such
stockholder's address as it appears on the books and records of the
Corporation. The notice shall state the place, date and hour of the meeting
and, in the case of a special meeting, the purpose for which the meeting is
called.
SECTION 4. Adjourned Meetings. When a meeting is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, the stockholders, or the
holder of any class of stock entitled to vote separately as a class, as the
case may be, may transact any business which might have been transacted by
them at the original meeting. If the adjournment is for more than thirty (30)
calendar days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the adjourned meeting.
<PAGE>
SECTION 5. Organization. The President shall act as chairman
of all meetings of the stockholders. In the absence of the President, any Vice
Chairman or Vice President designated by the Board or, in the absence of any
such officer, any person designated by the holders of a majority in number of
the shares of stock of the Corporation present in person or represented by
proxy and entitled to vote at such meeting shall act as chairman of the
meeting.
The Secretary of the Corporation shall act as secretary of
all meetings of the stockholders, but, in the absence of the Secretary, the
chairman of the meeting may appoint any person to act as secretary of the
meeting. It shall be the duty of the Secretary to prepare and make, at least
ten (10) calendar days before every meeting of stockholders, a complete list
of stockholders entitled to vote at such meeting, arranged in alphabetical
order and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open, either at
the offices of the Corporation or at the place where the meeting is to be
held, for the ten (10) calendar days next preceding the meeting, to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, and shall be produced and kept at the time and place
of the meeting during the whole time thereof and subject to the inspection of
any stockholder who may be present.
SECTION 6. Quorum. The holders of a majority of the shares
of stock issued and outstanding and entitled to vote, represented in person or
by proxy, shall constitute a quorum at all meetings of the stockholders for
the transaction of business, except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders present in
person or represented by proxy shall have the power to adjourn the meeting
from time to time, without notice other than announcement at the meeting,
until a quorum shall be present or represented. At such adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally notified.
SECTION 7. Voting. Except as otherwise provided in the
Certificate of Incorporation or by law, each stockholder shall be entitled to
one vote for each share of the capital stock of the Corporation registered in
the name of such stockholder upon the books of the Corporation. Each
stockholder entitled to vote at a meeting of stockholders may authorize
another person or persons to act for such stockholder by proxy, but such proxy
shall not be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. When directed by the presiding officer
or upon the demand of any stockholder, the vote upon any matter before a
meeting of stockholders shall be by ballot. Except as otherwise provided by
law or by the Certificate of Incorporation, (a) each Director shall be elected
by a plurality of the votes cast at a meeting of stockholders by the
stockholders entitled to vote in the election; and (b) whenever any corporate
action other than the election of Directors is to be taken, it shall be
authorized by a majority of the votes cast at a meeting of stockholders by the
stockholders entitled to vote thereon.
<PAGE>
Shares of the capital stock of the Corporation belonging to
the Corporation or to another corporation, if a majority of the shares
entitled to vote in the election of directors of such other corporation is
held, directly or indirectly, by the Corporation, shall neither be entitled to
vote nor be counted for quorum purposes.
SECTION 8. Procedure. At each meeting of stockholders, the
chairman of the meeting shall fix and announce the date and time of the
opening and the closing of the polls for each matter upon which the
stockholders will vote at the meeting and shall determine the order of
business and other matters of procedure. Except to the extent inconsistent
with any such rules and regulations as adopted by the Board of Directors or as
set forth in the Certificate of Incorporation, the chairman of the meeting may
establish rules, which need not be in writing, to maintain order and safety
and for the conduct of the meeting. Without limiting the foregoing, he or she
may:
(a) restrict attendance at any time to bona fide
stockholders of record and their proxies and other persons in attendance at
the invitation of the chairman;
(b) restrict dissemination of solicitation
materials and use of audio or visual recording devices at the meeting;
(c) establish seating arrangements;
(d) adjourn the meeting without a vote of the
stockholders, whether or not there is a quorum present; and
(e) make rules governing speeches and debate
including time limits and access to microphones.
The chairman of the meeting acts in his or her absolute
discretion and his or her rulings are not subject to appeal.
SECTION 9. Inspectors. The Board of Directors by resolution
shall, in advance of any meeting of stockholders, appoint one or more
inspectors, which inspector or inspectors may include individuals who serve
the Corporation in other capacities, including, without limitation, as
officers, employees, agents or representatives of the Corporation, to act at
the meeting and make a written report thereof. One or more persons may be
designated by the Board of Directors as alternate inspectors to replace any
inspector who fails to act. If an inspector or alternate is not able to act at
a meeting of stockholders, the chairman of the meeting shall, appoint one or
more inspectors to act at the meeting. Each inspector, before discharging his
or her duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall have the duties prescribed by the General
Corporation Law of the State of Delaware.
<PAGE>
ARTICLE III
Directors
SECTION 1. Number. The Board of Directors shall consist of
such number of directors, not less than three nor more than ten, as shall be
fixed by the Board of Directors in accordance with Article Eighth of the
Certificate of Incorporation. A director need not be a stockholder.
SECTION 2. Vacancies. Any vacancy occurring in the Board of
Directors shall be filled by the Board of Directors in accordance with the
provisions of Article Eighth of the Certificate of Incorporation.
SECTION 3. Removal. Directors may only be removed as
provided for in the Corporation's Certificate of Incorporation.
SECTION 4. Powers. The business affairs of the Corporation
shall be managed by its Board of Directors which may exercise all such powers
of the Corporation and do all such lawful acts and things as are not by
statute or by the Certificate of Incorporation or by these By-laws directed or
required to be exercised or done by the stockholders.
ARTICLE IV
Meetings of the Board of Directors
SECTION 1. Place of Meeting. The Board of Directors may hold
its meetings in such place or places in the State of Delaware or outside the
State of Delaware as the Board of Directors from time to time shall determine.
SECTION 2. Regular Meetings. Regular meetings of the Board
of Directors shall be held at such times and places as the Board of Directors
from time to time by resolution shall determine. No notice shall be required
for any regular meeting of the Board of Directors, but a copy of every
resolution fixing or changing the time or place of regular meetings shall be
mailed to every Director at least five (5) calendar days before the first
meeting held in pursuance thereof.
SECTION 3. Special Meetings. Special Meetings of the Board
of Directors may be called by the President in his discretion and shall be
called by the President or the Secretary upon the written request of any two
Directors. Notice need not be given to any Director who signs a waiver of
notice, whether before, at or after the meeting.
Notice of the day, hour and place of holding of each special
meeting shall be given on five (5) days notice to each Director by mail or
transmittal by telecopier, telegraph or cable. Unless otherwise indicated in
the notice thereof, any and all business, other than an amendment of these
By-Laws, may be transacted at any special meeting, and an amendment of these
By-Laws may be acted upon if the notice of the meeting shall have stated that
the amendment of these By-Laws is one of the purposes of the meeting. At any
meeting at which every Director shall be present, even though without any
notice, any business may be transacted, including the amendment of these
By-Laws.
<PAGE>
SECTION 4. Quorum. A majority of the members of the Board of
Directors in office (but in no case less than two (2) Directors) shall
constitute a quorum for the transaction of business, and, except as otherwise
provided in the Certificate of Incorporation, the vote of the majority of the
Directors present at any meeting of the Board of Directors at which a quorum
is present shall be the act of the Board of Directors. If at any meeting of
the Board of Directors there is less than a quorum present, a majority of
those present may adjourn the meeting from time to time.
SECTION 5. Organization. The President shall act as chairman
and preside at all meetings of the Board of Directors. In the absence of the
President, any Vice Chairman or Vice President shall act as chairman of the
meeting. The Secretary of the Corporation shall act as secretary of all
meetings of the Board of Directors, but, in the absence of the Secretary, the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
SECTION 6. Committees. The Board of Directors, by resolution
adopted by a majority of the number of Directors then in office, may designate
one or more Directors to constitute an executive committee, which committee,
to the extent provided in such resolution, shall have and exercise all of the
authority of the Board of Directors in the management of the Corporation,
except as otherwise required by law, or such other committees as the Board of
Directors may designate. Vacancies in the membership of the committees shall
be filled by the Board of Directors at a regular or special meeting of the
Board of Directors. The committees shall keep regular minutes of its
proceedings and report the same to the Board when required.
SECTION 7. Conference Telephone Meetings. Unless otherwise
restricted by the Certificate of Incorporation or by these By-Laws, the
members of the Board of Directors or any committee designated by the Board of
Directors may participate in a meeting of the Board of Directors or such
committee, as the case may be, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation shall constitute being
present in person at such meeting.
SECTION 8. Consent of Directors or Committee in Lieu of
Meeting. Unless otherwise restricted by the Certificate of Incorporation or by
these By-Laws, any action required or permitted to be taken at any meeting of
the Board of Directors, or of any committee thereof, may be taken without a
meeting if all members of the Board of Directors or committee, as the case may
be, consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee, as the case may
be.
SECTION 9. Compensation. For their services as Directors or
as members of committees, every Director shall receive such compensation,
attendance fees and other allowances as determined by resolution of the Board
of Directors.
<PAGE>
ARTICLE V
Officers
SECTION 1. Officers. The officers of the Corporation shall
be a Chief Executive Officer, President, one or more Vice Presidents who are
specifically designated as officers and who may be designated Executive Vice
Presidents or Senior Vice Presidents, a Secretary, a Treasurer and a Chief
Financial Officer, and such additional officers, if any, as shall be elected
by the Board of Directors pursuant to the provisions of Section 2 of this
Article V. The Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Treasurer and the Chief Financial Officer shall
be elected by the Board of Directors at its first meeting after such annual
meeting of the stockholders. The failure to hold such election shall not of
itself terminate the term of office of any officer. All officers shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board of Directors or
as shall be confirmed or required by law or these By-Laws or as shall be
incidental to the office. Any officer may resign at any time upon written
notice to the Corporation. Officers may, but need not, be Directors. Any
number of offices may be held by the same person. Any officer may be removed
with or without cause at any time by the affirmative vote of a majority of the
Board of Directors. Any vacancy caused by the death of any officer, his or her
resignation, his or her removal, or otherwise, may be filled by the Board of
Directors, and any officer so elected shall hold office at the pleasure of the
Board of Directors.
