United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934
For the fiscal year ended December 31, 1998
[ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934 for the Transition Period from _____________ to _______________
Commission File No. 1-14005
FRISBY TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Delaware 62-1411534
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
77 East Main Street, Bay Shore, New York 11706
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (516) 969-8570
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, $0.001 par value
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act:
None
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
State issuer's revenues for its most recent fiscal year. $2,869,139
State the number of shares outstanding of each of the issuer's classes of
common equity, as of March 8, 1999. 5,120,613
As of the close of business on March 8, 1999, the aggregate market value of
the registrant's common stock held by non-affiliates computed by reference to
the price at which the stock was sold was approximately $7,400,000. The shares
are currently traded on the NASDAQ SmallCap Market under the symbols "FRIZ" for
the Common Stock. The information required by Part III of this Form 10-KSB is
incorporated by reference to the Registrant's definitive proxy statement to be
filed with the Commission within 120 days.
<PAGE>
Part I
Item 1. Description of Business.
General
Frisby Technologies, Inc. (the "Company") is engaged in the development and
commercialization of innovative branded 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, medical
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). 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.
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, a series of
foams in which the thermal additives are embedded, and fabric packages
containing these foams. The Company currently markets its thermal additives,
foams and fabric packages under the trademarks Thermasorb(R) and ComforTemp(R),
respectively.
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,
Titleist and Foot-joy Worldwide, Schoeller Textil AG, Wells Lamont Division of
Marmon Holdings, Inc., LaCrosse Footwear, Inc., and Bell Sports Corp.
<PAGE>
Sale of Common Stock in Public Offering
On April 1, 1998, the Company consummated an Initial Public Offering (the
"IPO") of 1,600,000 shares of Common Stock at a price of $7.00 per share. On May
15, 1998, Barington Capital Group, L.P., the underwriter in connection with the
IPO (the "Underwriter"), exercised its over-allotment option to purchase an
additional 240,000 shares of the Common Stock at a price of $7.00 per share. The
total net proceeds to the Company amounted to approximately $10,384,000 after
the underwriters' discount and related expenses. The net proceeds of these
transactions were used for the operation of the Company and the balance have
been invested in cash deposit accounts and cash equivalents, institutional U.S.
Government Money Market Funds and commercial paper of selected U.S. companies.
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, gels, 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 43(degree)F to 190(degree)F. The variety of the Company's Thermsorb(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. Thermsorb(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. Moreover, in tests
performed for the United States Air Force by Triangle Research and Development
Corporation ("TRDC"), liquid coolants containing Thermasorb(R) additives have
been shown to dissipate up to 40 times more heat than traditional coolants.
ComfoTemp(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 they recharge 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. The lamination or
attachment by other means of ComforTemp(R) foams to a wide variety of fabrics
yield ComforTemp(R) fabric packages.
<PAGE>
Purchasing
The Company currently outsources all of its production needs for the raw
phase change materials, Thermasorb(R) and ComforTemp(R), and anticipates that it
will continue to do so for the foreseeable future. The Company currently has
both formal and informal agreements and is negotiating definitive supply
agreements with all 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.
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. In September 1998, the Company and 3M entered into a memorandum of
understanding that provides firm fixed pricing for the Company's anticipated
requirements for Thermasorb(R) additives for the five year period through and
including the year 2003. The parties are currently negotiating the final supply
contract. Prior to October 23, 1997, the Company obtained all of its
requirements for ComforTemp(R) foams under purchase orders with Lendell
Manufacturing, Inc. ("LMI"). On October 23, 1997, the Company entered into a
memorandum of understanding with LMI granting LMI the exclusive license to
manufacture a specific hydrophilic polyurethane version of the Company's
ComforTemp(R) foams. Since October 23, 1997, the Company has purchased foams
from LMI under the Memorandum of Understanding. Foamex International, Inc.
("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. The Company
has relationships with other suppliers for each of the other steps of the
production process for Thermasorb(R) and ComforTemp(R).
The Company monitors and tests its products during each step of the
manufacturing process for quality assurance purposes. Raw phase change material
("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 of raw PCM, 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 employees at the Company's North
Carolina facility or by third-party quality representatives at the manufacturing
site.
<PAGE>
The Company historically has not had material losses of inventory and does
not experience material losses due to cost and market fluctuations, overstocking
or technology. The Company's inventory turnover for the year ended December 31,
1998, was approximately three (3) times.
Sales and Marketing
Currently, the Company's sales strategy consists of (i) establishing
relationships with companies with recognized "brand-name" products and (ii)
working with its strategic partners to increase the number of end-use products
incorporating Thermasorb(R) and ComforTemp(R) offered for sale. The Company
seeks to leverage off the resources of its strategic partners and their existing
sales, marketing and distribution systems 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.
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 coordinates the promotion of its Thermasorb(R) additives and
ComforTemp(R) products with the promotional efforts of its strategic partners
and implements public relations campaigns in order to accelerate the inclusion
of feature stories and references to ComforTemp(R) products and its strategic
partners in targeted industry and consumer periodicals. The Company believes
that this co-branding strategy will help to enhance its advertising and
marketing efforts, 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, and the identification of appropriate acquisitions.
The Company earns revenues from the sale of its Thermasorb(R) additives and
ComforTemp(R) foams to its strategic partners for inclusion in their products,
earns royalties and 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.
The Company does a significant amount of business with a limited number of
strategic partners. Total revenues from two strategic partners comprised
approximately 53% (35% and 18%) of the Company's total revenues for the year
ended December 31, 1998. 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.
<PAGE>
Advertising
In addition to the coordinated efforts with strategic partners, the Company
uses advertising placements in various national trade and consumer publications
in order to build brand name recognition of its Thermasorb(R) and ComforTemp(R)
products and trademarks. Total expenses related to advertising creation and
placements in 1998 were $992,000. The Company also maintains Internet sites on
the World Wide Web at www.frisby.com and www.comfortemp.com. The sites promote
the Company's products and brands as well as its licensees' products. The
Company also attends and exhibits its products at numerous tradeshows during the
year.
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 development technology for certain of its
own uses, and the Company retains all other rights to use and further
commercialize the newly developed technology.
Beginning in 1997, the product development focus has shifted more toward
commercialization of its product and related applications and away from
government funded projects.
For the years ended December 31, 1998 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.
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. To date, the Company has not
developed any non-thermal technologies or products that it considers ready to
commercialize.
At December 31, 1998, the Company had ongoing research projects providing
engineering services directly or indirectly for the United States government in
the amount of less than $50,000 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 funded research projects in the
future.
<PAGE>
Patents/Intellectual Property
In 1991, the Company secured exclusive rights under a Joint Development
Agreement and subsequently entered into the TRDC License with TRDC whereby the
Company was granted a 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 MicroPCMs relating to fibers and
fabrics with reversible enhanced thermal storage properties ("MicroPCM Fibers
and Fabrics") which previously had been licensed to Outlast Technologies, Inc.
("Outlast") in a separate agreement (the "TRDC/Outlast Agreement"). Pursuant to
the terms of the TRDC License, the Company has the exclusive right to
manufacture bulk PCMs and MicroPCMs (except MicroPCM Fibers and Fabrics),
end-use products and improvements and the right to market, sell, use, lease and
distribute all applications, 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 fabric related 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 an agreement with Outlast (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 and agreed to pay Outlast a royalty if they 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.
In September 1998, the Company entered into an agreement with TRDC whereby
the Company (i) reduced the future royalty rates payable to TRDC based on the
Company's product sales revenues and royalty income received from its strategic
parties and (ii) was assigned TRDC's rights in the TRDC/Outlast Agreement
including the rights to royalty payments from Outlast. These items have the net
effect of reducing the Company's future royalty expense. As consideration, the
Company has given TRDC a combination of cash, stock options, and a put
agreement.
<PAGE>
Currently, TRDC's intellectual property relating to MicroPCMs includes ten
issued United States patents, and two 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.
In September 1998, the Company obtained the exclusive license for a patent
from the University of Miami for the application of encapsulated phase change
materials within liquids. This patent has applications within the electronics
and computer industries. The Company continues to look for opportunities to
license additional complementary technologies.
The following table sets forth information regarding the patents currently
licensed to the Company.
<TABLE>
<CAPTION>
Patent Expiration
Date of Patent Patent Number Description Industry (Year)
<S> <C> <C> <C> <C>
2/28/89 4,807,696 Thermal Energy Storage Automotive, 2006
Apparatus Using Encapsulated Aerospace, Electronics
PCMs.
3/27/90 4,911,232 Heat Transfer Using MicroPCM Automotive, 2007
Slurries Computers, Electronics
4/16/91 5,007,478 MicroPCM Slurry Heat Sink Computers, Electronics 2008
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 Protective Apparel 2011
Enhanced 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 All Industries 2012
Insulation
9/8/98 5,804,297 Thermal Insulating Coating All Industries 2011
using MicroPCMs
1/14/98 0611330* Coated Fabric With Reversible All Industries 2013
Enhanced Properties
</TABLE>
*European Patent granted with respect to the invention covered by United
States Patent No. 5,366,801
<PAGE>
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 March 9, 1998, the Company received a
registered Canadian trademark for ComforTemp(R). A trademark application has
also been submitted for ComforTemp(R) in the European Community, as well as in
most industrialized nations of the world including among others, Japan, China,
Russia and Korea.
The Company and its' partners have several patents pending and also intends
to file for additional patents related to its technologies and products.
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)), fleece, 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.
<PAGE>
The Company competes directly with Outlast in certain applications. The
license granted to Outlast by TRDC permits it to market applications of fibers
and fabrics with reversible enhanced thermal storage properties ("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
applications because fabrics will not have sufficient mass of MicroPCMs to
provide a significant thermal management solution.
The Company competes with other companies, including R.G. Barry Company and
Phase Change Laboratories, Inc., that utilize bulk PCMs primarily for heat
retention products. The Company believes Thermasorb(R) additives and
ComforTemp(R) foams offer superior performance characteristics compared to its
competitors' products 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 of the end product.
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
product 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 on a technical level 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.
Employees
As of December 31, 1998, the Company employed approximately 30 full-time
employees of which 6 were management personnel, 10 were sales and product
support personnel, 7 were product development personnel, 4 were administrative
personnel, and 3 were inventory purchasing and quality assurance personnel.
<PAGE>
Item 2. Description of Properties
The Company currently has three facilities. The Company occupies its
current headquarters located in 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 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.
In 1998, the Company entered into a lease with an unrelated third party for
the lease of a new facility in North Carolina. The Company planned to move its
North Carolina and South Carolina facilities into the new North Carolina
facility by June 1998. However, on August 27, 1998, the facility to which the
Company was relocating its North Carolina operations was destroyed by fire.
There was no significant impact on the operations of the Company as the fire
occurred prior to moving into the building it intended to occupy.
The Company now leases premises at 8 West Third Street, Winston-Salem,
North Carolina, a 3,000 square foot facility, which the Company uses as sales
and marketing offices. This lease is on a month-to-month basis and is rent-free.
The Company leases premises at 3380 Old Lexington Road, Winston-Salem,
North Carolina, a 10,000 square foot facility, which the Company uses as a
technology development center and warehouse. This lease expires September 30,
1999, and has an annual rent of approximately $90,000.
In September 1999, the North Carolina operations will be consolidated into
the Frisby Technologies Center, a 20,000 square foot facility located on 8 acres
in Winston-Salem, North Carolina. This facility will be used as executive, sales
and marketing offices, a technology development center and a warehouse. The
lease includes a 12-year lease term and includes annual rent payments ranging
from $147,000 to $202,000. The Frisby Technologies Center can be expanded in the
future if necessary.
The Company does not consider any of the facilities it currently occupies
suitable for its future needs and is negotiating a new lease for minimum space
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 and marketing efforts for
the foreseeable future.
Item 3. Legal Proceedings.
The Company is not currently involved in any legal proceedings. In the
ordinary course of its business, the Company, from time to time, may be subject
to litigation.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's securities are traded on the NASDAQ SmallCap Market under the
symbols "FRIZ" for the Common Stock.
The outstanding shares of Common Stock are currently held by approximately
1,200 shareholders of record, and the Convertible Preferred Stock by one holder
of record. The transfer agent and registrar for the Common Stock is American
Stock Transfer & Trust Company.
The following table indicates the quarterly high and low stock prices for
fiscal 1998 since its IPO:
Quarter Ended High Low
- - ----------------------------- ----------------- ----------------
June 30, 1998 $9.75 $6.50
September 30, 1998 $7.375 $2.50
December 31, 1998 $5.937 $2.00
The Company has paid no dividends on its common stock for the last two
years and does not expect to pay dividends in the future.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following management's discussion and analysis and this Form 10-KSB
contain forward-looking statements which involve risks and uncertainties. When
used herein, the words "anticipate," "believe," "estimate," and "expect" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company's actual results,
performance or achievements could differ materially from the results expressed
in or implied by these forward-looking statements.