SECTION 2. Additional Officers. The Board of Directors may
from time to time elect such other officers (who may, but need not, be
Directors), including, but not limited to, Assistant Treasurers, Assistant
Secretaries and Assistant Chief Financial Officer, as the Board may deem
advisable, and such officers shall have such authority and shall perform such
duties as may from time to time be assigned to them by the Board of Directors,
the President or as shall be conferred or required by law or these By-Laws or
as shall be incidental to the office.
SECTION 3. Compensation. The salaries of such officers shall
be fixed by the Board of Directors.
<PAGE>
ARTICLE VI
Stock, Seal and Fiscal Year
SECTION 1. Certificates for Shares. The shares of the
Corporation shall be represented by certificates signed by the President or a
Vice President and by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, and may be sealed with
the seal of the Corporation or a facsimile thereof.
When the Corporation is authorized to issue shares of more
than one class, there shall be set forth upon the face or back of the
certificate, or the certificate shall have a statement that the Corporation
will furnish to any stockholder upon request and without charge, a full
statement of the designations, preferences, limitations and relative rights of
the shares of each class authorized to be issued and, if the Corporation is
authorized to issue any preferred or special class in series, the variations
in the relative rights and preferences between the shares of each such series
so far as the same have been fixed and determined and the authority of the
Board of Directors to fix and determine the relative rights and preferences of
subsequent series.
The signatures of the officers of the Corporation upon a
certificate may be facsimiles if the certificate is countersigned by a
transfer agent, or registered by a registrar, other than the Corporation
itself or an employee of the Corporation. In case any officer who has signed
or whose facsimile signature has been placed upon such certificate shall have
ceased to be such officer before such certificate is issued, it may be issued
by the Corporation with the same effect as if he were such officer at the date
of its issue.
SECTION 2. Lost Certificates. The Board of Directors may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Corporation alleged to have been lost or destroyed. When
authorizing such issue of a new certificate, the Board of Directors, in its
discretion and as a condition precedent to the issuance thereof, may prescribe
such terms and conditions as it deems expedient, and may require such
indemnities as it deems adequate, to protect the Corporation from any claim
that may be made against it with respect to any such certificate alleged to
have been lost or destroyed.
SECTION 3. Transfer of Shares. Shares of stock of the
Corporation shall be transferred on the books of the Corporation by the
recordholder thereof, in person or by such holder's attorney duly authorized
in writing upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate representing shares duly endorsed or accompanied
by proper evidence of succession, assignment or authority to transfer. Upon
such surrender, a new certificate shall be issued to the person entitled
thereto, and the old certificate canceled and the transaction recorded upon
the books of the Corporation, except as otherwise required by law.
SECTION 4. Regulations. The Board of Directors, the
President or the Secretary shall have power and authority to make such rules
and regulations as it or such officer may deem expedient concerning the issue,
transfer, registration or replacement of certificates for shares of stock of
the Corporation.
<PAGE>
SECTION 5. Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversation or exchange of
stock or for the purpose of any other lawful action, as the case may be, the
Board of Directors may fix, in advance, a record date which shall be not more
than sixty (60) calendar days nor less than ten (10) calendar days before the
date of such meeting, nor more than sixty (60) calendar days prior to any
other action.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day next preceding the day on which
notice is given, or, if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held, and the record date for
determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
SECTION 6. Registered Stockholders. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends, and to vote as such owner, and to
hold liable for calls and assessments a person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such shares or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of the State of Delaware.
SECTION 7. Dividends. Subject to the provisions of the
Certificate of Incorporation, the Board of Directors shall have power to
declare and pay dividends upon shares of stock of the Corporation, but only
out of funds available for the payment of dividends as provided by law.
Subject to the provisions of the Certificate of
Incorporation, any dividends declared upon the stock of the Corporation shall
be payable on such date or dates as the Board of Directors shall determine. If
the day fixed for the payment of any dividend shall in any year fall upon a
legal holiday, then the dividend payable on such date shall be paid on the
next day not a legal holiday.
SECTION 8. Corporate Seal. The Corporation shall have a
suitable seal, containing the name of the Corporation. The Secretary shall
have custody of the seal, but he or she may authorize others to keep and use a
duplicate seal.
SECTION 9. Checks. All checks or demands for money and notes
of the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
SECTION 10. Fiscal Year. The fiscal year of the Corporation
shall be such fiscal year as the Board of Directors from time to time by
resolution shall determine.
<PAGE>
ARTICLE VII
Miscellaneous Provisions
SECTION 1. Waivers of Notice. Whenever any notice whatever
is required to be given by law, by the Certificate of Incorporation or by
these By-Laws to any person or persons, a waiver thereof in writing, signed by
the person or persons entitled to the notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Attendance of a person at
a meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting at the beginning
of the meeting to the transaction of any business because the meeting is not
lawfully called or convened.
SECTION 2. Indemnification. The Corporation shall, to the
maximum extent permitted from time to time under the law of the State of
Delaware, indemnify and upon request may advance expenses to any person who is
or was a party to any threatened, pending or completed action, suit,
proceeding or claim, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she is or was or has agreed to be a trustee,
director, officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a trustee, director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees and expenses),
judgment, fines, penalties and amounts paid in settlement incurred in
connection with the investigation, preparation to defend or defense of any
such action, suit, proceeding or claim. Such indemnification shall not be
exclusive of other indemnification rights arising under any by-law, agreement,
vote of directors or stockholders or otherwise and shall inure to the benefit
of the heirs and legal representatives of such person.
The Corporation may purchase and maintain insurance on any
person who is or was a trustee, director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
trustee, director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
incurred by him in any such position or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under this Article VII, Section 2.
SECTION 3. Amendments. These By-Laws may be altered,
amended, or repealed or new By-Laws may be adopted by the affirmative vote of
a majority of the Board of Directors at any regular or Special Meeting of the
Board of Directors, subject to any provision in the Certificate of
Incorporation reserving to the stockholders the power to adopt, amend, or
repeal By-Laws, but By-Laws made by the Board of Directors may be altered or
repealed and new By-Laws made by the stockholders. The stockholders may
prescribe that any By-Law made by them shall not be altered or repealed by the
Board of Directors.
<PAGE>
Ruskin, Moscou, Evans & Faltischek, P.C.
170 Old Country Road
Mineola, New York 11501
Writer's Direct Dial: (516) 663-6514
Writer's Direct Fax: (516) 663-6643
March 30, 1998
Frisby Technologies, Inc.
417 South Main Street
Freeport, NY 11520
Gentlemen:
We have acted as counsel for Frisby Technologies, Inc. (the
"Company"), a Delaware corporation, in connection with the registration
pursuant to a Registration Statement on Form SB-2 (the "Registration
Statement") by the Company under the Securities Act of 1933, as amended (the
"Act"), of shares of the Company's Common Stock, $.001 par value (the "Common
Stock") as follows: (i) 1,840,000 shares of Common Stock (including 240,000
shares issuable upon exercise of the Over-Allotment Option) being offered to
the public; and (ii) the Common Stock issuable upon exercise of the
Underwriter's Options. All terms defined in the Registration Statement and not
otherwise defined herein, are used herein as therein defined.
We have examined (i) the Company's Certificate of Incorporation,
By-Laws and minute books and (ii) such certificates of public officials and of
the Company and such other documents and records as we have deemed necessary
and relevant as a basis for our opinions hereinafter set forth. In forming our
opinions, we have relied upon certifications as to certain factual matters
from officers of the Company. For the purposes of this opinion, we have
assumed the genuineness of all signatures and the conformity to original
documents of all instruments furnished to us for review or examination as
copies.
Based on the foregoing and having regard to such legal considerations
as we have deemed relevant, it is our opinion that:
1. The Company is a corporation duly organized and validly existing
under the laws of the State of Delaware.
2. The Common Stock covered by the Registration Statement have been
validly authorized for issuance.
<PAGE>
Frisby Technologies, Inc.
March 30, 1998
Page 2
3. When the Common Stock and the Common Stock issuable upon exercise
of the Underwriter's Options covered by the Registration Statement have been
duly registered under the Act; when the provisions of the securities laws of
certain states shall have been complied with; when the Underwriting Agreement
shall have been duly executed and delivered in accordance with the
authorization thereof and delivered in accordance with the authorization
thereof by the Company; when the Underwriter's Options shall have been duly
executed and delivered; when proper certificates for the shares of Common
Stock shall have been duly executed and delivered; and when the Company shall
have received the consideration to be received by it pursuant to the
Underwriting Agreement:
(a) The Common Stock will be validly issued, fully paid and
non-assessable, with no liability attaching to the ownership thereof.
(b) Upon payment of the exercise price therefor and issuance
of Common Stock by the Company in accordance with the terms of the
Underwriter's Option, the Common Stock issuable upon exercise of the
Underwriter's Option will be validly issued, fully paid, and
non-assessable, with no personal liability attaching thereto.
In giving this opinion, we have assumed that, prior to issuance, all
certificates for the Common Stock (including the Common Stock issuable upon
exercise of the Overallotment Option and the Representative's Warrant) will be
duly executed on behalf of the Company by the Company's transfer and/or
warrant agent and registered by the Company's registrar, if necessary, and
will conform, except as to denominations, to specimens which we have examined.
We hereby consent to the inclusion of this opinion in the
Registration Statement and to the references to this firm contained therein.
Very truly yours,
/s/ Ruskin, Moscou, Evans & Faltischek, P.C.