General
The following discussion should be read in conjunction with the Company's
audited financial statements for the years ended December 31, 1997 and 1998,
appearing elsewhere in this Form 10-KSB. The financial information for the year
ended December 31, 1996 is presented for comparison purposes only.
<PAGE>
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 1998
<S> <C> <C> <C>
Revenues:
Product sales ......................... $ 14,000 $ 474,000 $2,198,000
Research and development projects...... 1,120,000 487,000 196,000
Licenses and royalties................. 75,000 301,000 475,000
-------- --------- --------
Total revenues.............................. 1,208,000 1,262,000 2,869,000
Cost of sales:
Product sales.......................... 12,000 452,000 2,126,000
Research and development projects...... 1,004,000 258,000 159,000
Licenses and royalties................. 20,000 265,000 234,000
--------- --------- --------
Total costs of sales........................ 1,036,000 976,000 2,518,000
--------- --------- --------
Gross profit................................ 173,000 286,000 350,000
Selling and marketing expense............... 83,000 315,000 2,234,000
General and administrative expense.......... 207,000 900,000 2,401,000
--------- --------- --------
Loss from operations........................ (118,000) (929,000) (4,285,000)
Interest expense (income)................... 19,000 37,000 (367,000)
--------- --------- --------
Loss before income taxes.................... (136,000) (965,000) (3,919,000)
Income tax (benefit) provision.............. (49,000) 45,000 --
--------- --------- --------
Net loss.................................... $ (88,000) $ (1,010,000) $(3,919,000)
========== ========= ==========
Net loss per common share - basic and diluted $ (0.03) $ (.36) $ (.84)
========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
December 31, December 31,
1997 1998
------------------ ------------------
<S> <C> <C>
Working capital $ 416,000 $ 8,515,000
Total assets 1,268,000 13,113,000
Long-term liabilities 141,000 1,467,000
Total liabilities 792,000 3,395,000
Total shareholders' equity 475,000 9,718,000
</TABLE>
Years ended December 31, 1998 and 1997
Revenues. The Company generates revenue from three primary sources: (i)
sales of its Thermasorb(R) additives and ComforTemp(R) foam products for use in
its strategic partners' products; (ii) revenue from research and development
contracts related to the United States government and from private companies;
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, 1998 increased by approximately
$1,607,000 to $2,869,000 compared to $1,262,000 for the year ended December 31,
1997.
<PAGE>
Product Sales. Product sales for the year ended December 31, 1998 increased
by approximately $1,724,000 to $2,198,000 compared to $474,000 for the year
ended December 31, 1997. These increases were primarily the result of the
Company bringing its ComforTemp(R) foams and Thermasorb(R) additives to market
commencing in the second quarter of 1997. Sales to partners that were present in
1997 more than doubled in 1998 as compared to 1997 from $474,000 to
approximately $1,000,000. The additional increase resulted from relationships
with strategic partners that began in 1998 such as Titleist and Foot-joy
Worldwide, Schoeller Textil AG, and Foamex International.
Research and Development Projects. Revenues from research and development
projects for the year ended December 31, 1998 decreased by approximately
$291,000 to $196,000 from $487,000 for the year ended December 31, 1997. These
decreases resulted primarily from the shift in the Company's focus away from
obtaining and performing funded research and development contracts to the
commercialization of its thermal management products.
Licenses and Royalties. Revenues from license fees and royalties for the
year ended December 31, 1998 increased by approximately $174,000 to $475,000
from $301,000 for the year ended December 31, 1997.License fees are recognized
as revenue ratably over the life of the license agreement. Accordingly, the
Company has recognized revenue in 1998 relating to license agreements entered
into beginning in the second quarter 1997. Additionally, royalty fees increased
to $380,000 for the year ended December 31, 1998 from $155,000 for the year
ended 1997.
Cost of Sales. 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 and private companies; and
(iii) royalty payments required to be made to the inventor of the thermal
management technology or other licensors. Costs of sales for the year ended
December 31, 1998 increased by approximately $1,543,000 to $2,519,000 compared
to $976,000 for the year ended December 31, 1997.
Cost of Sales --- Products. The cost of sales related to products for the
year ended December 31, 1998 increased by approximately $1,674,000 to $2,126,000
compared to $452,000 for the year ended December 31, 1997. These increases
reflect the higher volume of product sales in the year ended December 31, 1998
as compared to the year ended December 31, 1997.
Cost of Sales --- Research and Development Projects. The cost of sales
related to research and development projects for the year ended December 31,
1998 decreased by approximately $99,000 to $159,000 compared to $258,000 for the
year ended December 31, 1997. These decreases are consistent with the shift in
the Company's focus away from obtaining and performing funded research and
development contracts and to the commercialization of its thermal management
products.
<PAGE>
Cost of Sales --- Licenses and Royalties. The cost of sales related to
licenses and royalties for the year ended December 31, 1998 decreased by
approximately $31,000 to $234,000 from $265,000 for the year ended December 31,
1997. This decrease primarily reflect the expensing of the initial cost
associated with the Outlast Agreement in 1997.
Selling and Marketing Expenses. Selling and marketing expense for the year
ended December 31, 1998 increased by approximately $1,919,000 to $2,234,000
compared to $315,000 for the year ended December 31, 1997. These increases were
primarily the result of the Company increasing its marketing and advertising
activity in order to build brand name recognition of its Thermasorb(R) and
ComforTemp(R) products and trademarks. These activities included advertising
placements in many national trade and consumer publications and tradeshow
participation. Additionally, consulting expense of $180,000 was recorded
related to warrants and options granted to consultants in 1998.
General and Administrative Expense. General and administrative expense for
the year ended December 31, 1998 increased by approximately $1,501,000 to
$2,401,000 compared to $900,000 for the year ended December 31, 1997. These
increases reflect the increase in personnel and personnel-related expenses,
including travel, and recruiting costs of new employees.
Additionally, fees and expenses paid to consultants have also increased
over the comparable period for the prior year. These increases are in connection
with the expansion of the Company's operations and commercialization of its
thermal management products.
Net Interest Income/Expense. The Company earned net interest income of
$367,000 for the year ended December 31, 1998 as compared to net interest
expense of $37,000 for the year ended December 31, 1997. These changes are due
to the investing of the proceeds received from equity transaction during 1988.
Income Tax Provision. The Company recorded no income tax benefit for the
year ended December 31, 1998. For the year ended December 31, 1997, the Company
recorded a provision of $45,000 which arose from providing a valuation allowance
against all deferred tax assets. The net deferred tax assets at December 31,
1998 and 1997 arose principally from net operating loss carry forwards. The
valuation allowances recorded are due to uncertainties relating to expected
future taxable income that would have to be generated to realize such assets.
Net Loss. As a result of the foregoing, the net loss for the year ended
December 31, 1998 increased to $3,919,000 from $1,010,000 for the year ended
December 31, 1997.
<PAGE>
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, 1996 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.
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.
<PAGE>
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.
<PAGE>
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, 1998, the Company has incurred
cumulative losses of approximately $4,987,000. The Company has financed its
operations to date through research and development contracts relating to United
States government programs, bank borrowings and issuance of common stock and
convertible preferred stock.
At December 31, 1998, the Company had working capital of $8,515,000,
including cash and marketable securities of $8,072,000, accounts
receivable-billed of $1,046,000 and inventory of $672,000, offset by accounts
payable of $869,000 and accrued expenses and other current liabilities of
$386,000.
The Company's liquidity during the year ended December 31, 1998 was
significantly impacted by the proceeds from the IPO, offset in part 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, 1998 and 1997 was $4,554,000 and $832,000, respectively. The
principal factor contributing to the cash used in operating activities for each
of the years ended December 31, 1998 and 1997 was the net loss for each of the
respective periods. Cash used by investing activities was $2,308,000 for the
year ended December 31, 1998. The principal factor contributing to the cash used
in investing activities was the purchase of marketable securities. Cash provided
by financing activities were $13,002,000 and $1,154,000, respectively for the
years ended December 31, 1998 and 1997. The principal financing activity in 1998
was the receipt of the net proceeds of $2,479,000 from the exercise of the
Convertible Preferred Option and approximately $10,523,000 from the IPO. The
principal financing activity in 1997 was the net proceeds of approximately
$1,550,000 from the Private Placement.
The Company has a $1,000,000 line of credit with a bank. The line of credit
bears interest at the lower of the bank's prime rate or a two point spread
versus the London Interbank Overnight Rate ("LIBOR") and will expire on June 30,
1999. The full amount of the line 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, 1998, the Company has generated net operating loss carryforwards of
approximately $4,692,000 which may be available to reduce future available
taxable income and future tax liabilities. These carryforwards expire in years
through 2018. 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 IPO, 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.
<PAGE>
The Company expects to use $1,000,000 in 1999 for the purchase of capital
equipment and furniture for the new facility in North Carolina.
Based on the Company's current operating plan, the Company believes that
its available cash, cash flow from operations and available line of credit, will
be sufficient to satisfy its operational and capital requirements through
December 1999. 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 its available cash, cash flow from operations and available
line of credit 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 or the identification of strategic acquisition or licensing
opportunities, 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.
Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on recent assessments, the Company determined that it will not
require significant modifications of its hardware or software so that those
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications of its existing software, the Year
2000 Issue can be mitigated.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. As of
February 28, 1999, the Company has fully completed its assessment of all
internal systems that could be significantly affected by the Year 2000. The
completed assessment indicated that most of the Company's significant
information technology systems will not be significantly affected, particularly
the general ledger, billing, and inventory systems. The Company does not believe
that the Year 2000 presents a material exposure as it relates to the Company's
products. In addition, the Company has begun to gather information about the
Year 2000 compliance status of its external agents and continues to monitor
their compliance. To date, the Company is not aware of any external agent with a
Year 2000 issue that would materially impact the Company's results of
operations, liquidity, or capital resources. The Company has requested from its
bank an assessment of the extent of the bank's Year 2000 compliance. In the
event the bank is not Year 2000 compliant in a timely manner, the Company is
prepared to change banks. However, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion could materially
and adversely impact the Company. The effect of non-compliance by external
agents is not determinable.
<PAGE>
The Company will utilize its external software and service provider to
reprogram, test and implement the software for the Year 2000 modification as
needed, the cost of which is not expected to be significant. The Company will
evaluate the status of completion of Year 2000 modifications in June 1999 and
will undertake all remaining necessary steps to seek to ensure its systems are
Year 2000 compliant. In the event the Company is unable to resolve its Year 2000
modifications in a timely fashion, the business of the Company may be materially
and adversely impacted.
In the event the Company's computer systems are materially adversely
affected by the Year 2000 issue, the Company's business and operations could be
materially adversely affected by disruptions in the operations of other entities
with which the Company interacts. However, the Company believes that the most
likely worst case scenario is that there will be some localized disruptions of
systems that will affect individual processes, facilities or service technology
providers for a short time rather than systematic or long-term problems
affecting its business operations as a whole. In such event, the Company has
contingency plans for certain critical applications and is working on plans for
others. These contingency plans involve, among other actions, manual
workarounds, increasing inventories, and adjusting staffing strategies.
<PAGE>
Item 7. Financial Statements.
The information required by this item is incorporated by reference to the
Company's financial statements.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
Part III
The information required by Part III of this Form 10-KSB is incorporated by
reference to the Registrant's definitive proxy statement to be filed with the
Commission within 120 days.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed under the Company's Form SB-2 under Registration
No. 333-45121:
3.2 By-Laws
4.1 Form of Common Stock Certificate
4.2 Form of Representative's Option
10.2 Stock Option Plan
10.3 Amended Employment Agreement dated as of December 8, 1997 between the
Company and Gregory S. Frisby
10.4 Employment Agreement dated December 6, 1997 between the Company and
Douglas J. McCrosson
10.5 Shareholder Agreement dated December 10, 1997 between the Company,
Gregory S. Frisby and Jeffry D. Frisby
10.6 Line of Credit Agreement with European American Bank
10.7.1 License Agreement dated May 1, 1995 between the Company and Triangle
Research and Development Corp. ("TRDC")
10.7.2 Assignment of License Agreement effective January 3, 1997 from TRDC
to Delta Thermal Systems, Inc.
10.8 License Agreement effective January 1, 1998 between the Company and
Outlast Technologies, Inc.
10.9 License Agreement dated March 31, 1997 between the Company and Fly
Technologies, Inc.
10.10 License Agreement dated January 23, 1997 between the Company and
Wells Lamont Division, Marmon Holdings, Inc.
10.11 License Agreement dated February 1, 1997 between the Company and Cove
Shoe Company, Inc.
10.12.1 License Agreement dated May 22, 1996 between the Company and Thermo
Solutions, Inc. (f/k/a Temptop Container Systems, Inc.) ("Thermo Solutions")
10.12.3 Memorandum of Understanding dated January 22, 1998 between the
Company and Thermo Solutions
10.13 License Agreement dated February 10, 1997 between the Company and
Genfoot, Inc. and Genfoot America, Inc.
10.14 Contract No. 00178-96-C-3014 between the Company and the United
States of America (Naval Surface Warfare Division)
10.15 Contract No. F08637-97-C-6017 between the Company and the United
States of America (325th Contracting Squadron/LGCX)
10.16 Arrangement dated January 21, 1998 between the Company and Minnesota
Mining & Manufacturing, Inc.
10.17 Memorandum of Understanding dated October 23, 1997 between the
Company and Lendell Manufacturing, Inc.
10.18 Memorandum of Understanding dated April 14, 1997 between the Company
and Bell Sports Corp.
10.19 Memorandum of Understanding dated July 9, 1997 between the Company
and CamelBak/FasTrak Systems, Inc.
10.20 Memorandum of Understanding dated December 11, 1997 between the
Company and Foamex International, Inc.
10.21 Memorandum of Understanding dated January 15, 1998 between the
Company and LaCrosse Footwear, Inc.
10.22 Lease dated March 2, 1998 between Piedmont Institute for Research &
Technology, II, LLC, as landlord, and the Company, as tenant
10.23 Lease dated June 1, 1993 between Frisby Aerospace, Inc., as landlord,
and the Company, as tenant
10.24 Lease dated September 1, 1994 between Charles Winburn, as landlord,
and the Company, as tenant
(b) The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed with the Company's Form 10-QSB for the fiscal
quarter ended March 31, 1998.
3.1 Amended and Restated Certificate of Incorporation
10.1 Amended MUSI Stockholder Agreement
(c) The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed with the Company's Form 10-QSB for the fiscal
quarter ended June 30, 1998:
10.6.1 Revised Line of Credit Agreement with European American Bank
10.25 Consulting Agreement dated April 13, 1998 between the Company and
GGC, Inc.
(d) Exhibits
10.7.1.1 Amendment to License Agreement between the Company and TRDC
27.1 Financial data schedule
(e) Reports on Form 8-K
The Company filed a Report on Form 8-K dated October 27, 1998, which
reported events under Items 5 and 7.
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Frisby Technologies, Inc.
By: /s/Gregory S. Frisby
--------------------------------
Gregory S. Frisby
Chief Executive Officer
Dated: March 31, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dated indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Gregory s. Frisby Chairman of the Board of Directors, Chief March 31, 1999
- - --------------------------- Executive Officer; Treasurer
Gregory S. Frisby
/s/Stephen P. Villa Chief Financial Officer March 31, 1999
- - ---------------------------
Stephen P. Villa
/s/Jeffry D. Frisby Director March 31, 1999
- - ---------------------------
Jeffry D. Frisby
/s/Pietro A. Motta Director March 31, 1999
- - ---------------------------
Pietro A. Motta
/s/Domenico DeSole Director March 31, 1999
- - ---------------------------
Domenico DeSole
/s/Robert C. Grayson Director March 31, 1999
- - ---------------------------
Robert C. Grayson
</TABLE>
<PAGE>
Item 7. Financial Statements.
Frisby Technologies, Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors..................................................................... F-2
Balance Sheet as of December 31, 1998.............................................................. F-3
Statements of Operations for the Years Ended December 31,
1998 and 1997................................................................................... F-4
Statements of Stockholders' Equity (Deficit) for the Years Ended December 31,
1998 and 1997................................................................................... F-5
Statements of Cash Flows for the Years Ended December 31,
1998 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, 1998 and the related statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 1998. 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. as
of December 31, 1998, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/Ernst & Young LLP
Melville, New York
February 3, 1999
F-2
<PAGE>
Frisby Technologies, Inc.
Balance Sheet
<TABLE>
<CAPTION>
December 31,
1998
-------------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,516,138
Marketable securities 1,555,683
Accounts receivable - billed, less allowance for doubtful accounts of
$30,000 1,045,975
Accounts receivable - unbilled 58,159
Inventory 671,569
Prepaid expenses and other current assets, including related party
receivable of $94,320 595,998
---------------
Total current assets 10,443,522
Property and equipment, net 277,494
Intangible assets, less accumulated amortization of $51,300 2,000,700
Other assets 391,516
---------------
Total assets $ 13,113,232
================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 868,649
Accrued expenses and other current liabilities 385,533
Payable to Triangle Research and Development Corporation 400,000
License fees payable 189,726
Deferred license revenues 85,000
---------------
Total current liabilities 1,928,908
Accrued license agreement costs 120,250
Deferred license revenues 46,250
Other liability 1,300,000
---------------
Total liabilities 3,395,408
Commitments and contingencies
Stockholders' equity:
Preferred Stock, 1,000,000 shares authorized; 587,500 shares issued
and outstanding 2,479,000
Common Stock, $.001 par value; 10,000,000 shares authorized; 5,120,613
shares issued and outstanding 5,121
Additional paid-in capital 12,199,828
Accumulated other comprehensive income 21,000
Accumulated deficit (4,987,125)
---------------
Total stockholders' equity 9,717,824
---------------
Total liabilities and stockholders' equity $ 13,113,232
===================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Frisby Technologies, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------------------------------------
1998 1997
--------------------- ---------------------
<S> <C> <C>
Revenues:
Product sales $ 2,198,275 $ 474,179
Research and development projects 196,345 486,700
Licenses and royalties 474,519 300,960
--------------------- ---------------------
Total revenues 2,869,139 1,261,839
--------------------- ---------------------
Cost of sales:
Product sales 2,125,730 452,377
Research and development projects 158,856 257,843
Licenses and royalties 234,403 265,350
--------------------- ---------------------
Total cost of sales 2,518,989 975,570
--------------------- ---------------------
Gross profit 350,150 286,269
Selling and marketing expense 2,234,499 315,169
General and administrative expense 2,400,930 899,620
--------------------- ---------------------
Loss from operations (4,285,279) (928,520)
Interest income (expense), net 366,635 (36,666)
--------------------- ---------------------
Loss before income taxes (3,918,644) (965,186)
Income tax provision - 44,792
===================== =====================
Net loss $ (3,918,644) $ (1,009,978)
===================== =====================
Net loss per common share - basic and
diluted $ (0.84) $ (0.36)
===================== =====================
Shares used in the calculation of basic
and diluted net loss per common share 4,637,325 2,842,913
===================== =====================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Frisby Technologies, Inc.
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Comprehensive Accumulated
Shares Amount Shares Amount Capital Income Deficit Total
------ ------ ------ ------ -------- ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 -- $ -- 2,839,286 $ 500 $ -- $ -- $ (58,503) $ (58,003)
Sale of common stock and
options, net of $956,444 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
Net loss -- -- -- -- -- -- (3,918,644) (3,918,644)
Unrealized gains on
marketable securities -- -- -- -- -- 21,000 -- 21,000
--------
Comprehensive (loss) -- -- -- -- -- -- -- (3,897,644)
Exercise of preferred stock
option, net of $21,000 of
related costs and expenses 587,500 2,479,000 -- -- -- -- -- 2,479,000
Initial public offering, net
of $2,495,907 of related
costs and expenses -- -- 1,840,000 1,840 10,382,253 -- -- 10,384,093
Issuance of options and
warrants to consultants
and pursuant to acquisition
of intangible assets -- -- -- -- 277,000 -- -- 277,000
-------- -------- -------- -------- ----------- -------- -------- --------
Balance at
December 31, 1998 587,500 $2,479,000 5,120,613 $ 5,121 $ 12,199,828 $ 21,000 $ (4,987,125) $ 9,717,824
======== ======== ======== ======== ========== ======== ========== =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
Frisby Technologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Operating activities
Net loss $ (3,918,644) $ (1,009,978)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 37,003 15,121
Non cash consulting expense 180,000 -
Amortization of intangibles 51,300 -
Provision for doubtful accounts 30,000 -
Deferred income tax provision - 44,792
Changes in operating assets and liabilities:
Accounts receivable (723,532) (226,656)
Inventory (423,883) (199,712)
Prepaid expenses and other current assets (491,904) (2,269)
Accounts payable 318,410 260,190
Accrued expenses and other current liabilities 322,390 29,965
Licenses fees payable 5,086 177,194
Accrued license agreement costs 19,000 -
Deferred license revenues 41,250 90,000
Due to related party - (10,550)
------------------- --------------------
Net cash used in operating activities (4,553,524) (831,903)
------------------- --------------------
Investing activities
Purchases of property and equipment (447,878) -
Purchases of marketable securities (1,534,683) -
Purchase of intangible assets (325,000) -
------------------- --------------------
Net cash used in investing activities (2,307,561) -
------------------- --------------------
Financing activities
Net proceeds from private placement 2,479,000 1,543,356
Net proceeds from initial public offering 10,523,001 -
Net repayments of notes payable - (250,000)
Borrowings from related party - 517,000
Repayment to related party - (517,000)
Payment of transaction costs - (138,908)
------------------- --------------------
Net cash provided by financing activities 13,002,001 1,154,448
------------------- --------------------
Net increase in cash and cash equivalents 6,140,916 322,545
Cash and cash equivalents - beginning of year 375,222 52,677
------------------- --------------------
Cash and cash equivalents- end of year $ 6,516,138 $ 375,222
=================== ====================
Supplemental information
Interest paid $ 1,189 $ 36,666
=================== ====================
</TABLE>
F-6
See accompanying notes
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements
December 31, 1998
1. Organization and Business
Frisby Technologies, Inc. (the "Company") is engaged in one business
segment, the development and commercialization of branded 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.
2. Summary of Significant Accounting Policies
Revenue Recognition
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.
The Company accounts for significant long-term contracts using 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.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.
F-7
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements (Continued)
Marketable Securities
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses reported in other comprehensive income. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
interest income.
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.
Intangible assets, consisting of the assignment of rights under a
third-party license agreement and the reduction of future license and royalty
fees, are being amortized on a straight-line basis over seven years.
Net Loss Per Share
Basic and diluted net loss per share is calculated in accordance with FASB
Statement No. 128 "Earnings Per Share."
The denominator used in the computation of basic and diluted net loss per
share for the years ended December 31, 1998 and 1997 was 4,637,325 and
2,842,913, respectively; the weighted-average shares. The calculation of diluted
net loss per share excludes shares of common stock issuable upon the exercise of
stock options and warrants (Notes 7, 8 and 11) and the conversion of the
Convertible Preferred Stock (Note 7) as the effect of such exercises would be
antidilutive. There were no dilutive securities as of December 31, 1997.
Fair Value of Financial Instruments
The reported amounts of cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair values.
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.
F-8
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements (continued)
Advertising Expense
The cost of advertising, including creation and placement, is expensed as
incurred. The Company incurred approximately $ 992,000 and $212,000 of
advertising costs for the years ended December 31, 1998 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.
Long-Lived Assets
The Company reviews the carrying value of its long-lived assets in
determining the ultimate recoverability of their unamortized values using future
undiscounted cash flow analyses if there are indicators of impairment.
Stock Based Compensation
The Company grants options for a fixed number of shares to employees with
an exercise price equal to the market value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related Interpretations
because the Company believes the alternate fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock-Based Compensation" requires
the use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price equals the
market price of the underlying stock on the date of grant, no compensation
expense is recorded.
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.
In September 1998, the Company and a supplier entered into a Memorandum of
Understanding (see Note 11 (d)), for its anticipated Thermasorb(R) requirements.
Two licensed vendors currently manufacture the Company's ComforTemp(R) foam
products.
F-9
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements (continued)
The Company does a significant amount of business with a limited number of
strategic partners. Total revenues from two strategic partners comprised
approximately 53% (35% and 18%) of the Company's total revenues for the year
ended December 31, 1998. 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, 1998, the three strategic partners accounted for
approximately 59% (27%, 17% and 15%) of the Company's accounts receivable. The
Company performs credit evaluations of its strategic partners' financial
condition and payment history prior to extending credit. 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,
1998
--------------
Leasehold improvements................................. $51,626
Furniture............................................... 16,247
Equipment............................................... 292,224
---------------
360,097
Less accumulated depreciation and
amortization............................................ 82,603
---------------
$277,494
===============
5. Marketable Securities
Marketable securities consist of a publicly traded mutual fund. At December
31, 1998, the aggregate cost, fair market value and gross unrealized holding
gains were $1,534,683, $1,555,683 and $21,000, respectively.
F-10
<PAGE>
Frisby Technologies, Inc. Notes to
Financial Statements (continued)
6. Line of Credit
During 1998, the Company's available line of credit with a bank (the
"Line"), was increased to $1,000,000. The Line is maintained for working capital
purposes. The Line bears interest at the lower of the bank's prime rate or a two
point spread versus the London Interbank Overnight Rate ("LIBOR") and expires on
June 30, 1999. At December 31, 1998 no amounts were outstanding under the Line.