--------------------------------------------
RUSKIN, MOSCOU, EVANS
& FALTISCHEK, P.C.
<PAGE>
FRISBY TECHNOLOGIES, INC.
1998 STOCK OPTION PLAN
1. Plan; Purpose; General. The purpose of this Stock Option Plan (the
"Plan") is to advance the interests of Frisby Technologies, Inc. and any
present and future subsidiaries (as defined below) of Frisby Technologies,
Inc. (hereinafter inclusively referred to as the "Company") by enhancing the
ability of the Company to attract and retain selected employees, consultants,
advisors and directors (collectively the "Participants") by creating for such
Participants incentives and rewards for their contributions to the success of
the Company, and by encouraging such Participants to become owners of shares
of the Company's Common Stock, par value $.001 per share, as the title or par
value may be amended (the "Shares").
2. Effective Date of Plan. The Plan will become effective upon
approval by the Board of Directors of the Company (the "Board"), and shall be
subject to the approval by the shareholders of the Company as provided under
the Securities Act of 1933, as amended (the "Act").
3. Administration of the Plan.
(a) The Plan will be administered by the Board, subject to
Paragraph 3(b). The Board will have authority, not inconsistent with the
express provisions of the Plan, to take all action necessary or appropriate
thereunder, to interpret its provisions, and to decide all questions and
resolve all disputes which may arise in connection therewith. Such
determinations of the Board shall be conclusive and shall bind all parties.
(b) The Board may, in its discretion, delegate its powers
with respect to the Plan to an employee benefit plan committee or any other
committee (the "Committee"), in which event all references to "the Board"
hereunder, including without limitation the references in Section 9, but
excluding the references in Section 2, shall be deemed to refer to the
Committee. The Committee shall consist of not fewer than two (2) members of
the Board; provided, however, that if, at any time the awards under the Plan
are granted, the Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), each of the
members of the Committee must be a "non-employee director" as that term is
defined in Rule 16b-3 as promulgated and amended from time to time by the
Securities and Exchange Commission under the Exchange Act, or any successor
thereto ("Rule 16b-3"). In addition, at any time the Company is subject to
Section 162(m) of the Code, each member of the Committee shall be an "outside
director" within the meaning of such Section. A majority of the members of the
Committee shall constitute a quorum, and all determinations of the Committee
(including determinations of eligibility, the number of Options granted to a
Participant and the exercise price of Options) shall be made by the majority
of its members present at a meeting. Any determination of the Committee under
the Plan may be made without notice or meeting of the Committee by a writing
signed by all of the Committee members.
<PAGE>
4. Eligibility. The Participants in the Plan shall be all employees,
consultants, advisors and directors of the Company who are selected by the
Board whether or not they are also officers of the Company; provided, however,
that Incentive Options shall only be granted to employees of the Company, and
provided further, however, that Gregory S. Frisby and Jeffry D. Frisby shall
not be eligible Participants.
5. Grant of Options.
(a) The Board shall grant Options to Participants that it,
in its sole discretion, selects. Options shall be granted in accordance with
the terms and conditions set forth in Section 6 hereof and on such other terms
and conditions as the Board shall determine. Such terms and conditions may
include a requirement that a Participant sell to the Company any Shares
acquired upon exercise of Options upon the Participant's termination of
employment upon such terms and conditions as the Board may determine.
Incentive Options shall be granted on terms that comply with the Code and
Regulations thereunder.
(b) Options granted pursuant to the Plan (the "Options") may
be (i) incentive stock options ("Incentive Options") that are intended to
qualify under the Internal Revenue Code of 1986, as amended (the "Code"), or,
(ii) options that are not intended to so qualify, or, (iii) both. The proceeds
received from the sale of Shares pursuant to the Plan shall be used for
general corporate purposes.
(c) No Options shall be granted after December 31, 2007 but
Options previously granted may be exercised after that date until the
expiration of the Option.
6. Terms and Conditions of Options
(a) Exercise Price. The purchase price per share for Shares
issuable upon exercise of Options shall be a minimum of one hundred (100%)
percent of fair market value on the date of grant as determined by the Board.
For this purpose, "fair market value" will be determined as set forth in
Section 8 hereof. Notwithstanding the foregoing, if any person to whom an
Option is to be granted owns in excess of ten (10%) percent of the combined
voting power of all classes of outstanding capital stock of the Company (a
"Principal Shareholder"), then no Option may be granted to such person for
less than one hundred ten (110%) percent of the fair market value on the date
of grant as determined by the Board.
<PAGE>
(b) Period of Options. The expiration of each Option shall
be fixed by the Board, in its discretion, at the time such Option is granted.
No Option shall be exercisable after the expiration of five (5) years from the
date of its grant and each Option shall be subject to earlier termination as
expressly provided in this Section 6 hereof or as determined by the Board, in
its discretion, on the date such Option is granted.
(c) Payment for Delivery of Shares. Shares which are subject
to Options shall be issued only upon receipt by the Company of full payment of
the purchase price for the Shares as to which the Option is exercised. Payment
for Shares may be made (as determined by the Board at the time the Option is
granted) (i) in cash; (ii) by certified or bank check payable to the order of
the Company in the amount of the purchase price; (iii) by delivery of Shares
owned by the Participant having a fair market value equal to the purchase
price; or (iv) by any combination of the methods of payment described in (i)
through (iii) above, as determined by the Board at the time the Option is
granted.
In addition, any grant of a nonqualified Option may provide
that payment of the purchase price for the Option may also be made in whole or
in part in the form of Shares that are subject to risk of forfeiture or
restrictions of transfer. Unless otherwise determined by the Board on or after
the date of grant, whenever any purchase price for an Option is paid in whole
or in part by means of any of the forms of consideration specified in this
Section 6(c), the Shares received by the Participant upon the exercise of the
nonqualified Option shall be subject to the same risk of forfeiture or
restrictions on transfer as those that applied to the consideration
surrendered by the Participant; provided, however, that such risks of
forfeiture and restrictions on transfer shall apply only to the same number of
Shares received by the Participant as applied to the forfeitable or restricted
Shares surrendered by the Participant.
Any grant may, if there is then a public market for the
Shares, provide for deferred payment of the purchase price for the Option from
the proceeds of sale through a broker of some or all of the Shares to which
the exercise relates.
The Company shall not be obligated to deliver any Shares
unless and until, in the opinion of the Company's counsel, all applicable
federal and state laws and regulations have been complied with and until all
other legal matters in connection with the issuance and delivery of Shares
have been approved by the Company's counsel. Without limiting the generality
of the foregoing, the Company may require from the person exercising an Option
such investment representation or such agreement, if any, as counsel for the
Company may consider necessary in order to comply with the Act and applicable
state securities laws.
(d) Legend on Certificates. The stock certificates
representing the Shares shall carry such appropriate legends, and such written
instructions shall be given to the Company's transfer agent, as may be deemed
necessary or advisable by counsel to the Company in order to comply with the
requirements of the Act or any state securities laws.
<PAGE>
(e) Rights as Shareholder. A Participant or a transferee of
an Option shall have no rights as a Shareholder with respect to any Shares
covered by the Option until the date of the issuance of a stock certificate to
him for such Shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distribution
of other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 7 hereof. Each grant of
Options shall be evidenced by an agreement, which shall be executed on behalf
of the Company and delivered to and accepted by the Participant and shall
contain such terms and provisions as the Board may determine consistent with
the Plan.
(f) Vesting. Options granted shall vest in the Participant
and become immediately exercisable by the Participant on the fourth (4th)
anniversary of the date of grant or such earlier date as the Board of
Directors, at its sole discretion, may determine, provided, however, for every
option granted for more than 50,000 Shares, no more than one-third (1/3) of
such shares shall become vested and exercisable earlier than twelve (12)
months following the date of the grant, and no more than a total of two-thirds
(2/3) of such Shares shall become vested and exercisable earlier than thirty
(30) months following the date of the grant.
(g) Non-Transferability of Options. Except as provided in
Sections 6(h)(ii) and (iii), Options granted under this Plan may not be
exercised during a Participant's lifetime except by the Participant, other
than by will or the laws of descent and distribution. Options may not be sold,
assigned or otherwise transferred or disposed of in any manner whatsoever
except as provided in Section 6(h) hereof. Notwithstanding the foregoing, the
Board, in its sole discretion, may provide for the transferability of
particular awards under this Plan so long as such provisions would not
disqualify the exemption for other awards under Rule 16b-3, if then applicable
to awards under the Plan. Moreover, any grand made under this Plan may provide
that all or any part of the Shares issued or transferred by the Company upon
exercise of Options shall be subject to further restrictions on transfer.
(h) Termination of Relationship. Except as otherwise
provided in an Option or other agreement between the Company and a
Participant, upon the termination of a Participant's status as an employee,
consultant, advisor or director, for any reason other than as set forth in
subsections (ii) and (iii) below, at a time when the Shares are then Publicly
Traded (as defined below), then the following provisions shall apply:
(i) Such Participant may exercise Options to the
extent exercisable on the date of termination not later than three (3) months
(or such shorter time as may be specified in the grant), after the date of
such termination. To the extent that the Participant was not entitled to
exercise the Option at the date of such termination, or does not exercise such
Option within the time specified herein, such Option shall expire and
terminate. Notwithstanding anything else herein, if the employment or other
relationship of any Participant shall be terminated voluntarily by the
Participant and without the consent of the Company, or for "Cause" (as
hereinafter defined), then any Option granted to such Participant (whether or
not then vested in the Participant) to the extent not previously exercised
shall expire immediately on the date of termination. For purposes of the Plan,
"Cause" shall mean "Cause" as defined in any employment agreement between any
employee Participant and the Company ("Employment Agreement"), and in the
absence of an Employment Agreement or in the absence of a definition of
"Cause" in such Employment Agreement, "Cause" shall mean: (i) any continued
failure by the employee Participant to obey the reasonable instructions of the
president or any member of the Board; (ii) continued neglect by the
Participant of his duties and obligations as an employee of the Company or a
failure to perform such duties and obligations to the reasonable satisfaction
of the president or the Board; (iii) willful misconduct of the Participant or
other actions in bad faith by the Participant which are to the detriment of
the Company, including, without limitation, commission of a felony,
embezzlement or misappropriation of funds or of confidential information or
commission of any act of fraud; or (iv) a breach of any material provision of
any Employment Agreement not cured within ten (10) days after written notice
thereof.
<PAGE>
(ii) Notwithstanding the provisions of subsection
(i) above, in the event of termination of a Participant's status as an
employee as a result of "permanent disability" (as such term is defined in any
contract of employment between the Company and the Participant or, if not
defined, then such term shall mean the inability to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or can
be expected to last for a continuous period of twelve (12) months), the
Participant (or, in the case of the Participant's legal incapacity, such
Participant's guardian or legal representative acting in a fiduciary capacity
on behalf of the Participant under state law and court supervision) may
exercise the Option, but only to the extent such Option was exercisable on the
date the Participant ceased working as the result of the permanent disability.
Such exercise must occur within six (6) months (or such shorter time as is
specified in the grant) from the date on which the Participant ceased working
as a result of the permanent disability. To the extent that the Participant
was not entitled to exercise such Option on the date the Participant ceased
working, or does not exercise such Option within the time specified herein,
such Option shall terminate.
(iii) Notwithstanding the provisions of subsection
(i) above, in the event of the death of a Participant, the Option may be
exercised, at any time within six (6) months following the date of death (or
such shorter time as may be specified in the grant), by the Participant's
estate or by a person who acquired the right to exercise the Option by will or
the applicable laws of descent and distribution, but only to the extent such
Option was exercisable on the date of the Participant's death. To the extent
that the Participant was not entitled to exercise such Option on the date of
death, or the Option is not exercised within the time specified herein, such
Option shall terminate.
(iv) Notwithstanding subsections (i), (ii), and
(iii) above, the Board shall have the authority to extend the expiration date
of any outstanding Option in circumstances in which it deems such action to be
appropriate (provided that no such extension shall extend the term of an
Option beyond the date on which the Option would have expired if no
termination of the Participant's relationship's with the Company had
occurred).
(h) Financial Assistance. The Company is vested with
authority under this Plan to assist any employee to whom an Option is granted
hereunder (including, to the extent permitted by law, any director or officer
of the Company who is also an employee of the Company) in the payment of the
purchase price payable on exercise of that Option, by lending the amount of
such purchase price to such employee on such terms and at such rates of
interest and upon such security (or unsecured) as shall have been authorized
by or under authority of the Board.
(i) Withholding Taxes. To the extent required by applicable
federal, state, local or foreign law, a Participant shall make arrangements
satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise by reason of an Option exercise or any sale of Shares.
The Company shall not be required to issue Shares until such obligations are
satisfied. The Board may permit these obligations to be satisfied by having
the Company withhold a portion of the Shares that otherwise would be issued to
the Participant upon exercise of the Option, or to the extent permitted, by
tendering Shares previously acquired.
7. Shares Subject to Plan.
(a) Number of Shares and Stock to be Delivered. Shares
delivered pursuant to this Plan shall in the discretion of the Board be
authorized but unissued Shares or previously issued Shares acquired by the
Company. The unexercised portion of any expired, terminated or cancelled
Option shall again be available for the grant of Options under the Plan.
Subject to adjustment as described below, the aggregate number of Shares which
may be delivered under this Plan shall not exceed two hundred fifty thousand
(250,000) Shares.
(b) Changes in Stock. In the event of a stock dividend,
stock split, combination of Shares, recapitalization or similar change in the
capital structure of the Company, merger in which the Company is the surviving
Company, consolidation, spin-off, split up, reorganization, partial or
complete liquidation or other distribution of assets, issuance of warrants or
other rights to purchase securities or any other corporate transaction or
event having any effect similar to any of the foregoing, the number and kind
of Shares of stock or securities of the Company to be subject to the Plan and
to Options then outstanding or to be granted thereunder, the maximum number of
Shares or securities which may be delivered under the Plan, the Option price
and other relevant provisions may be appropriately adjusted by the Board,
whose determination shall be binding on all persons. In the event of a
consolidation, merger or tender offer in which the Company is not the
surviving Company or which results in the acquisition of substantially all the
Company's outstanding stock by a single person or entity, or in the event of
the sale or transfer of substantially all the Company's assets, all
outstanding Options, whether or not then exercisable, shall immediately become
exercisable. In such event, the Board shall notify the Participants that all
outstanding Options shall be fully exercisable for a period of fifteen (15)
days from the date of such notice, and the Option will terminate upon the
expiration of such period.
<PAGE>
The Board may also adjust the number of Shares subject to
outstanding Options, the exercise price of outstanding Options and the terms
of outstanding Options to take into consideration material changes in
accounting practices or principles, consolidations or mergers (except those
described in the immediately preceding paragraph), acquisitions or
dispositions of stock or property or any other event if it is determined by
the Board that such adjustment is appropriate to avoid distortion in the
operation of the Plan.
8. Certain Definitions.
Certain terms used in the Plan have been defined above. In
addition, as used in the Plan, the following terms shall have the following
meanings:
(a) A "subsidiary" is any company (i) in which the Company
owns, directly or indirectly, stock possessing fifty (50%) percent or more of
the total combined voting power of all classes of stock or (ii) over which the
Company has effective operating control.
(b) The "fair market value" of the Shares shall mean:
(i) If the Shares are then Publicly Traded: The
closing price of the Shares as of the day in question (or, if such day is not
a trading day in the principal securities market or markets for such Shares,
on the nearest preceding trading day), as reported with respect to the market
(or the composite of markets, if more than one) in which Shares are then
traded, or, if no such closing prices are reported, on the basis of the mean
between the high bid and low asked prices that day on the principal market or
quotation system on which Shares are then quoted, or, if not so quoted, as
furnished by a professional securities dealer making a market in such Shares
selected by the Board; or
(ii) If the Shares are then not Publicly Traded: The price
at which one could reasonably expect such Shares to be sold in an arm's length
transaction, for cash, other than on an installment basis, to a person not
employed by, controlled by, in control of or under common control with the
issuer of such Shares. Such fair market value shall be that which has
concurrently or most recently been determined for this purpose by the Board,
or at the discretion of the Board by an independent appraiser or appraisers
selected by the Board, in either case giving due consideration to recent
transactions involving Shares, if any, the issuer's net worth, prospective
earning power and dividend-paying capacity, the goodwill of the issuer's
business, the issuer's industry position and its management, that industry's
economic outlook, the value of securities of issuers whose Shares are Publicly
Traded and which are engaged in similar businesses, the effect of transfer
restrictions to which such Shares may be subject under law and under the
applicable terms of any contract governing such Shares, the absence of a
public market for such Shares and other matters as the Board or its appraiser
or appraisers deem pertinent. The determination by the Board or its appraiser
or appraisers of the fair market value shall, if not unreasonable, be
conclusive and binding notwithstanding the possibility that other persons
might make a different, and also reasonable, determination. If the fair market
value to be used was thus fixed more than twelve (12) months prior to the day
as of which fair market value is being determined, it shall in any event be no
less than the book value of the Shares being valued at the end of the most
recent period for which financial statements of the Company are available; or
<PAGE>
(iii) Shares are "Publicly Traded" if stock of that class is
listed or admitted to unlisted trading privileges on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
("NASD") or if sales or bid and offer quotations are reported for that class
of stock in the automated quotation system ("NASDAQ") operated by the NASD.
9. Indemnification of Board. In addition to and without affecting
such other rights of indemnification as they may have as members of the Board
or otherwise, each member of the Board shall be indemnified by the Company to
the extent legally possible against expenses, including reasonable attorney's
fees, actually and reasonably incurred in connection with any appeal therein,
to which he may be a party by reason of any action taken or failure to act
under or in connection with the Plan, or any Option granted thereunder, and
against all judgments, fines and amounts paid by him in settlement thereof;
provided that such payment of amounts so indemnified is first approved by a
majority of the members of the Board who are not parties to such action, suit
or proceedings, or by independent legal counsel selected by the Company, in
either case on the basis of a determination that such member acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company; and except that no indemnification shall be
made in relation to matters as to which it shall be adjudged in such action,
suit or proceeding that such Board member is liable for a breach of the duty
of loyalty, bad faith or intentional misconduct in his duties; and provided
further, that the Board member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend same.
10. Amendments. The Board may at any time discontinue granting
Options under the Plan. The Board may at any time or times amend the Plan or
amend any outstanding Option or Options for the purpose of satisfying the
requirements of any changes in applicable laws or regulations or for any other
purpose which may at the time be permitted by law, provided that (except to
the extent explicitly required or permitted hereinabove) no such amendment
will, without the approval of the shareholders of the Company: (a) increase
the maximum number of Shares available under the Plan; (b) reduce the Option
price of outstanding Options or reduce the price at which Options may be
granted; (c) extend the time within which Options may be granted, however,
this period shall not exceed the term provided in Section 5(c) hereof; (d)
amend the provisions of this Section 10 of the Plan; (e) adversely affect the
rights of any Participant (without his consent) under any Options theretofore
granted; (f) cause any award under the Plan to cease to qualify for any
applicable exceptions to Section 162(m) of the Code, or (g) be effective if
shareholder approval is required by applicable statute, rule or regulation.
<PAGE>
11. Miscellaneous Provisions.
(a) Rule 16b-3. With respect to Participants subject to
Section 16 of the Exchange Act, transactions under this Plan are intended to
comply with all applicable provisions of Rule 16b-3. To the extent any
provision of the Plan or action by the Plan administrators fails to so comply,
it shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Board.