Substantially all of the Company's assets are pledged as security for any
outstanding borrowing under the Line.
On December 30, 1997, the Company repaid all then amounts outstanding under
the Line with a portion of the proceeds from a private placement (see Note. 7).
7. Stockholders' Equity
On December 29, 1997, the Company sold 441,327 shares of 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 expiring on February 27, 1998 in a
private placement to a foreign investor for an aggregate purchase price of
$2,500,000. The Company allocated $353,000 of the purchase price as the
estimated value of the option. This transaction resulted in net proceeds of
approximately $1,543,000, after the payment of related costs and expenses. On
February 27, 1998, the foreign investor exercised the Convertible Preferred
Stock option. This transaction resulted in net proceeds to the Company of
$2,479,000, after the payment of related costs and expenses. Each share of
Convertible Preferred Stock is convertible into one share of Common Stock at the
election of the investor for a 60-day period commencing on April 6, 1999.
On April 1, 1998, the Company consummated an Initial Public Offering (the
"IPO") of 1,600,000 shares of Common Stock at a price of $7.00 per share. On May
15, 1998, the underwriter in connection with the IPO exercised its
over-allotment option to purchase 240,000 additional shares of Common Stock at a
price of $7.00 per share. The total net proceeds to the Company amounted to
approximately $10,400,000 after the underwriters' discount and related expenses.
The underwriter has an additional option to purchase 160,000 shares of common
stock at an exercise price of 165% of the IPO price or $11.55 per share expiring
in April 2003.
In April 1998, the Company entered into a two-year consulting agreement
with a company controlled by a member of the Company's Board of Directors. In
addition to a monthly fee, the Company issued warrants to purchase 110,000
shares of the Company's Common Stock at an exercise price of $7.25 per share
expiring in April 2003. Additionally, the Company issued options to consultants
to purchase 4,000 shares of the Company's Common Stock at an exercise price of
$7.00 per share expiring in April 2003. The exercise prices of the above
mentioned warrants and options were equal to the market price of the Company's
Common Stock at the date of grant. The aggregate fair market value of these
warrants and options of $250,000 is being charged to expense over the respective
service periods.
8. Stock Based Compensation Plan
In March 1998, the stockholders adopted a Stock Option plan pursuant to
which 250,000 shares of Common Stock are reserved for issuance to key employees,
officers, directors and consultants of the Company.
F-11
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements (continued)
The following table summarizes activity in stock options:
<TABLE>
<CAPTION>
Shares Weighted-
Under Average
Option Exercise Price
-------------------- ---------------------------------
<S> <C> <C>
Balance at December 31, 1997 $ -- $ --
Grants 190,500 $6.29
Forfeitures (14,000) $7.00
===================
Balance at December 31, 1998 176,500 $6.23
===================
Weighted-average fair value of
option issued during the year $4.14
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
Weighted-Average
Options Remaining
Exercise Price Options Outstanding Exercisable Contractual Life
---------------------- --------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
$3.00 5,000 - 4.90
$3.19 2,500 - 4.75
$3.56 16,500 - 4.90
$3.69 10,000 5,000 4.60
$4.50 10,000 - 4.60
$7.00 97,500 97,500 4.25
$7.25 35,000 35,000 4.25
===================== ===================
176,500 137,500
===================== ===================
</TABLE>
At December 31, 1998, the Company has reserved 1,207,500 shares of common
stock for issuance of all options, warrants outstanding and the conversion of
the Convertible Preferred Stock into Common Stock.
F-12
<PAGE>
Pro forma information regarding net loss and net loss per share is required
by Statement 123, and has been determined as if the Company had accounted for
its stock options under the fair value of that statement. The fair value for
these options was estimated at the date of grant using the Black-Sholes option
pricing model with the following weighted-average assumptions for the year ended
December 31, 1998: risk-free Frisby Technologies, Inc. Notes to Financial
Statements (continued) interest rate of 5.0%; no dividend yield; volatility
factor of the expected market price of the Company's Common Stock of 1.044 and a
weighted-average expected life of the options of three years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
Pro forma net loss $ (4,538,195)
==================
Pro forma basic and diluted loss per share $ (0.98)
==================
9. 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 expected to be recovered or settled. Significant components of the
Company's deferred tax assets are as follows:
December 31,
1998
------------
Accounts receivable reserve......................... $ 12,000
License agreement costs............................. 47,000
Deferred license revenues........................... 52,000
Net operating loss carryforward..................... 1,847,000
-------------
Total deferred tax assets......................... 1,958,000
Valuation allowance for deferred tax assets......... (1,958,000)
-------------
Net deferred tax assets........................... $ ----
=============
The Company had a valuation allowance for deferred tax assets of $406,000
at December 31, 1997. As a result of losses from operations through December 31,
1998, the Company has available a net operating loss carryforward ("NOL") of
approximately $4,714,000 for Federal income tax purposes that expires in years
through 2018.
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 in 1999, the Company has established a valuation allowance for
deferred tax assets at December 31, 1998.
F-13
<PAGE>
Frisby Technologies, Inc. Notes to
Financial Statements (continued)
Significant components of the income tax provision for the year ended
December 31, 1997 is as follows:
Deferred:
Federal..........................$36,000
State............................ 8,792
-------
Total...............................$44,792
=======
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,
1998 1997
----------- ----------
<S> <C> <C>
Benefit for Federal income taxes at the statutory rate............ $ (1,332,339) $(328,163)
State income taxes, net of Federal income tax benefit............. (134,229) (33,061)
Permanent differences............................................. (8,759) ----
Other............................................................. (19,326) 214
Losses not currently deductible................................... 1,494,653 405,802
------------- --------
$ -- $ 44,792
============== =========
</TABLE>
10. Related Party Transactions
(a) Frisby Aerospace, Inc. ("Frisby Aerospace"), certain former
stockholders of which were also stockholders of the Company, charged the Company
for space and related services. These charges, which were non-interest bearing,
were 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 were reasonable. These charges aggregated
approximately $36,000 and $57,000 for the years ended December 31, 1998 and
1997, respectively, and were included in cost of sales in the accompanying
statements of operations. In addition, during the year ended December 31, 1997,
Frisby Aerospace provided the Company with certain facilities, accounting,
clerical and office services without charge. The value of such services were not
deemed material and, accordingly, have not been recorded in the accompanying
financial statements.
F-14
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements (continued)
A portion of the proceeds received from a private placement (see Note 7)
was used to repay the amounts owed to Frisby Aerospace in full on December 30,
1997.
(b) The Company has a receivable at December 31, 1998 of approximately
$94,000 from a not-for-profit organization of which the Company's chairman is
its chairman. The receivable represents management time billed by the Company
under an agreement between the parties and the reimbursement of direct expenses
incurred by the Company on behalf of this organization. These amounts are
subject to review and audit by a local governmental agency and are believed to
be reasonable and collectible.
11. 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:
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, 1998 and
1997.
F-15
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements (continued)
(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 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 $250,000
to $600,000 per year from 1999 through 2002, provided the Company elects to
maintain the exclusivity granted by the license. The Company expensed the
minimum annual payment of $150,000 in 1998. 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) In September 1998, the Company entered into an agreement with the
inventor of the technology used by the Company, Triangle Research and
Development Corporation ("TRDC"), that reduced the Company's royalty rates from
those described in (a) above. Additionally, the Company has been assigned TRDC's
right to their original license agreement for fabrics with Outlast. This
assignment will result in the Company receiving royalty income from Outlast
subject to certain payback to TRDC. As consideration, the Company has given TRDC
a combination of cash, stock options and a put agreement.
(d) The Company and its Thermasorb(R) supplier have entered into an
Memorandum of Understanding for a long-term supply agreement that provides firm,
fixed pricing for all of the Company's anticipated requirements for
Thermasorb(R) additives. The agreement includes annual purchase requirements
over the five-year term and subjects the Company to a maximum penalty of
$2,500,000 if no future purchases are made.
(e) In February 1999, the Company entered into an operating lease agreement
with an unrelated entity for a facility in North Carolina. The lease term is for
12 years and monthly payments are expected to commence in September 1999. This
lease includes scheduled rent escalations throughout the lease term, which will
be expensed on a straight-line basis over the lease term. The Company has also
entered into several operating leases for computer equipment. Rent expense was
approximately $89,000 and $43,000 for the years ended December 31, 1998 and
1997, respectively. Future minimum payments under these leases are as follows:
1999 $ 119,000
2000 204,000
2001 180,000
2002 175,000
2003 182,000
Thereafter 1,478,000
--------------------
$ 2,338,000
====================
Upon execution of the North Carolina lease, the Company will receive an
equity interest in the lessor, which vests after the twelve-year lease period.
Notwithstanding the equity interest, the Company believes that the rental
payments represent an arms-length price for the lease.
F-16
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements (continued)
12. Retirement Plan
All eligible employees of the Company had been permitted to participate in
a 401(k)/Profit Sharing Plan (the "Plan") adopted effective January 1, 1997 by
Frisby Aerospace for employees of both companies. 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 becomes 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 are 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.
In April 1998, the contributions to the Plan were suspended due to the
pending transfer of the assets attributable to the Frisby Aerospace's employees
as a result of the sale of Frisby Aerospace to an unrelated third party. In
October 1998, the Plan was amended to only include the Company's employees and
to also establish a Company matching contribution. The Company currently matches
50% of the employee's first 6% pre-tax contribution. The Company matching
contribution was approximately $7,300 for the year ended December 31, 1998.
The Company is entitled to also make optional profit sharing contributions
at its discretion. During the years ended December 31, 1998 and 1997, the
Company did not make any profit sharing contributions to the Plan.
F-17
LICENSE AGREEMENT DATED SEPTEMBER 24, 1998 BETWEEN
THE COMPANY AND TRIANGLE RESEARCH AND DEVELOPMENT CORPORATION
[INFORMATION PLACED IN BRACKETS [] HAS BEEN
OMITTED IN ACCORDANCE WITH A CONFIDENTIAL
TREATMENT REQUEST PURSUANT TO RULE 406
AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION
<PAGE>
AGREEMENT
AGREEMENT (this "Agreement"), dated September 24, 1998, by and among Frisby
Technologies, Inc., a Delaware corporation ("Frisby"), Triangle Research and
Development Corporation, a North Carolina corporation ("TRDC"), Delta Thermal
Systems, Inc., a North Carolina corporation ("Delta"), and Dr. David Colvin, an
individual ("Dr. Colvin").
A. Frisby has agreed to grant to TRDC an option to acquire up to [This
information has been omitted in accordance with a Confidential Treatment Request
and has been filed separately with the Commission.] shares of common stock of
Frisby in accordance with the terms of the option agreement attached hereto as
Exhibit A (the "Option Agreement").
B. Frisby and TRDC have agreed to amend that certain Exclusive License
Agreement between TRDC and Frisby dated as of May 1, 1995 (the "License
Agreement"), in accordance with the terms of the amendment to the License
Agreement attached hereto as Exhibit B (the "License Agreement Amendment").
C. TRDC has agreed to assign to Frisby its rights under that certain
License Agreement between TRDC and Outlast Technologies, Inc., formerly known as
Gateway Technologies, Inc. ("Outlast"), dated January 21, 1991 (the "Outlast
Agreement"), in accordance with the terms of the assignment agreement attached
hereto as Exhibit C (the "Outlast Assignment Agreement").
D. The parties wish to set forth their understandings and agreements
relating to the foregoing and the other transactions relating thereto.
NOW, THEREFORE, the parties hereby agree as follows:
1. Outlast. (a) Simultaneously with the execution and delivery of this
Agreement, Frisby and TRDC will enter into the Outlast Assignment Agreement
which provides for TRDC's assignment of its rights under the Outlast Agreement
to Frisby.
(b) From and after the date hereof, Frisby shall pay to TRDC the following
percentages of all "Outlast Fees" received by Frisby from Outlast in respect of
each of the following calendar years:
Calendar Year Percentage of Outlast Fees
[This information has been omitted in accordance with a Confidential
Treatment Request and has been filed separately with the Commission.]
<PAGE>
For purpose of this Paragraph 1(b), "Outlast Fees" mean (i) all annual
payments made by Outlast to Frisby pursuant to Section 4.8 of the Outlast
Agreement and (ii) all other payments made by Outlast to Frisby pursuant to
Articles VI or XIII of the Outlast Agreement, in each case reduced by the amount
of any set-offs against such payments which Outlast makes in accordance with
Article XIII of the Outlast Agreement or otherwise thereunder.
(c) In the event Frisby conducts an audit of Outlast records for periods
prior to 1998 and, as a result of such audit, receives any payment of additional
Outlast Fees which relate to such periods Frisby shall pay over to TRDC one
hundred percent (100%) of such Outlast Fees less the cost of such audit,
including legal fees, if any, incurred by Frisby in conducting such audit for
such periods.