(b) Underscored References. The underscored references
contained in the Plan and in any Option agreement are included only for
convenience, and they shall not be construed as a part of the Plan or Option
agreement or in any respect affecting or modifying its provisions.
(c) Number and Gender. The masculine, feminine and neuter,
wherever used in the Plan or in any Option agreement, shall refer to either
the masculine, feminine or neuter and, unless the context otherwise requires,
the singular shall include the plural and the plural the singular.
(d) Governing Law. The place of administration of the Plan
and each Option agreement shall be in the State of New York. The corporate law
of the Company's state of incorporation shall govern issues related to the
validity and issuance of Shares. Otherwise, this Plan and each Agreement shall
be construed and administered in accordance with the laws of the State of New
York, without giving effect to principles relating to conflict of laws.
(e) No Employment Contract. Neither the adoption of the Plan
nor any benefit granted hereunder shall confer upon any Participant any right
to continued employment or other service with the Company, nor shall the Plan
or any benefit interfere in any way with the right of the Company to terminate
any Participant's employment or other service at any time.
<PAGE>
AMENDED EMPLOYMENT AGREEMENT
----------------------------
EMPLOYMENT AGREEMENT dated as of December 8, 1997, by and between
FRISBY TECHNOLOGIES, INC., a North Carolina corporation with its principal
offices located at 417 South Main Street, Freeport, New York 11520 (the
"Company"), and GREGORY S. FRISBY, residing at 67 Glenlawn Avenue, Sea Cliff,
New York 11579 (the "Executive").
WHEREAS, the Company wishes to continue the employment of the
Executive upon the terms and conditions set forth in this Agreement as of
January 1, 1998; and
WHEREAS, the Executive is willing to continue to serve in the employ
of the Company upon the terms and conditions set forth in this Agreement as of
January 1, 1998; and
WHEREAS, the Company and the Executive wish to amend the original
Employment Agreement dated December 8, 1997 and replace it with this Amended
Employment Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and agreements hereinafter set forth, the Company and the Executive
agree as follows:
1. Employment and Duties.
(a) The Company hereby employs the Executive to render full-time
exclusive services to the Company during the Term (as defined in Section 2
hereof) as President, Chief Executive Officer and Chairman of the Board of
Directors of the Company. The Company agrees that the Executive shall have
such power and authority as should reasonably be required to fulfill all
duties in an efficient manner.
(b) The Executive hereby accepts such employment and agrees to
devote his full time, attention and best efforts exclusively to performing the
duties described above. During the Term of this Agreement, the Company will
use its best efforts to have the Executive elected to the Board of Directors
of the Company and its subsidiaries, and elected Chairman of the Company's
(and any subsidiaries) Board of Directors. In the event the Executive is
employed with the Company until December 31, 2002, the Company will, in good
faith, discuss the possibility of a renewable employment agreement with terms
(including Salary) at least as favorable to the Executive as in effect on
December 30, 2002.
(c) The Company acknowledges and agrees that the Executive shall
be permitted to fulfill his part-time consulting obligations to Frisby
Aerospace, Inc. (or its successors or assigns) so long as the obligations do
not interfere with Executive's duties hereunder, and shall be permitted to
engage in activities with not-for-profit, educational and/or governmental
entities which are, in the opinion of the Executive, consistent with the
Company's interests and prospects.
2. Term. This Agreement shall become effective on the date hereof
(the "Effective Date") for a period commencing on the Effective Date and
terminating on December 31, 2002, subject to the earlier termination at any
time during the Executive's period of employment, as hereinafter provided (the
"Term").
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3. Compensation.
------------
(a) The Company shall pay the Executive a salary, commending
January 1, 1998, for the services to be rendered by him pursuant to this
Agreement at the initial annual rate of $200,000. The Executive's annual rate
of payment is herein called "Salary". The Salary shall be payable in periodic
installments commencing on or after January 1, 1998 in accordance with the
Company's regular payroll practices as in effect from time to time. On January
1 of each year of the Term, beginning with January 1, 1999, the Salary shall
automatically increase by an amount of 10% of the then current Salary. The
Company may withhold from any amounts payable under this Agreement all
federal, state, local or other taxes that the Company is required to withhold
pursuant to any law or regulation.
(b) During the Term, the Executive shall be entitled to an annual
bonus equal to two (2%) percent of the Company's pre-tax profits calculated
without regard to this bonus. Payment of the bonus, if any, shall be made
within fifteen (15) days after the audit for the relevant fiscal year has been
completed. Each payment shall be accompanied by a financial statement of the
Company and a schedule calculating such bonus. Pre-tax profits of the Company
shall be determined in accordance with generally accepted accounting
principles consistently applied. In calculating pre-tax profits, there shall
be adjustments for gains (and losses) on non-recurring transactions, to wit:
the up-front payment to the Company of a license fee; the costs and expenses
associated with the Company's acquisition of any business or interests; or
non-cash expenses/deductions for goodwill or stock-based compensation. In
calculating Executive's bonus if he shall have been employed for less than
twelve (12) months during any fiscal year of the Company, pre-tax profits
shall be calculated from the beginning of the Company's fiscal year to the
completion of the quarter during which termination of employment occurred and
Executive's bonus shall be pro-rated for the period of Executive's employment.
The determination of pre-tax profits by the Company's independent accounting
firm shall be final and binding upon the parties.
(c) The Executive shall be entitled to participate in and receive
the benefits under any pension plans or bonus plans of the Company or of any
subsidiary and shall be included in, at no cost to Executive, the Company's
health plan (including hospitalization, medical and major medical), life,
prescription drug, accident and disability insurance plans or programs and any
other employee benefit or fringe benefit plans, perquisites or arrangements
which the Company makes available generally to other employees of the Company.
(d) The Executive shall be entitled to a $400 per month automobile
allowance (payable on the first day of each month commencing January 1, 1998)
for the Term of this Agreement.
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(e) The Executive shall be entitled to five (5) weeks paid
vacation each calendar year (commencing in 1998 ).
(f) The Executive shall be entitled to reimbursement for all
reasonable travel, entertainment, conference expenses, organization dues and
other expenses incurred by the Executive in connection with his service under
the Agreement.
(g) For a period through April 15, 2000, the Company shall provide
the Executive with a term life insurance policy in the amount of at least $7.5
million.
4. Termination of Employment.
-------------------------
(a) (1) The Executive's employment hereunder shall terminate
automatically as of the date of his death or upon the Executive's becoming
eligible for benefits under the Company's long term disability plan as in effect
from time to time, or if no disability plan is in effect, upon the Executive
becoming permanently disabled. For purposes of this Agreement, the Executive
shall be deemed to be permanently "disabled" if he has been unable to perform
his duties for six (6) consecutive months or any nine (9) months in any twelve
(12) month period, all as conclusively determined in good faith by the Board
of Directors of the Company.
(2) Upon termination of the Executive's employment under
circumstances described in Section 4(a)(1) above, the Company shall promptly
pay and provide to the Executive (or, in the event of his death, to his
surviving spouse or such other beneficiary as the Executive may designate in
writing, or if there is neither, to his estate):
(i) his earned but unpaid Salary and bonus and accrued
vacation pay as of the date of termination of his employment with the Company;
(ii) the benefits, if any, to which he is entitled as a
former employee under the Company's employee benefit plans and programs and
compensation plans and programs in which he was a participant;
(iii) any reimbursements due to him under Section 3(f).
the benefits, if any, to which he is entitled as a former employee under the
Company's employee benefit plans and programs and compensation plans and
programs in which he was a participant; and
(iv) an amount of Salary at the then current rate equal to
the Salary payable for a period of three (3) months or such shorter period
commencing when non-taxable disability insurance payments of at least sixty
(60%) percent of Executive's Salary become payable to Executive.
(b) (i) The Company may, at any time at its option, terminate the
Executive's employment for "Cause" (as hereinafter defined) within 30 days
following its
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knowledge of an event which gives the Company the right to terminate the
Executive for Cause. In the event of termination for Cause, the Executive shall
receive the earned Salary and benefits (except he shall not receive any bonus
earned but not yet paid) described in Sections 4(a)(2)(i), (ii) and (iii) and no
other compensation. For purposes of this Agreement, the term "Cause" means (i)
any act of fraud or embezzlement in respect of the Company or its funds,
properties or assets, or (ii) conviction of the Executive of a felony under the
laws of the United States or any state thereof unless such acts were committed
with the knowledge and approval of the Company's independent members of the
Board of Directors and counsel in the reasonable, good faith belief that such
actions were in the best interests of the Company and its stockholders and would
not violate criminal law; or (iii) willful misconduct or gross negligence by the
Executive in connection with the performance of his duties that has caused or is
highly likely to cause a material adverse effect , its business or its results
of operations; or (iv) intentional dishonesty by the Executive in the
performance of his duties hereunder which has a material adverse effect on the
Company.
(ii) If the Company elects to terminate the Executive's
employment for Cause, it shall deliver a notice to the Executive setting forth
the termination date and describing with reasonable detail, the action or
omission of the Executive constituting the basis for the termination (the
"Termination Notice").
(c) The Company may terminate the Executive's employment in its
sole discretion for any reason on not less than thirty (30) days written
notice to the Executive.
(d) The Executive may terminate his employment by written notice
to the Board of Directors of the Company, under circumstances where the
Company has committed a material breach of its obligations under this
Agreement and such termination shall be effective if, in the case of the first
such breach, such breach continues for a period of thirty (30) days following
such notice or, in any subsequent breach, on the fifth (5th) day such written
notice is delivered to the Board of Directors.
(e) (i) In the event of termination by the Company pursuant to
Section 4(c), or termination by the Executive pursuant to Section 4(d), the
Executive shall receive (A) the Salary and benefits described in Sections 4(a)
(2) (i), (ii) and (iii), and (B) his then Salary for a period through December
31, 2002, when due and payable.