(d) Frisby shall pay to TRDC all applicable percentages of the "Outlast
Fees" in respect of each calendar year noted above for which such Outlast Fees
are due not later than 30 days following receipt thereof from Outlast.
(e) In the event that TRDC receives directly from Outlast any Outlast Fees
TRDC shall promptly pay over such Outlast Fees to Frisby.
(f) Without the prior written consent of Frisby, which consent may be
withheld by Frisby in its sole discretion, neither TRDC nor Delta shall
transfer, sell or assign its rights to the Licensed Technology (as such term is
defined in the Outlast Agreement) to any party other than a Permitted Assignee.
For purposes of this Agreement, a Permitted Assignee means (i) any of the
current shareholders of TRDC or Delta and their respective heirs at law and
devisees or (ii) any corporation, partnership or limited liability company
controlled by or under common control with TRDC. As a condition to any
assignment to a Permitted Assignee, such Permitted Assignee shall execute and
deliver to Frisby an instrument reasonably satisfactory to Frisby pursuant to
which such Permitted Assignee shall agree to be bound by all of the terms of
this Agreement, including the restrictions on transfer set forth herein. Any
attempt to assign or transfer the Licensed Technology (or any part thereof) not
in compliance with this Paragraph 1(e) will be null and void and of no effect.
(g) TRDC and Delta covenant to Frisby that from and after the date hereof
they will execute, deliver and acknowledge (or cause to be executed, delivered
and acknowledged), from time to time at the request of Frisby and without
further consideration (other than the reimbursement of any direct costs incurred
by TRDC or Delta), all such further instruments and take all such further action
as may be reasonably necessary or appropriate to enable Frisby to assert its
rights under the Outlast Agreement, including without limitation, in connection
with (i) any legal proceedings commenced against any third party infringers of
the Licensed Technology, and (ii) any termination of the Outlast Agreement by
Frisby. Without limiting the foregoing, TRDC and Delta hereby appoint Frisby
their attorney-in-fact, with full power of substitution and resubstitution, to
execute and deliver in TRDC's and/or Delta's name any instrument that Frisby
deems necessary or advisable in order to further effect the assignment of TRDC's
rights under the Outlast Agreement to Frisby and to enforce such rights against
Outlast or any third party. The power of attorney granted under this Paragraph
1(f) is coupled with an interest and is irrevocable and will survive the merger,
consolidation, dissolution, liquidation or bankruptcy of TRDC or Delta.
<PAGE>
(h) TRDC represents and warrants to Frisby that (i) each of its
representations and warranties of TRDC contained in the Outlast Agreement,
including without limitation, those set forth in Section 11.1 thereof, are true
and correct on the date hereof with the same force and effect as if made on and
as of the date hereof, (ii) the Outlast Agreement is in full force and effect,
has not been amended or modified, that TRDC has performed all of its obligations
required to be performed by it thereunder, and TRDC is not (with or without the
lapse of time or the giving of notice of both) in breach or default thereunder,
(iii) it has no other agreements or understandings with Outlast relating to the
subject matter of the Outlast Agreement other than the Outlast Agreement and the
Agreement for Research and Development of Microencapsulated Phase Change Fibers
and Fabrics dated January 22, 1991 between TRDC and Outlast and the related
letter dated May 3, 1995 between TRDC and Outlast, and it has not assigned, or
subjected any of its rights or interests in the Outlast Agreement to any lien,
encumbrance or security interest, and (iv) Outlast has not asserted or, to the
best of TRDC's knowledge, threatened to assert any claims against TRDC,
including, without limitation, any claims under the Outlast Agreement or with
respect to the subject matter thereof.
(i) Frisby shall indemnify and hold TRDC and its directors and officers
harmless from and against (i) any claims asserted by Outlast arising out of any
breach by Frisby of its assumed obligations under the Outlast Agreement, (ii)
any claim asserted by Outlast that the assignment of the Outlast Agreement to
Frisby constitutes a breach of the Outlast Agreement, and (iii) any other claims
asserted by Outlast against TRDC relating to events occurring prior to the date
hereof. Notwithstanding the foregoing, Frisby shall not indemnify and hold TRDC
harmless from and against any claims asserted by Outlast relating to obligations
which are personal to the shareholders of TRDC.
(j) In the event of the termination of the Outlast Agreement in accordance
with its terms, each of TRDC and Frisby hereby agree that the Licensed
Technology will automatically be deemed to be included in the definition of
Technology (as such term is defined in the License Agreement), and that TRDC
will have no rights to use or exploit such Licensed Technology (including any
further licensing thereof), other than as provided for under the License
Agreement, including the right to conduct research and development relating to
the Licensed Technology.
(k) In consideration for the foregoing and the other obligations of TRDC
contained in this Agreement, Frisby shall pay to TRDC or its designee(s) [This
information has been omitted in accordance with a Confidential Treatment Request
and has been filed separately with the Commission.] The 1998 Cash Payment shall
be due and payable upon execution and delivery of this Agreement and receipt by
Frisby of payment instructions from TRDC. The 1999 Cash Payment shall be due and
payable on or after January 1, 1999 and upon receipt by Frisby of payment
instructions from TRDC. Not later than two business days following receipt of
such payment instructions, Frisby shall deliver to TRDC the 1998 Cash Payment or
the 1999 Cash Payment, as the case may be, in immediately available funds by
wire transfer to the account or accounts designated by TRDC in its payment
instructions.
<PAGE>
2. Option Agreement. As additional consideration for the assignment of the
Outlast Agreement, simultaneously with the execution and delivery of this
Agreement, Frisby and TRDC will enter into the Option Agreement which provides
for the grant to TRDC of an option to acquire up to [This information has been
omitted in accordance with a Confidential Treatment Request and has been filed
separately with the Commission.] shares of common stock of Frisby.
3. License Agreement Amendment. As additional consideration for the
assignment of the Outlast Agreement, simultaneously with the execution and
delivery of this Agreement, Frisby and TRDC will enter into the License
Agreement Amendment which provides for the amendment of certain provisions of
the License Agreement.
4. Research and Development Funding. Commencing in January 1, 1999 and on
each January 1 thereafter through and including January 1, 2001 (the "R&D
Funding Years"), Frisby shall provide TRDC with funding to support certain
research and development projects of TRDC solely related to microencapsulated
phase change materials technology and thermal management ("R&D Projects"),
subject to the following conditions and limitations:
(a) Frisby will provide TRDC with funding for each R&D Project upon review
of the budget (which will set forth in detail the terms and conditions of such
R&D Project) and payment schedule submitted therewith, which funding will be in
the amount of [This information has been omitted in accordance with a
Confidential Treatment Request and has been filed separately with the
Commission.] in respect of the calendar year 1999 and [This information has been
omitted in accordance with a Confidential Treatment Request and has been filed
separately with the Commission.] per year in respect of each of the calendar
years 2000 and 2001.
(b) TRDC acknowledges that all inventions, developments, proprietary
information, patents, improvements, and know how resulting from such R&D
Projects will be subject to the terms of the License Agreement to the extent
applicable thereto.
5. Appointment to Advisory Board. Upon the execution and delivery of this
Agreement by TRDC, Frisby shall appoint Dr. Colvin to be a member of the Frisby
Innovation Advisory Board (the "Advisory Board"), such appointment to be for not
less than a two year term. As a member of the Advisory Board, Dr. Colvin will be
entitled to receive options to purchase [This information has been omitted in
accordance with a Confidential Treatment Request and has been filed separately
with the Commission.] shares of common stock of Frisby for each year he serves
on the Advisory Board at a price equal to no less than the fair market value of
Frisby's common stock on the date of the granting of such option. The specific
terms and conditions of such option shall be set forth in the option agreement,
the form of which is attached hereto as Exhibit D. In addition, Frisby will
reimburse Dr. Colvin for expenses he incurs in connection with his attendance at
Advisory Board meetings in accordance with Frisby's expenses and reimbursement
practices and policies.
6. Representations. (a) Frisby hereby represents and warrants to TRDC as
follows: (i) it has all corporate power and authority, and has taken all action
necessary, to execute and deliver this Agreement, to consummate the transactions
contemplated hereby and to perform its obligations hereunder; (ii) the execution
and delivery of this Agreement does not, and the consummation of the
transactions contemplated hereby and compliance with the terms hereof will not,
violate or conflict with any contract, judgment, order, law, rule or regulation
applicable to Frisby; and (iii) no consent of, or filing with, any court,
governmental authority or other person is required to be obtained or made by
Frisby in connection with the execution and delivery of this Agreement or the
consummation by Frisby of the transactions contemplated hereby.
<PAGE>
(b) TRDC represents and warrants to Frisby as follows: (i) it has all
corporate power and authority, and has taken all action necessary (other than
any action which may be necessary under the Outlast Agreement), to execute and
deliver this Agreement, to consummate the transactions contemplated hereby and
to perform its obligations hereunder; (ii) the execution and delivery of this
Agreement does not, and the consummation of the transactions contemplated hereby
and compliance with the terms hereof will not, violate or conflict with any
contract, judgment, order, law, rule or regulation applicable to TRDC; and (iii)
no consent of, or filing with, any court, governmental authority or other person
is required to be obtained or made by TRDC in connection with the execution and
delivery of this Agreement or the consummation by TRDC of the transactions
contemplated hereby.
7. Delta Acknowledgment. Delta hereby acknowledges and confirms to Frisby
that, to the extent that any of the transactions contemplated by this Agreement
affect any of the rights and/or obligations of Delta, Delta hereby consents to
all such transactions and agrees to be bound by all of the terms and conditions
set forth herein, including Exhibits A, B and C hereto.
8. Miscellaneous. (a) All notices and other communications hereunder shall
be in writing and shall be deemed given when delivered personally or by
telecopier, or three days after being mailed by registered or certified mail
(return receipt requested), to the parties at the following addresses (or at
such other addresses for a party as shall be specified by like notice):
If to Frisby:
Frisby Technologies, Inc.
77 East Main Street, Suite 2000
Bay Shore, NY 11706
Telecopier: (516) 969-8579
Attention: Chief Executive Officer
If to TRDC, Delta or Dr. Colvin:
Triangle Research and Development Corporation
P.O. Box 12696
Research Triangle Park, N.C. 27709
Telecopier: (919) 832-5988
Attention: President
(b) This Agreement shall be governed by and construed in accordance with
the laws of the State of North Carolina applicable to contracts entered into and
wholly to be performed therein.
(c) This Agreement may not be modified, amended, altered or supplemented
except by an agreement in writing executed by the parties to be charged and
bound.
<PAGE>
(d) If any provisions hereof shall be determined to be invalid or
unenforceable in any respect, such determination shall not affect such provision
in any other respect or any other provision of this Agreement which shall remain
in full force and effect, and this Agreement shall, if possible, be construed in
all respects which most closely reflects the intent of the parties hereto as if
such invalid or unenforceable provision were not contained herein.
(e) This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, personal representatives, successors
and assigns. Except as otherwise specifically provided for in this Agreement, no
party shall assign this Agreement or any of its rights or obligations under this
Agreement without the prior written consent of the other parties; provided,
however, that Frisby shall have the right to assign this Agreement to (a) any
entity controlling, controlled by or in common control with Frisby or (b) any
entity which acquires all or substantially all of the assets or stock of Frisby,
provided that Frisby shall remain liable for its obligations herein.
(f) This agreement (together with the Exhibits hereto) shall constitute the
entire agreement among the parties hereto with respect to the subject matter
hereof and shall supersede all prior verbal or written agreements, covenants,
communications, understandings, commitments, representations or warranties,
whether oral or written, by any party hereto or any of its representatives
pertaining to such subject matter.
(g) This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same Agreement.
(h) Captions and paragraph headings used herein are for convenience and are
not part of this Agreement and shall not be used in construing it.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
FRISBY TECHNOLOGIES, INC.
By: /s/Gregory S. Frisby
-------------------------
Name: Gregory S. Frisby
Title: Chairman of the Board
and Chief Executive Officer
TRIANGLE RESEARCH AND
DEVELOPMENT CORPORATION
By: /s/David P. Colvin
-------------------------
Name: David P. Colvin
Title: President
DELTA THERMAL SYSTEMS, INC.
By: /s/David P. Colvin
----------------------
Name: David P. Colvin
Title: President
/s/Dr. David Colvin
--------------------------
Dr. David Colvin
<PAGE>
Exhibit A
OPTION AGREEMENT DATED SEPTEMBER 24, 1998
BY AND BETWEEN TRIANGLE RESEARCH AND DEVELOPMENT CORPORATION,
DELTA THERMAL SYSTEMS, INC. AND THE COMPANY
[INFORMATION PLACED IN BRACKETS [] HAS BEEN
OMITTED IN ACCORDANCE WITH A CONFIDENTIAL
TREATMENT REQUEST PURSUANT TO RULE 406 AND
HAS BEEN FILED SEPARATELY WITH THE COMMISSION.