(ii) In the event the Company and the Executive, by
December 31, 2002, do not reach an agreement to extend/renew an employment
arrangement for a period following December 31, 2002, the Executive shall
receive on December 31, 2002, a payment (the "Payment") equal to the amount of
Executive's annual Salary as of December 30, 2002, provided, however, so long as
the Company is willing to enter into an extension/renewal of this Agreement
(or a similar type of agreement) for a period of at least three (3) years
following December 31, 2002 on terms substantially similar to the terms of this
Agreement in effect on December 31, 2002, the Company shall not be obligated to
pay the Executive the Payment if an agreement between the Company and the
Executive is not achieved.
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(f) The Company and the Executive hereby stipulate that the
damages which may be incurred by the Executive following the Company's breach
of this Agreement (including termination of employment under circumstances
which do not follow the procedures and obligations set forth herein) are not
capable of accurate measurement as of the date first above written and that
such stipulated amounts set forth above payable to Executive constitute
reasonable damages under the circumstances, and do not require mitigation by
the Executive.
5. Covenants and Representations.
-----------------------------
(a) The Executive has not, and unless authorized or instructed in
writing by the Board of Directors of the Company the Executive shall not,
except as required in the conduct of the Company's business, use or disclose
to others, any of the Company's inventions or discoveries or its secret or
confidential information, knowledge or data (oral, written, or in
machine-readable form) which the Executive may have obtained or will obtain
during the course of or in connection with the Executive's employment,
including, without limitation, such inventions, discoveries, information,
knowledge, know-how or data relating to machines, equipment, products,
services, systems, software, research and/or development, designs,
compositions, formulae, processes, manufacturing procedures or business
methods, information relating to present and prospective marketing, sales and
advertising programs and agreements with representatives or prospective
representatives of the Company, present or prospective sources of supply or
any other business arrangements of the Company, including but not limited to,
customers, customer lists, costs, prices and earnings, whether or not
developed by the Executive, by others in the Company or obtained by the
Company from third parties, and irrespective of whether or not such
inventions, discoveries, information, knowledge, know-how or data have been
identified by the Company as secret or confidential, unless and until, and
then only to the extent that, such inventions, discoveries, information,
knowledge, know-how or data become available to the public otherwise than by
the Executive's act or omission.
(b) (i) The Executive agrees to disclose immediately to the
Company or any persons designated by it and to assign to the Company at its
option, or its successors or assigns, all inventions made, discovered,
conceived or first reduced to practice by the Executive, solely or jointly
with others, at any time during the time while employed by the Company which
inventions are made, discovered or conceived either in the course or such
employment and a period of one (1) year thereafter, or with the use of the
Company's time, material, facilities or funds, or which relate to or are
suggested by any subject matter with which the Executive's employment by the
Company may bring the Executive into contact, or which relate to any
investigations or obligations undertaken by the Company; and the Executive
hereby grants and agrees to grant the right to the Company and its nominees to
obtain, for its own benefit and in its own name (entirely at its expense)
patents and patent applications including original, continuation, reissue,
utility and design patents, and applications, patents of addition,
confirmation patents, registration patents, petty patents, utility models,
etc., and all other types of patents and the like, and all renewals and
extensions of any of them for those inventions in any and all countries; and
the Executive shall assist the Company without further charge during the
period of the Executive's employment and thereafter, through counsel
designated by the Company to execute, acknowledge, and deliver all
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<PAGE>
such further papers, including assignments, applications for Letters Patent (of
the United States or of any foreign country), oaths, disclaimers or other
instruments and to perform such further acts, including giving testimony or
furnishing evidence in the prosecution or defense of appeals, interferences,
suits and controversies relating to any of the aforesaid inventions,
applications and patents as may be deemed necessary by the Company or its
nominees to effectuate the vesting or perfecting in the Company or its
nominees of all right, title and interest in and to said inventions,
applications and patents.
(ii) The Executive agrees to disclose immediately to the
Company or any persons designated by it and to assign to the Company, at its
option, or its successors or assigns, all works of authorship, including all
writings, manuals, computer programs, software and hardware, written or
created by the Executive solely or jointly with others, at anytime during the
course of his employment by the Company, which works are made or conceived
either in the course of such employment, or with the use of the Company's
time, material, facilities or funds, or which relate to or are suggested by
any subject matter with which the Executive's employment by the Company may
bring the Executive into contact or which relate to any investigations or
obligations undertaken by the Company; and the Executive hereby agrees that
all such works are works made for hire, of which the Company is the author and
the beneficiary of all rights and protections afforded by the law of copyright
in any and all countries; and the Executive will assist the Company without
further charge during the term of his employment and thereafter, through
counsel designated by the Company, to execute, acknowledge, and deliver all
such further papers, including assignments, applications for copyright
registration (in the United States or in any foreign country), oaths,
disclaimers or other instruments, and to perform such further acts, including
giving testimony or furnishing evidence in the prosecution or defense of
appeals, interferences, suits and controversies relating to any of the
aforesaid works, as may be deemed necessary by the Company or its nominees to
effectuate the vesting or perfecting in the Company or its nominees of all
rights and interest in and to said works and copies thereof, including the
exclusive rights of copying and distribution.
(iii) Executive agrees to submit to the Board of
Directors of the Company, within a reasonable length of time prior to
dissemination, the text of any speech, professional paper, article or similar
communication created by Executive which relates to the Company's present or
future business or research and development endeavors. The Company will
determine whether any Confidential Information is contained in the
communication, and will notify Executive if the dissemination of the
communication is permitted under the terms of this Agreement.
(c) As a matter of record, Executive represents that there are no
inventions, patented or unpatented, which the Executive has made or conceived
prior to his employment by the Company, and no works of authorship, patented
or unpatented, which the Executive has made or conceived prior to his
employment by the Company.
(d) (i) The Executive shall not during the "Non-Competition
Period," (i) engage in business of the type conducted (or proposed to be
conducted) by the Company or its
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subsidiaries or solicit business of the type conducted (or proposed to be
conducted) by the Company from any person, firm or entity which was a licensee,
customer or prospective customer of the Company at any time within two (2) years
prior to the end of the Term, induce or attempt to induce any such licensee or
customer of the Company to reduce its business with the Company, solicit (or
attempt to solicit) any employees of the Company to leave the employ of the
Company or offer or cause to be offered employment to any person who was
employed by the Company at any time during the two (2) years prior to the end of
the Term; (ii) engage in, represent or be connected with, as a shareholder,
member of a limited liability entity, partner or owner, or as an officer,
director, employee, sales representative, proprietor, consultant, associate,
agent, co-venturer, investment adviser or otherwise, any business or activity
competing with the business of the Company or its subsidiaries or affiliates or
any part thereof as conducted by them (or proposed to be conducted) during the
Term in any geographic location where the Company conducts business at the time
of the termination of the employment. The term "Non-Competition Period" as used
herein means a period commencing on the date hereof and ending eighteen (18)
months after the end of the Term. For purposes of determining whether the
Executive is permitted to be a shareholder of a corporation, the Executive's
ownership of less than 3% of the issued and outstanding securities of a
company whose securities are publicly-traded in any U.S. or non-U.S.
securities exchanges shall be permitted.
(ii) The foregoing prohibitions in Subsection (i) and (ii)
of this Section (e) shall bind the Executive (A) if the Agreement is
terminated for "Cause," and (B) if the Agreement is terminated for reasons
other than for "Cause" (Paragraph 4(b) hereof) only so long as the Company
pays him monthly, upon demand, a sum at least equal to fifty (50%) percent of
the Executive's monthly base pay at termination, as defined below, for each
month of the Non-Competition Period. The term "monthly base pay" means the
Executive's monthly portion of annual Salary, including bonus payable pursuant
to Paragraph 3(b) hereof and is subject to regular deductions for taxes,
social security payments, etc. If the Executive is being paid after his
termination of employment pursuant to the provisions of Subsection (a), (b) or
(e) of Section 4, no additional payments are required to be made pursuant to
this Subsection (ii) of Section (e) so long as the payments under subsections
(a), (b) or (e) of Section 4 are being made.
(f) All computer software, computer programs, source codes,
object codes, magnetic tapes, printouts, samples, notes, records, reports,
documents, customer lists, photographs, catalogs and other writings, whether
copyrightable or not, relating to or dealing with the Company's business and
plans, and those of others entrusted to the Company which are prepared or
created by the Executive or which may come into his possession at any time
during his employment, are the property of the Company, and upon termination
of his employment, the Executive agrees to return all such computer software,
computer programs, source codes, object codes, magnetic tapes, printouts,
samples, notes, records, reports, documents, customer lists, photographs,
catalogs and writings and all copies thereof to the Company.
(g) If any of the rights or restrictions contained or provided for
in this Agreement shall be deemed by a court of competent jurisdiction to be
unenforceable by reason of the extent, duration or geographical scope, the
parties hereto contemplate that the court shall reduce
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<PAGE>
such extent, duration, geographical scope and enforce this Agreement in its
reduced form for all purposes in the manner contemplated hereby. Should any of
the provisions of this Agreement require judicial interpretation, it is agreed
that the court interpreting or construing this Agreement shall not apply a
presumption that any provision shall be more strictly construed against one
party by reason of the rule of construction that a document is to be construed
more strictly against the party who itself or through its agents prepared the
same, it being agreed that both parties and their respective agents have
participated in the preparation of this Agreement.
(h) The Executive agrees to cooperate with the Company with
respect to the Company obtaining life insurance on the life of the Executive
with the Company named as the beneficiary or disability insurance with respect
to Executive or both.
6. Indemnification and Attorneys' Fees. Subject to applicable laws,
during the Term and thereafter, the Company shall indemnify, hold harmless and
defend the Executive from all damages, claims, losses, and costs and expenses
(including reasonable attorney's fees) arising out of, in connection with, or
relating to all acts or omissions taken or not taken by him in good faith
while performing services for the Company, and shall further promptly
reimburse the Executive for all expenses (including attorney's fees) incurred
in enforcing the benefits of this Agreement. If and to the extent that the
Company maintains, at any time during the Term, an insurance policy covering
the officers and directors of the Company against claims and/or lawsuits, the
Company shall use its best efforts to cause the Executive to be covered under
such policy upon the same terms and conditions as other similarly situated
officers and directors during the Term and for a period of at least five (5)
years thereafter, provided, however, the cost of providing such coverage after
the Term shall not materially increase the cost to the Company of its general
officers and directors insurance.
7. Miscellaneous.
-------------
(a) Neither of the parties hereto shall have the right to assign
this Agreement or any rights or obligations hereunder without the prior
written consent of the other party; provided, however, that this Agreement
shall inure to the benefit or and be binding upon the successors and assigns
of the Company upon any sale of all or substantially all of the Company's
assets, or upon any merger or consolidation of the Company with or into any
other corporation, all as though such successors and assigns of the Company
and their respective successors and assigns were the Company. Insofar as the
Executive is concerned this Agreement, being personal, cannot be assigned.
(b) This Agreement and the relationships of the parties in
connection with the subject matter of this Agreement shall be construed and
enforced according to the laws of the State of New York without giving effect
to the conflicts of laws rules thereof.
(c) This Agreement contains the full and complete agreement or the
parties relating to the employment of the Executive hereunder and supersedes
all prior agreements, arrangements or understandings, whether written or oral,
relating thereto (including the original
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Employment Agreement dated December 8, 1997). This Agreement may not be amended,
modified or supplemented, and no provision or requirement hereof may be waived,
except by written instrument signed by the Party to be charged.
(d) Executive agrees that any violation by him of Section 5 of
this Agreement may cause the Company irreparable injury. Therefore, Executive
agrees that the Company shall be entitled, in addition to an other remedies it
may have under this Agreement or law, to injunctive and other equitable relief
to prevent or curtail any breach of this Agreement.
(e) Except for applications for equitable injunctive relief (which
the Company may obtain without the requirement to post any bond or
undertaking), any dispute or question arising from this Agreement or its
interpretation and any other remedies which the Company may be entitled to
seek and receive shall be settled by arbitration by one (1) arbitrator in
accordance with the commercial rules then in effect of the American
Arbitration Association. Hearings of the arbitrator shall be held in the
county of Nassau, State of New York, unless the parties agree otherwise.
Judgment upon an award rendered by the arbitrator may be entered in any court
of competent jurisdiction, including courts in the State of New York. Any
award so rendered shall be final and binding upon the parties hereto. All
costs and expenses of the arbitrator shall be paid as determined by such
arbitrator, and all costs and expenses of experts, witnesses and other persons
retained by the parties shall be borne by them respectively, subject to the
provisions of Section 6 hereof. In the event that injunctive relief is
requested, either of the parties shall have the right to seek provisional
remedies prior to an ultimate resolution by arbitration.
(f) All notices which either party hereto is required or permitted
to give to the other will be given by certified mail or by personal delivery,
addressed to such other at the address referred to above, or at such other
place as either may from time to time designate by notice to the other in
writing. Three days after the date of mailing of any such notice and the date
of actual delivery if made by personal delivery will be deemed to be the date
of delivery thereof.
(g) No waiver by either party of any breach or nonperformance of
any provision or obligation of this Agreement shall be deemed to be a waiver of
any preceding or succeeding breach of the same or any other provision of this
Agreement.
(h) The enumeration and headings contained in this Agreement are
for convenience of reference only and are not intended to have any substantive
significance in interpreting this Agreement.
(i) Unless the context otherwise requires, whenever used in this
Agreement the singular shall include the plural, the plural shall include the
singular, and the masculine gender shall include the neuter or feminine gender
and vice versa.
(j) Whenever any determination is to be made or action to be taken
on a date specified in this Agreement, if such date shall fall upon a
Saturday, Sunday or a legal holiday, the
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date for such determination or action shall be extended to the first business
day immediately thereafter.
(k) This Agreement may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which
when so executed and delivered shall be an original document, but all of which
counterparts shall together constitute one and the same instrument. This
Agreement shall not be effective unless and until executed by all parties
hereto.
(l) All provisions hereof which by their nature shall survive the
termination of the Executive's employment, including, without limitation, the
provisions in Section 5, shall survive the termination of the Executive's
employment.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
FRISBY TECHNOLOGIES, INC.
/s/ Jeffrey D. Frisby
By:_____________________________
Authorized Board Member
/s/ Gregory S. Frisby
_____________________________
GREGORY S. FRISBY
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SHAREHOLDERS AGREEMENT
----------------------
AGREEMENT dated as of the 10th day of December, 1997 by and among
FRISBY TECHNOLOGIES, INC., a North Carolina corporation with its principal
office at 417 South Main Street, Freeport, New York 11520 (the "Corporation"),
JEFFRY FRISBY, residing at 706 Riverbend Drive, Advance, North Carolina 27706
("Jeffry"), and GREGORY S. FRISBY, residing at 67 Glenlawn Avenue, Sea Cliff,
New York 11579 ("Greg") (Greg and Jeffry are collectively referred to as the
"Shareholders").
RECITALS
--------
A. The Corporation's authorized capital stock consists of One Hundred
Thousand (100,000) shares of Common Stock, par value $1.00 per share (the
"Common Stock"); and
B. There are issued Five Hundred (500) shares of Common Stock, of
which Two Hundred Fifty (250) shares are owned by Jeffry (the "JF Shares,"
which term includes any other securities of the Corporation issued or
distributed in connection with the initial shares owned by Jeffry and any
other securities of the corporation hereinafter acquired by Jeffry) and Two
Hundred Fifty (250) shares are owned by Greg (the "GF Shares," which includes
any other securities of the Corporation issued or distributed in connection
with the initial shares owned by Greg and any other securities of the
Corporation hereinafter acquired by Greg). The term "Shares" shall mean the JF
Shares and/or the GF Shares, as the case may be.
C. The Shareholders desire to promote the interests of the
Corporation and their mutual interests by setting forth certain rights,
restrictions, and obligations in connection with the management of the
Corporation and the manner in which the Shares shall be held and disposed of,
all as hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties agree as follows:
1. Irrevocable Voting Agreement and Proxy re: Shareholder
Action.
(a) Jeffry, until the death of Greg, irrevocably agrees to
vote, in person or by proxy, and hereby grants to Greg an irrevocably proxy to
so vote, all of the JF Shares now or hereafter owned by him, at any meeting of
shareholders of the Corporation called for any purpose or by consensual action
of shareholders with respect to any purpose including election of directors,
in such manner as Greg shall designate. This irrevocable voting agreement and
proxy shall be binding upon any transferee (whether by purchase, gift,
assignment or operation of law, including the estate of Jeffry) of any of the
JF Shares now or hereafter owned by Jeffry and shall be in full force and
effect until the earlier of (i) the tenth anniversary of the date hereof (or
such other earlier date as may be required by law), (ii) the death of Greg, or
(iii) the date following an initial public offering of the Company's
securities ("IPO") upon which any contractual restriction on the transfer of
the JF Shares shall terminate.
<PAGE>
(b) Greg, effective upon the death of Greg, hereby
irrevocably grants Jeffry an irrevocable proxy on all GF Shares then owned by
him, at any meeting of shareholders of the Corporation called for any purpose
or by consensual action of shareholders with respect to any purpose including
election of directors, in such manner as Jeff shall designate. This
irrevocable voting agreement and proxy shall be binding upon any transferee
(whether by purchase, gift, assignment or operation of law, including the
estate of Greg) of any of the GF Shares then owned by Greg and shall be in
full force and effect until the earlier of (i) the tenth anniversary of the
date hereof (or such other earlier date as may be required by law), or (ii)
the date following the IPO upon which any contractual restriction upon the
transfer of the GF Shares shall terminate.
(c) Each Shareholder shall use his best efforts to cause the
Corporation to employ Greg as its President and Chief Executive Officer.
2. Restrictions on Transfer of Shares. The Shareholders agree that:
(a) No Shareholder shall pledge, assign, sell, gift, transfer,
hypothecate, or otherwise dispose of or encumber his Shares, or cause or
permit a change in the legal or beneficial ownership of Shares (any such
pledge, assignment, sale, gift, or transfer, whether by operation of law or
otherwise), hypothecation, disposition, encumbrance, or change is referred to
as a "Transfer"), except as expressly permitted in this Agreement. Any
Transfer requiring consent which is attempted without such consent shall be
null and void and without any force or effect.
(b) Every transferee of Shares shall be bound by the terms and conditions
of this Agreement and all amendments hereto without the requirement for the
execution of any further document or agreement. Nevertheless, each authorized
transferee of Shares shall execute and deliver to the Corporation, at the
transferee's own cost and expense, all documents, instruments, certificates,
or agreements required to bind the transferee to the terms of this Agreement.
If the transferee refuses or fails to deliver any such document, instrument,
certificate, or agreement within thirty (30) days after demand thereof by the
Corporation, the Transfer of Shares to such transferee shall be null and void;
(c) If any Shares are subject to attachment, lien, or charge by a
creditor or is assigned to or held for the benefit of any creditor, the
interest obtained by such creditor or assignee shall be only that of a
lienholder, and in no event shall any such creditor or assignee have any
rights as a shareholder.
(d) All Shares, whether or not hereafter acquired or transferred pursuant
to the provisions of this Agreement, shall remain in all respects subject to
this Agreement and every transferee thereof shall by his acceptance of such
Shares be deemed to have consented thereto.