<PAGE>
OPTION AGREEMENT
This Option Agreement (this "Agreement") is made and entered into as of
September 24, 1998 by and between Triangle Research and Development Corporation,
a North Carolina corporation ("TRDC"), Delta Thermal Systems, Inc., a North
Carolina corporation ("Delta") and Frisby Technologies, Inc., a Delaware
corporation ("Frisby").
RECITALS:
A. Contemporaneously with the execution and delivery of this Agreement, the
parties hereto have entered into an agreement (the "Master Agreement") which,
inter alia, sets forth the terms of the assignment to Frisby from TRDC of its
rights under the Outlast Agreement (as such term is defined in the Master
Agreement).
B. In connection with the transactions contemplated under the Master
Agreement, Frisby desires to grant to TRDC an option to acquire certain shares
of common stock, par value $0.001, of Frisby (the "Common Stock").
NOW, THEREFORE, the parties hereto hereby agree as follows:
I. DEFINITIONS AND CERTAIN INTERPRETIVE MATTERS
I.1. Defined Terms. In addition to the terms defined elsewhere herein,
terms used herein which are not defined herein will have the meanings ascribed
to them in the Master Agreement.
I.2. Certain Interpretive Matters. This Agreement will be interpreted in
accordance with the provisions of the Master Agreement.
II. THE OPTION
II.1. Option Grant. On the terms and subject to the conditions set forth in
this Agreement, for $10.00 and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Frisby hereby grants to
TRDC an option (the "Option") to purchase up to [This information has been
omitted in accordance with a Confidential Treatment Request and has been filed
separately with the Commission.] shares of its Common Stock (the "Option
Shares") at a price per share equal to [This information has been omitted in
accordance with a Confidential Treatment Request and has been filed separately
with the Commission.] (the "Exercise Price").
II.2. Vesting and Exercise of Option. (a) The Option may be exercised in
whole or part (subject to the restrictions set forth in clause (b) below) at any
time and from time to time from and after the second anniversary of the date
hereof. Notwithstanding the foregoing, this Agreement and the Option shall
terminate and expire on the earlier of (i) the fifth anniversary of the date
hereof or (ii) the date on which all of the Option Shares are purchased pursuant
to exercise of the Option.
<PAGE>
(b) TRDC may exercise the Option by giving Frisby a notice (an "Exercise
Notice") which specifies (i) the total number of Option Shares to be purchased,
which shall be not less than [This information has been omitted in accordance
with a Confidential Treatment Request and has been filed separately with the
Commission.] (ii) the aggregate Exercise Price payable in respect of such Option
Shares, and (iii) a date not earlier than 5 business days nor later than 10
business days from the date of receipt of the Exercise Notice for the closing of
such purchase (the "Option Closing Date"). The closing of any complete or
partial exercise of the Option (the "Option Closing") will take place at the
principal executive offices of Frisby.
(c) The Exercise Price will be payable by delivery by TRDC of a promissory
note, in the form of Annex A hereto (the "Note"), in the aggregate principal
amount of the Exercise Price for the Option Shares being purchased. As security
for repayment of the Note, TRDC will pledge all of its right, title and interest
in and to the Option Shares being purchased to Frisby.
II.3. The Option Closing. Subject to adjustment as contemplated by Section
2.4, at each Option Closing, (a) TRDC shall deliver to Frisby the Note in the
aggregate principal amount of the Exercise Price for the Option Shares being
purchased and (b) Frisby will deliver to TRDC a certificate or certificates
evidencing the Option Shares acquired in connection therewith.
II.4. Adjustments to Option Shares. (a) In the event of any change in the
outstanding equity securities of Frisby by reason of any stock dividend or stock
split that would alter the percentage of equity interest in Frisby to be
acquired by TRDC hereunder, the number of Option Shares subject to the Option
shall be adjusted appropriately so as to provide that upon exercise of the
Option, TRDC will acquire the same percentage of equity interest in Frisby as
TRDC would have acquired prior to such stock dividend or stock split.
(b) In the event of any recapitalization, combination, consolidation or
merger of Frisby into another entity or other similar transaction in which
Frisby is not the surviving entity (a "Disposition Event") while any unexercised
Option remains outstanding then, in such a situation, at Frisby's election and
upon notice to TRDC prior to the consummation of the Disposition Event, (i) the
Option may be canceled as of the effective date of the Disposition Event
provided that notice of such cancellation shall have been provided to TRDC, and
TRDC shall have the right to exercise the Option in full during a period
specified by Frisby preceding the effective date of such Disposition Event, or
(ii) Frisby and all other persons participating in the Disposition Event shall
have executed and delivered to TRDC an agreement that provides that TRDC will
have the right from and after the occurrence of the Disposition Event, upon
exercise of the Option and payment of the Exercise Price in effect immediately
prior to such Disposition Event, to purchase, on the same terms and conditions
that were available to the other persons, the kind and amount of shares of the
Common Stock and other securities, assets and property that TRDC would have been
entitled to receive upon or after the happening of any such transaction had TRDC
exercised the entire Option immediately prior to such Disposition Event.
<PAGE>
III. REPRESENTATIONS AND WARRANTIES
III.1. Representations and Warranties of Frisby. Frisby represents and
warrants to TRDC that the Option Shares which are subject to the Option are
presently authorized but unissued and such Option Shares will remain reserved
and available for issuance upon the timely exercise of the Option. The Option
Shares to be purchased upon any complete or partial exercise of the Option will
be validly issued upon payment of the Exercise Price and such Option Shares,
when so issued upon such exercise, will be duly and validly issued, fully paid
and free and clear of all liens, claims and encumbrances other than those
imposed by applicable securities laws.
3.2 Representations and Warranties of TRDC. TRDC represents and warrants to
Frisby, by acceptance of the Option, as follows:
(a) This Option and the right to purchase Common Stock hereunder is
personal to TRDC and shall not be transferred to any other person, other than to
TRDC's and Delta's existing shareholders and their respective heirs at law and
devisees, the immediate family members of Dr. Colvin (spouse and children) and
the following persons: Yvonne Bryant, Barbara McKinney, Richard McKinney, David
Moody and Jim Mulligan, Benjamin T. Gravely (each, a "TRDC Holder" and together
with TRDC and Delta, the "TRDC Holders"); provided, however, that as a condition
to any such transfer each such TRDC Holder shall have executed and delivered to
Frisby an instrument reasonably satisfactory to Frisby pursuant to which such
TRDC Holder shall have agreed to be bound by the terms of this Agreement
applicable to TRDC.
(b) TRDC acknowledges that (i) this Option has been issued in reliance upon
an exemption from registration under the Securities and Exchange Act of 1933, as
amended (the "Securities Act") and applicable state statutes, (ii) the exercise
of the Option and the Option Shares have not been registered under the
Securities Act or applicable state statutes and must be held and may not be
sold, transferred or otherwise disposed of for value unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available, (iii) Frisby is under no obligation to register the
Option or the Option Shares under the Securities Act or the applicable state
securities, and (iv) that any certificate issued upon exercise of the Option
representing the Option Shares will bear on its face a legend in substantially
the following form restricting the sale of the Option Shares:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM.
IV. TRDC PUT RIGHT
IV.1. Put Right. (a) At any time from and after the exercise of the Option
and purchase by TRDC of all of the Option Shares and prior to the fifth
anniversary of the date hereof, TRDC shall have the right to cause Frisby to
purchase all of its Option Shares (the "Put Right") at a price equal to the
Exercise Price plus [This information has been omitted in accordance with a
Confidential Treatment Request and has been filed separately with the
Commission.] (the "Put Price"); provided, however, that the Put Right shall
terminate automatically upon the registration of the Option Shares under the
Securities Act.
<PAGE>
(b) TRDC may exercise the Put Right by giving Frisby a notice (a "Put
Exercise Notice") which specifies (i) TRDC's election to exercise its Put Right
with respect to all of the Option Shares then owned by TRDC, and (ii) a date not
earlier than 10 business days from the date of receipt of the Put Exercise
Notice for the closing of such purchase (the "Put Closing Date"); provided,
however, that if, prior to the date of such Put Exercise Notice, the closing
price of Frisby's Common Stock on NASDAQ, or any other recognized stock exchange
on which it is then publicly traded, is equal to or greater than the Put Price,
then the Put Price shall be a price equal to the closing price of Frisby's
Common Stock on NASDAQ, or any other recognized stock exchange on which it is
then publicly traded, on the last trading date immediately prior to the date of
the Put Exercise Notice. The closing of any exercise of the Put Right (the "Put
Closing") will take place at the principal executive offices of Frisby.
IV.2. The Put Closing. At the Put Closing, (a) the Note(s) previously made
by TRDC in favor of Frisby shall be canceled and (b) Frisby shall pay to TRDC an
amount equal to the aggregate Put Price less an amount equal to the principal
amount and all accrued interest on the Note(s), (c) TRDC will deliver to Frisby
the certificate or certificates evidencing the Option Shares owned by TRDC, duly
endorsed in blank or accompanied by a stock power in form and substance
reasonably satisfactory to Frisby, (d) TRDC will be deemed to represent to
Frisby that, upon the Put Closing, TRDC will transfer and Frisby will acquire
the entire record and beneficial ownership of, and good title to, the Option
Shares, free and clear of any and all liens, encumbrances and security
interests, and (e) each of the parties will take such additional actions as may
be reasonably requested by the other to carry out the intent and purposes
hereof.
IV.3. Assignment of Obligation. Frisby shall have the right to assign all
of its rights and obligations with respect to the Put Right to a third party,
including any shareholder or affiliate of Frisby; provided, however, that such
assignment shall not relieve Frisby of any of its obligations in respect of the
Put Right.
4.4. TRDC Holders' Rights. Any right or action that may be taken at the
election of the TRDC Holders shall be taken by a representative of the TRDC
Holders (the "TRDC Holder Representative") on behalf of all the TRDC Holders.
The initial TRDC Holder Representative shall be Dr. Colvin. Upon the death or
permanent disability (or during any period of temporary disability) of Dr.
Colvin, the successor TRDC Holder Representative shall be designated by the
estate of Dr. Colvin; provided, however, that if no such successor is so
designated within 30 calendar days from such death or permanent disability, such
successor will be the TRDC Holder holding a majority of the Option Shares (or
Option to acquire a majority of such Option Shares) then held by the TRDC
Holders. Any change in the TRDC Holder Representative shall become effective
upon notice in accordance with Section 5.1 of this Agreement.
<PAGE>
V. MISCELLANEOUS
V.1. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given when delivered personally or by telecopier, or
three days after being mailed by registered or certified mail (return receipt
requested), to the parties at the following address (or such other address for a
party as shall be specified by like notice):
(a) if to Frisby, to:
Frisby Technologies, Inc.
77 East Main Street
Bay Shore, NY 11706
Telecopier: (516) 969-8579
Attention: Chief Financial Officer
(a) if to TRDC, to:
Triangle Research and Development Corporation
P.O. Box 12696
Research Triangle Park, N.C. 27709
Telecopier: (919) 832-5988
Attention: President
V.2. Governing Law. This Agreement will be governed by and construed in
accordance with the law of the State of North Carolina applicable to contracts
entered into and wholly to be performed therein.
V.3. Amendments. This Agreement may not be modified, amended, altered or
supplemented except by an agreement in writing executed by the parties to be
charged and bound.
V.4. Severability. If any provision hereof shall be determined to be
invalid or unenforceable in any respect, such determination shall not affect
such provision in any other respect or any other provision of this Agreement
which shall remain in full force and effect, and this Agreement shall, if
possible, be construed in all respects which most closely reflects the intent of
the parties hereto as if such invalid or unenforceable provision were not
contained herein.
V.5. Successors and Assigns. The provisions of this Agreement will be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that, except as otherwise provided in
Section 3.2(a), no party may assign, delegate or otherwise transfer any of its
rights or obligations under this Agreement without the consent of the other
parties hereto.
V.6. Entire Agreement. This Agreement shall constitute the entire agreement
between the parties with respect to the subject matter of this Agreement and
shall supersede all prior verbal and written agreements, covenants,
communications, understandings, commitments, representations or warranties,
whether oral or written, by any party hereto or any of its representatives
pertaining to such subject.
V.7. 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 Agreement.
V.8. Headings. Captions and paragraph headings used herein are for
convenience and are not part of this Agreement and shall not be used in
construing it.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
FRISBY TECHNOLOGIES, INC.
By: /s/Gregory s. Frisby
--------------------------
Name: Gregory S. Frisby
Title: Chairman of the Board and
Chief Executive Officer
TRIANGLE RESEARCH AND
DEVELOPMENT CORPORATION
By: /s/David P. Colvin
-------------------------
Name: David P. Colvin
Title: President
DELTA THERMAL SYSTEMS, INC.
By: /s/David P. Colvin
-------------------------
Name: David P. Colvin
Title: President
<PAGE>
EXHIBIT B
AMENDMENT AGREEMENT DATED SEPTEMBER 24, 1998
BY AND BETWEEN TRIANGLE RESEARCH AND DEVELOPMENT CORPORATION
DELTA THERMAL SYSTEMS, INC. AND THE COMPANY
[INFORMATION PLACED IN BRACKETS [] HAS BEEN
OMITTED IN ACCORDANCE WITH A CONFIDENTIAL
TREATMENT REQUEST PURSUANT TO RULE 406 AND
HAS BEEN FILED SEPARATELY WITH THE COMMISSION.
<PAGE>
AMENDMENT AGREEMENT
Amendment No.1 (this "Amendment Agreement"), dated September 24, 1998, to
the Exclusive License Agreement, dated as of May 1, 1995 (the "License
Agreement") by and between Triangle Research and Development Corporation, a
North Carolina corporation ("TRDC"), Delta Thermal Systems, Inc., a North
Carolina corporation ("Delta") and Frisby Technologies, Inc., a Delaware
corporation and successor-in-interest to Frisby Technologies, Inc., a North
Carolina corporation ("Frisby").
A. Contemporaneously with the execution and delivery of this Amendment
Agreement, the parties have entered into an agreement (the "Master Agreement"),
which, inter alia, sets forth the terms of the assignment to Frisby by TRDC of
its rights under the Outlast Agreement (as such term is defined in the Master
Agreement); each of the parties hereby acknowledges that TRDC has previously
transferred ownership of the Technology (as such term is defined in the License
Agreement) to Delta.
B. In connection with the transactions contemplated by the Master
Agreement, TRDC, Delta and Frisby desire to amend the License Agreement as
hereinafter set forth.
NOW THEREFORE, the parties hereby agree as follows:
1. Article I of the License Agreement is hereby amended by adding a new
section 1.11 which shall read in its entirety as follows:
"1.11 Selected Agricultural Applications. "Selected Agricultural
Applications" means any application of phase change material to agronomic,
ornamental, horticultural (with emphasis on fruit crops of all types) and
turfgrass crops from crop cultivation through harvest and up to the point of
transport and animal husbandry applications (limited solely to biological
processes control) wherein the purpose of the PCM is to provide, among other
benefits, (a) enhanced pesticide efficacy, (b) enhanced control of biological
organisms, (c) microenvironmental regulation, (d) crop sterilization, (e)
improved germinations and/or (f) improved crop productivity through (i) freeze
protection, (ii) heat protection, (iii) protection from pathogen organism and/or
(iv) improvements of pesticides efficacy. Selected Agricultural Applications
specifically exclude those applications wherein the purpose of the PCM is to
enhance the survivability or shelf-life of the agricultural product during
transport, as exemplified by the case of transporting perishable citrus products
in a temperature controlled container or by the case of transporting seeds or
seedlings within temperature regulating foam media."
<PAGE>
2. Article I of the License Agreement is hereby amended by adding a new
section 1.12 which shall read in its entirety as follows:
"1.12 Passive MacroPCM Garments. "Passive MacroPCM Garments" means any
article of clothing, excluding footwear, handwear and accessories and, during
the first 36 months following the date of this Amendment Agreement, headwear
(other than headwear designed exclusively for military use and/or for fire
safety personnel), containing compartmentalized packets of MacroPCMs (1
millimeter diameter and above), wherein said MacroPCMs are the only means by
which phase change materials are incorporated into the garments."
3. Article II of the License Agreement is hereby amended by adding a new
Section 2.05 which shall read in its entirety as follows:
"2.05 Frisby grants to TRDC (a) an exclusive worldwide sublicense to
develop and commercialize (including the right to further sublicense to third
parties) (i) Selected Agricultural Applications and (ii) Cutting Fluids and
systems to circulate same (to the extent covered by U.S. Patent No. 5,141,079),
and (b) a non-exclusive worldwide sublicense to develop and commercialize
(including the right to further sublicense to third parties) Macro size PCM
capsule (having a diameter of one (1) millimeter or greater) applications for
Passive MacroPCM Garments (collectively, the "Frisby Licensed Applications");
provided, however, that should TRDC (i) during the 24 month period following the
date hereof (or any successive 24 month period thereafter) (A) fail to fund or
secure funding for research and development in excess of $100,000 per annum or
(B) fail to secure one or more new grants or contracts from third parties for
research and development, or (ii) commercialize the Frisby Licensed Applications
within five (5) years of the date of this Amendment, all license rights to the
Frisby Licensed Applications shall revert to Frisby."
4. Section 3.031 of the License Agreement is hereby amended by amending the
royalty fee provisions to read as follows:
". . . Frisby agrees to pay TRDC a royalty or fee in accordance with the
following schedule . . . . [This information has been omitted in accordance with
a Confidential Treatment Request and has been filed separately with the
Commission.]
The foregoing new royalty fee rate will be effective as of June 30, 1998."
Section 3.031 of the License Agreement is hereby further amended by
amending the "Exclusion" provision thereof by deleting the phrase "in accordance
with Par. 3.032 below" at the end of the first full sentence thereof.
<PAGE>
5. Section 3.032 of the License Agreement is hereby deleted in its
entirety.
6. Section 3.033 of the License Agreement is hereby amended by amending the
sublicense fee provisions to read as follows:
". . . Frisby agrees to pay TRDC in accordance with the following schedule
. . . .
[This information has been omitted in accordance with a Confidential
Treatment Request and has been filed separately with the Commission.]
The foregoing new sublicense fee rate will be effective as of June 30,
1998."
7. Article III of the License Agreement is further amended by adding the
following new sections 3.037, 3.038, 3.039 and 3.040 which shall read in their
entirety as follows:
"3.037 Purchase of PCMs. In connection with the research and development
and commercialization of the Frisby Licensed Applications, TRDC agrees to
purchase all of its MicroPCM requirements from Frisby, subject to:
1. Frisby satisfying TRDC's specification and reasonable delivery
requirements for such PCMs, which specification and delivery requirements shall
be in writing and of sufficient detail to enable Frisby to comply therewith. If
Frisby does not accept a TRDC purchase order within 10 days of receipt, said
purchase order will be deemed to have been rejected by Frisby and TRDC shall
then be free to purchase the therein specified PCMs from a third party; and
2. In the event that Frisby is able to satisfy TRDC's specification and
elects to supply such MicroPCMs to TRDC, Frisby will provide such MicroPCMs to
TRDC at the lowest price it then offered to its other customers for MicroPCM
orders of similar quantity, quality and technical specification; provided,
however, that if TRDC is quoted a lower bona fide price from a third party
supplier for such MicroPCMs, TRDC shall have the right to purchase such
MicroPCMs from such third party supplier if Frisby elects not to match such
price within 10 days after written receipt of such third parties proposal.
3.038 TRDC Product Sales. On all sales by TRDC of bulk PCMs, MicroPCMs and
End-Use Products incorporating MicroPCMs, which are based on the Frisby Licensed
Applications, but excluding therefrom all direct government development
contracts related to the Frisby Licensed Applications, TRDC agrees to pay to
Frisby a royalty fee of [This information has been omitted in accordance with a
Confidential Treatment Request and has been filed separately with the
Commission.] of TRDC's gross sales revenues.
<PAGE>
3.039 Sublicense Payments. On all monies received by TRDC from any
sublicensee of the Frisby Licensed Applications, TRDC agrees to pay to Frisby a
sublicense fee of [This information has been omitted in accordance with a
Confidential Treatment Request and has been filed separately with the
Commission.]
3.040 Payments to Frisby. All amounts owed by TRDC to Frisby in accordance
with this Article III shall be paid to Frisby within thirty days after the end
of the calendar quarter during which payments were received by TRDC from sales
or revenues described in Sections 3.038 and 3.039. Each payment shall be
accompanied by a statement consisting of records sufficient to enable the
verification of amounts payable hereunder."
8. Section 5.04 of the License Agreement is hereby amended by inserting the
following language after the first sentence:
"Notwithstanding the foregoing, without the prior written consent of
Frisby, which consent may be withheld by Frisby in its sole discretion, TRDC
shall not transfer, sell or assign its rights to the Technology to any party
other than a Permitted Assignee. For purposes of this Agreement, a Permitted
Assignee means (i) any of the current shareholders of TRDC or Delta and their
respective heirs at law and devisees or (ii) any corporation, partnership or
limited liability company controlled by or under common control with TRDC. As a
condition to any assignment to a Permitted Assignee, such Permitted Assignee
shall execute and deliver to Frisby an instrument reasonably satisfactory to
Frisby pursuant to which such Permitted Assignee shall agree to be bound by all
of the terms of this Agreement, including the restrictions on transfer set forth
herein. Any attempt to assign or transfer the Technology (or any part thereof)
not in compliance with this Section 5.04 will be null and void and of no
effect."
9. Except as otherwise set forth herein, all other provisions of the
License Agreement shall continue in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Amendment as of the date first above written.
TRIANGLE RESEARCH AND DEVELOPMENT CORPORATION
By:/s/
Name:
Title:
DELTA THERMAL SYSTEMS, INC.
By:/s/____________________________
Name:
Title:
FRISBY TECHNOLOGIES, INC.
By: /s/___________________________
Name:
Title:
<PAGE>
EXHIBIT C
ASSIGNMENT AGREEMENT DATED SEPTEMBER 24, 1998
BY AND BETWEEN TRIANGLE RESEARCH AND DEVELOPMENT
CORPORATION AND THE COMPANY
[INFORMATION PLACED IN BRACKETS [] HAS BEEN
OMITTED IN ACCORDANCE WITH A CONFIDENTIAL
TREATMENT REQUEST PURSUANT TO RULE 406 AND
HAS BEEN FILED SEPARATELY WITH THE COMMISSION.
<PAGE>
ASSIGNMENT AGREEMENT
ASSIGNMENT AGREEMENT (this "Agreement") dated September 24, 1998, by and
between Triangle Research and Development Corporation, a North Carolina
corporation ("TRDC" or "Assignor"), and Frisby Technologies, Inc., a Delaware
corporation ("Frisby" or "Assignee").
A. Assignor is the licensor of certain "Licensed Technology", as such term
is defined in Section 1.1 of that certain license agreement, dated January 22,
1991 (the "License Agreement"), by and between Assignor and Outlast
Technologies, Inc. (formerly known as Gateway Technologies, Inc.), a Colorado
corporation ("Outlast").
B. Assignor desires to assign its rights under the License Agreement to
Assignee and Assignee desires to acquire the rights of Assignor under the
License Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
1. Assignment. In consideration for $10.00 and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Assignor hereby assigns, transfers and conveys to Assignee, and Assignee hereby
accepts all right(s) Assignor has in, and with respect to, the License
Agreement.
2. Assignee's Obligations. To the extent that it is practical but only to
that extent, Assignee agrees to perform obligations under the License Agreement,
as follows:
(a) Assignee shall pay patent annuities under Section 7.2 of the License
Agreement only if advised in advance by Assignor that such are due; otherwise
Assignor shall retain this obligation, subject to reimbursement by Assignee
(which may in turn seek reimbursement from Outlast, as provided in Section 7.2);
and
(b) Assignee shall assume litigation duties and expenses under Section 13.1
and Section 13.3, but Assignor shall, at Assignee's request, join as party and
cooperate in prosecution or defense at Assignee's expense using counsel selected
by Assignee.
Assignee does not assume, and Assignor hereby expressly retains, any
obligations under the License Agreement that are personal to Assignor or its
shareholders. Assignor shall retain whatever ongoing obligations it may have, if
any, under the License Agreement or any other agreement or understanding with
Outlast, express or implied, to develop Licensed Technology.
3. Further Assurances. From and after the date hereof, Assignor shall
execute and deliver such other documents or instruments and take such further
action as may be reasonably requested by Assignee in order to effect the
assignment of the License Agreement as contemplated by this Assignment.
<PAGE>
4. Successors and Assigns. This Agreement shall inure to the benefit of and
be binding upon the successors and assigns of the parties hereto.
5. Controlling Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina applicable to contracts
entered into and wholly to be performed therein.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
TRIANGLE RESEARCH AND DEVELOPMENT CORPORATION
By: /s/____________________________
Name:
Title:
FRISBY TECHNOLOGIES, INC.
By: /s/___________________________
Name:
Title:
<PAGE>
EXHIBIT D
NON-QUALIFIED STOCK OPTION AGREEMENT DATED SEPTEMBER 24, 1998
BY AND BETWEEN DR. DAVID P. COLVIN AND THE COMPANY
[INFORMATION PLACED IN BRACKETS [] HAS BEEN
OMITTED IN ACCORDANCE WITH A CONFIDENTIAL
TREATMENT REQUEST PURSUANT TO RULE 406
AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION
<PAGE>
Exhibit D
FRISBY TECHNOLOGIES, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT is made and entered as of the __ day of
September, 1998, by and between Frisby Technologies, Inc., a Delaware
corporation (the "Corporation") and Dr. David P. Colvin (the "Optionee").