(e) The Corporation shall not be required to recognize a Transfer of any
Shares on the books of the Corporation unless the Transfer shall comply, and
be made in accordance, with the terms of this Agreement.
2
<PAGE>
3. Legends.
Each certificate evidencing the Shares and each certificate issued in
exchange for or upon Transfer of any of the Shares shall be stamped or
otherwise imprinted with a legend in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
CERTAIN SHAREHOLDERS AGREEMENT DATED AS OF DECEMBER 29, 1997
BY AND AMONG THE CORPORATION AND CERTAIN SHAREHOLDERS, AND
AS SUCH ARE SUBJECT TO CERTAIN VOTING PROVISIONS AND
RESTRICTIONS ON TRANSFER SET FORTH IN THE SHAREHOLDERS
AGREEMENT."
4. Sales of Shares.
The following provisions shall apply to all offers and sales of Shares:
(a) Upon receipt by any holder of either JF Shares or GF Shares (the
"Selling Shareholder") of a bona fide, arm's length offer in writing (a "Bona
Fide Offer") to purchase any, or any, and all, Shares held by such a holder,
which such holder intends to accept, the following provisions shall govern:
(i) All sales of Shares must be entirely for cash (whether
or not payable in installments).
(ii) Offer to Other Shareholder. The Selling Shareholder in
the case of JF Shares shall promptly offer in writing to sell such Shares to
the Greg, or in the case of GF Shares such offer shall be made to Jeffry, (the
offer is herein called the "First Reoffer" and the person to whom a First
Reoffer is made is called the Offeree), upon terms and conditions no less
favorable than contained in the Bona Fide Offer and shall attach a copy of the
Bona Fide Offer to the First Reoffer. Such First Reoffer may be accepted at
any time by the Offeree within twenty (20) days next following the receipt of
the First Reoffer (the "First Reoffer Period"). Such acceptance must be made
unconditionally and in full by the accepting Offeree by notice to the Selling
Shareholder prior to the expiration of the First Reoffer Period.
(iii) Offer to Corporation. If the First Reoffer is not
accepted within the First Reoffer Period, the Selling Shareholder shall
promptly offer in writing (the "Second Reoffer") to sell such Shares to the
Corporation upon terms and conditions no less favorable than contained in the
Bona Fide Offer and shall attach a copy of the Bona Fide Offer to the Second
Reoffer. The Second Reoffer may be accepted by the Corporation at any time
within twenty (20) days next following its receipt (the "Second Reoffer
Period."). Such acceptance must be made unconditionally and in full by the
Corporation prior to the expiration of the Second Reoffer Period.
3
<PAGE>
(iv) Sales to Persons Other than Offeree or Corporation.
Upon the expiration of the First Reoffer Period and Second Reoffer Period
without either the First Reoffer or the Second Reoffer having been accepted in
accordance herewith, the Selling Shareholder shall be free to accept the Bona
Fide Offer; provided, however, that:
(a) the third person or persons so acquiring such
Shares shall, prior to such acquisition, agree in writing with the Corporation
and the other Shareholder to hold such Shares subject to and in accordance
with all of the terms, provisions, and considerations contained in this
Agreement to the same extent as if such person(s) originally executed this
Agreement;
(b) the conclusion of the transaction contemplated
by the Bona Fide Offer shall have been effected within sixty (60) days after
the expiration of the Second Reoffer Period, and if not so effected within
such sixty (60) day period, the Bona Fide Offer shall be deemed to have
terminated at the end of such period and may not thereafter be accepted; and
(c) if the amount of a Bona Fide Offer should be
reduced, or if any of its terms or provisions should otherwise be changed,
then such Bona Fide Offer shall be treated as being a new Bona Fide Offer and
may not be accepted by the Selling Shareholder unless there has been
compliance with the provisions of this Section 6 with respect to such new Bona
Fide Offer.
5. Purchase Upon Death.
(a) In the event that Jeffry and/or Greg dies, the Corporation, upon the
written request of the estate of such Shareholder, may purchase all of the
Shares (or such portion of such Shares as the estate of the Shareholder
requests) owned by such deceased Shareholder which shall also include (any
Shares owned by any spouse or child of such Shareholder, or pursuant to any
test or similar estate planning entity established by Jeffry or Greg, as the
case may be, for the benefit of their family) at the time of his death, and
the estate of the deceased Shareholder shall sell to the Corporation all (or
such portion) of such Shares owned by him which it agrees to sell.
(b) The purchase price per share of the Shares to be sold pursuant to
this Section 5 shall be determined by dividing the total number of Shares of
the Corporation issued and outstanding at the end of the month preceding the
date of death into the "Value" of the Corporation at the time. The term
"Value" shall mean an amount of Twenty Two Million Five Hundred Thousand
($22,500,000) dollars, or such greater amount as determined by the
Corporation's Board of Directors.
4
<PAGE>
(c) If the Corporation elects to purchase all or a portion of the Shares
pursuant to Section 5(a) hereof, within thirty (30) days after the
qualification of a legal representative for the estate of the Shareholder the
Corporation shall give the estate of the deceased Shareholder a notice
specifying the date (which shall be a business day not more than thirty (30)
days thereafter) and the time at which a closing of the sale of the deceased
Shareholder's Shares shall be held. At the closing, the legal representative
of the estate of the deceased Shareholder shall deliver to the Corporation
certificates for the deceased Shareholder's Shares being sold, together with
stock powers therefor duly endorsed in blank and such other documents as may
reasonably be requested by the Corporation to effect transfer thereof, and the
Corporation shall deliver to the legal representative of the estate of the
deceased Shareholder a certified or bank cashier's check drawn on a New York
bank in the amount of the purchase price of the Shares sold by such estate to
the Corporation. At the closing, the Shares transferred to the Corporation
shall be free and clear of all pledges, liens, and encumbrances whatsoever and
the estate shall so represent in writing to the Corporation.
6. Miscellaneous.
(a) Notices. Notices or other communications required or permitted to be
given hereunder shall be in writing, and shall be deemed duly given upon
personal delivery or mailing by registered or certified mail, return receipt
requested, to the Corporation at its principal place of business, to the
attention of the President, and to the Shareholders at their last known
residence as reflected on the books of the Corporation or at such other
address as any party may designate to the others by notice hereunder. Such
notices shall be effective upon receipt in the case of personal or courier
service or telecopier delivery and on the third (3rd) day after posting in the
U.S. mail.
(b) Governing Law. This Agreement shall be governed in all respects in
accordance with the laws of the State of North Carolina without reference to
principles of conflicts of law, except that questions of corporate law shall
be governed by the laws of the State of North Carolina.
(c) Entire Agreement. This Agreement supersedes all prior agreements and
understandings, oral and written, among the parties with respect to the
subject matter hereof, and this Agreement constitutes the entire agreement of
the parties, provided, however, a Stockholders Agreement dated December 29,
1997 among the Company, the Shareholders and MUSI Investments S.A., shall be
effective and shall be operative.
(d) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(e) Severability. If any term, covenant, condition, or provision of this
Agreement or the application thereof to any circumstance shall be invalid or
unenforceable to any extent, the remaining terms, covenants, conditions, and
provisions of this Agreement shall not be affected and each remaining term,
covenant, condition, and provision of this Agreement shall be valid and shall
be enforceable to the fullest extent permitted by law. If any provision of
this Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only as broad as is enforceable.
5
<PAGE>
(f) Amendments. This Agreement may not be amended, modified, or changed
except by an instrument or instruments in writing signed by all parties to
this Agreement.
(g) Lack of Independent Counsel. The parties all acknowledge that the
Corporation's counsel, Ruskin, Moscou, Evans & Faltischek, P.C., prepared this
Agreement on behalf of and in the course of its representation of the
Corporation, and that:
(i) The parties have been advised by Ruskin, Moscou, Evans &
Faltischek, P.C. that a conflict exists among their individual interests; and
(ii) The parties have been advised by Ruskin, Moscou, Evans
& Faltischek, P.C. to seek the advice of independent counsel; and
(iii) The parties have had the opportunity to seek the
advice of independent counsel.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
FRISBY TECHNOLOGIES, INC.
By: /s/ Gregory Frisby
----------------------------------
GREGORY FRISBY, Chairman and CEO
/s/ Jeffry Frisby
----------------------------------
JEFFRY FRISBY
/s/ Gregory S. Frisby
----------------------------------
GREGORY S. FRISBY
<PAGE>
March 16, 1998
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for Frisby Technologies, Inc. and,
under the date of April 24, 1996, we reported on the financial statements as
of and for the year ended December 31, 1995. On December 1, 1996, our
appointment as principal accountants was terminated. We have read Frisby
Technologies' statements included under the heading "Change in Independent
Auditors" in its Amendment No. 1 to the Form SB-2 dated March 9, 1998, and we
agree with such statements, except that we are not in a position to agree with
Frisby Technologies' statements that the decision to change firms was approved
by the Company's Board of Directors and that during the year ended December
31, 1995 and until completion of the audit of the Company's 1995 Financial
Statements, the Company did not consult with Ernst & Young LLP on items which
(i) were of or should have been subject to the Statement of Auditing Standards
No. 50, or (ii) concerned the subject matter of a disagreement or reportable
event with KPMG.
Very truly yours,
/s/ KPMG Peat Marwick LLP
- --------------------------
KPMG Peat Marwick LLP
<PAGE>
Exhibit 24.1 - Consent of Independent Auditors
The Stockholders
Frisby Technologies, Inc.:
We consent to the reference to our firm under the headings "Experts" and
"Change in Independent Auditors" and to the use of our report dated February
27, 1998, in Amendment No. 2 to the Registration Statement (Form SB-2 No.
333-45121) and related Prospectus of Frisby Technologies, Inc. dated March 30,
1998.
/s/ ERNST & YOUNG LLP
Mellville, New York
March 30, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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