WHEREAS, the Optionee is a member of the Innovation Advisory Board of the
Corporation; and
WHEREAS, the Corporation considers it desirable and in its best interests
that Optionee be given an opportunity to acquire a proprietary interest in the
Corporation by possessing a non-qualified option to purchase up to [This
information has been omitted in accordance with a Confidential Treatment Request
and has been filed separately with the Commission.] of Common Stock of the
Corporation, par value $.001 per share (the "Common Stock").
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the receipt and adequacy of
which is hereby acknowledged, the parties agree as follows: 1. Grant of Option.
The Corporation hereby grants to the Optionee the right and option (hereinafter
the "Option") to purchase all or any part of an aggregate of [This information
has been omitted in accordance with a Confidential Treatment Request and has
been filed separately with the Commission.] of Common Stock (such number being
subject to adjustment as hereinafter provided), on the terms and conditions
herein set forth and in the Plan, which is incorporated herein by reference. The
Optionee acknowledges receipt of a copy of the Plan.
The Optionee acknowledges that the Option is not an "incentive option"
within the meaning of an "incentive stock option plan" and Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
<PAGE>
2. Purchase Price. The purchase price of the Common Stock covered by
the Option shall be [This information has been omitted in accordance with a
Confidential Treatment Request and has been filed separately with the
Commission.] per share (the "Purchase Price").
3. Term of the Option. Unless terminated earlier pursuant to Paragraph
9 hereof, the Option shall vest in its entirety on the anniversary of the date
hereof. Accordingly, the Option shall be exercisable as to the full amount of
the Option commencing one year from the date hereof. The Option granted hereby
shall terminate September 23, 2003 unless earlier terminated as provided herein
or in the Plan.
4. Method of Exercising Option. The Option may be exercised in whole or
in part at any time (to the extent that it is exercisable in accordance with its
terms) by giving written notice to the Corporation, together with the tender of
the Purchase Price of the Common Stock covered by the Option. Payment of the
Purchase Price may be made in any of the following ways:
(a) in United States dollars in cash or by check payable to the
Corporation; or
(b) by delivery of shares of Common Stock of the Corporation already owned
by the Optionee, valued at fair market value; or
(c) by a combination of cash or check and Common Stock as provided in (a)
and (b) above; or
(d) in the discretion of the Corporation, by the issuance by the Optionee
of a promissory note, which shall be payable in thirty (30) days and shall bear
interest at such rate as shall be determined by the Corporation, which in no
event shall be less than the minimum rate required by the provisions of Section
483 of the Code to avoid the imputation of income to such Optionee.
<PAGE>
As soon as practicable after receipt by the Corporation of such notice and
of payment in full of the Option price of all the Common Stock with respect to
which the Option has been exercised (including interest if payment is made in
installments), a certificate or certificates representing such Common Stock
shall be issued in the name of the Optionee, and shall be delivered to the
Optionee. All Common Stock shall be issued only upon receipt by the Corporation
of the Optionee's representation that the shares of Common Stock are purchased
for investment and not with a view toward distribution thereof.
5. Availability of Shares. The Corporation, during the term of this Option,
at all times shall keep available the number of shares of Common Stock required
to satisfy the Option. Notwithstanding the foregoing, the Corporation shall not
be obligated to deliver any Common Stock unless and until, in the opinion of the
Corporation's counsel, all applicable federal and state laws and regulations
have been complied with, nor, if the outstanding Common Stock is at the time
listed on any securities exchange, unless and until the Common Stock to be
delivered has been listed (or authorized to be added to the list upon official
notice of issuance) upon such exchange, nor unless or until all other legal
matters in connection with the issuance and delivery of the Common Stock have
been approved by the Corporation's counsel.
6. Adjustments. (a) If prior to the exercise of the Option granted
hereunder the Corporation shall have effected one or more stock split-ups, stock
dividends, or other increases or reductions of the number of shares of its
Common Stock outstanding without receiving compensation therefor in money,
services or property, the number of shares of Common Stock subject to the option
hereby granted shall (i) if a net increase shall have been effected in the
number of outstanding shares of the Corporation's Common Stock, be
proportionately increased and the Purchase Price per share of Common Stock shall
be proportionately reduced; and (ii) if a net reduction shall have been effected
in the number of outstanding shares of the Corporation's Common Stock, be
proportionately reduced and the Purchase Price per share of Common Share be
proportionately increased.
<PAGE>
(b) In the event the Corporation is merged into or consolidated with
another corporation under circumstances where the Corporation is not the
surviving corporation, or if the Corporation is liquidated or sells or otherwise
disposes of all or substantially all of its assets to another corporation while
any unexercised Options remain outstanding:
(i) subject to the provisions of clauses (iii), (iv) and (v) below, after
the effective date of such merger, consolidation or sale, as the case may be,
the Optionee shall be entitled, upon exercise of the Option, to receive in lieu
of shares of Common Stock, shares of such stock or other securities as the
holders of the shares of Common Stock received pursuant to the terms of the
merger, consolidation or sale; or
(ii) the Corporation may waive any discretionary limitations imposed with
respect to the exercise of the Option so that the Option from and after a date
prior to the effective date of such merger, consolidation, liquidation or sale,
as the case may be, specified by the Corporation, shall be exercisable in full;
or
(iii) the Option may be canceled by the Corporation as of the effective
date of any such merger, consolidation, liquidation or sale, provided that
notice of such cancellation shall be given to the Optionee, and the Optionee
shall have the right to exercise such option in full (without regard to any
discretionary limitations imposed with respect to the option) during a 30-day
period preceding the effective date of such merger, consolidation, liquidation
or sale; or
(iv) the Option may be canceled by the Corporation as of the date of any
such merger, consolidation, liquidation or sale, provided that notice of such
cancellation shall be given to the Optionee and the Optionee shall have the
right to exercise the Option but only to the extent exercisable in accordance
with any discretionary limitations imposed with respect to the Option prior to
the effective date of such merger, consolidation, liquidation or sale; or
(v) the Corporation in its discretion may provide for the cancellation of
the Option and for the payment to the Optionee of some part or all of the amount
by which the value thereof exceeds the payment, if any, which the Optionee would
have been required to make to exercise such option.
(c) Except as expressly provided herein, no issuance by the Corporation of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or Purchase Price of shares of Common Stock subject to
the Option.
7. Restrictions. The holder of this Option, by acceptance hereof,
represents and warrants as follows:
(a) This Option and the right to purchase Common Stock hereunder is
personal to the holder and shall not be transferred to any other person, other
than by will or the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Code, or Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or by the rules
thereunder. The Option shall not be assigned, pledged or hypothecated in any way
(whether by operation of law or otherwise) and shall not be subject to
execution, attachment or similar process. Any attempted transfer, assignment,
pledge, hypothecation or other disposition of the Option or of any rights
granted hereunder contrary to the provisions of this Section 7, or the levy of
any attachment or similar process upon the Option or such right, shall be null
and void.
<PAGE>
(b) The holder hereof has been advised and understands that the Option has
been issued in reliance upon exemptions from registration under the Securities
Act and applicable state statutes; the exercise of the Option and resale of the
Option and the Common Stock have not been registered under the Securities Act or
applicable state statutes and must be held and may not be sold, transferred, or
otherwise disposed of for value unless they are subsequently registered under
the Securities Act or an exemption from such registration is available; except
as set forth herein, the Corporation is under no obligation to register the
Option or the Common Stock under the Securities Act or the applicable state
statutes; in the absence of such registration, the sale of the Option or the
Common Stock may be practicably impossible; the Corporation's registrar and
transfer agent will maintain stop-transfer instructions against registration or
transfer of the Option and the Common Stock and any certificate issued upon
exercise of the Option representing the Common Stock will bear on its face a
legend in substantially the following form restricting the sale of the Common
Stock:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND ARE
"RESTRICTED SECURITIES" WITHIN THE MEANING OF RULE 144 PROMULGATED UNDER THE
SECURITIES ACT. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD OR TRANSFERRED WITHOUT COMPLYING WITH RULE 144 IN THE ABSENCE OF EFFECTIVE
REGISTRATION OR OTHER COMPLIANCE UNDER THE SECURITIES ACT.
(c) Prior to one year from the date the Option has been exercised and the
Common Stock fully paid for, the Corporation may refuse to transfer the Common
Stock unless the holder thereof provides an opinion of legal counsel reasonably
satisfactory to the Corporation or a "no action" letter or interpretive response
from the staff of the Securities and Exchange Commission to the effect that the
transfer is proper; further, unless such opinion letter or response states that
the Common Stock are free of any restrictions under the Securities Act, the
Corporation may refuse to transfer the Common Stock to any transferee who does
not furnish in writing to the Corporation the same representations and agree to
the same conditions with respect to such Common Stock as are set forth herein.
Notwithstanding any of the foregoing, the Corporation may refuse to transfer the
Common Stock if any circumstances are present reasonably indicating that the
transferee's representations are not accurate.
(d) After one year but prior to two years from the date the incentive
Option has been exercised and the Common Stock fully paid for, the Corporation
may refuse to transfer the Common Stock unless the holder either (i) meets the
requirements of Subparagraph (b) above; or (ii) sells such Common Stock in
accordance with Rule 144 and furnishes to the Corporation written assurances of
compliance therewith in the form of a copy of the Notice of Form 144 and
appropriate letters of compliance from the holder of such Common Stock and the
securities broker-dealer to or through which such Common Stock are being sold.
No opinion of counsel for the holder of the Common Stock shall be required
respecting sales in reliance on Rule 144 pursuant to Clause (ii) of this
Subparagraph (d).
(e) After two years from the date that the Option has been exercised and
the Common Stock fully paid for, the Corporation shall, upon the written request
of any persons who have held the Common Stock for one year (excluding any
tolling period provided for by Rule 144) and who is not, and has not been during
the preceding three months, an affiliate of the Corporation, re-issue to such
holder in such names and denominations as the holder shall request, one or more
certificates for the Common Stock without any restriction whatsoever on their
further transfer and cancel any and all stop transfer instructions regarding
such Common Stock on the books and records of the Corporation.
<PAGE>
8. Shareholder's Rights. The Optionee shall have no rights as a shareholder
with respect to the Common Stock issuable upon exercise of this Option until
payment of the Purchase Price and delivery to the Optionee of the Common Stock
has been made as provided herein.
9. Termination of Option. Except as otherwise stated herein, the Option to
the extent not heretofore exercised shall terminate upon the first of the
following dates to occur:
(a) In the event the Optionee ceases to be a member of the Board of
Directors of the Corporation for any reason other than death or permanent
disability, any then unexercised portion of the Option granted to the Optionee
shall, to the extent not then vested, immediately terminate and become void; any
portion of the Option which is then vested but has not been exercised at the
time the Optionee so ceases to be a member of the Board of Directors may be
exercised, to the extent it is then vested, by the Optionee within 180 days of
the date the Optionee ceased to be a member of the Board; and all options shall
terminate after such 180 days have expired.
(b) In the event that the Optionee ceases to be a member of the Board by
reason of his or her death or permanent disability, any option granted to such
optionee shall be immediately and automatically accelerated and become fully
vested and all unexercised options shall be exercisable by the Optionee (or by
the Optionee's personal representative, heir or legatee, in the event of death)
until the scheduled expiration date of the Option.
(c) September 23, 2003, the fifth anniversary of this Agreement.
10. Validity and Construction. The validity and construction of this Option
shall be governed by the laws of the State of North Carolina. Such construction
is vested in the Board of Directors and its construction shall be final and
conclusive.
IN WITNESS WHEREOF, the Corporation has caused this Option Agreement to be
executed by its proper corporate officers thereunto duly authorized.
FRISBY TECHNOLOGIES, INC.
By: /s/Gregory S. Frisby
-----------------------------
Gregory S. Frisby, President
/s/David P. Colvin
------------------------------
Dr. David P. Colvin
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001051904
<NAME> Frisby Technologies, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1998
<CASH> 6,516,138
<SECURITIES> 1,555,683
<RECEIVABLES> 1,075,975
<ALLOWANCES> (30,000)
<INVENTORY> 671,569
<CURRENT-ASSETS> 10,443,522
<PP&E> 360,097
<DEPRECIATION> (82,603)
<TOTAL-ASSETS> 13,113,232
<CURRENT-LIABILITIES> 1,928,908
<BONDS> 0
0
2,479,000
<COMMON> 5,121
<OTHER-SE> 7,233,703
<TOTAL-LIABILITY-AND-EQUITY> 13,113,232
<SALES> 2,198,275
<TOTAL-REVENUES> 2,869,139
<CGS> 2,125,730
<TOTAL-COSTS> 2,518,989
<OTHER-EXPENSES> 4,285,279
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (366,635)
<INCOME-PRETAX> (3,918,644)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,918,644)
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<EXTRAORDINARY> 0
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<NET-INCOME> (3,918,644)
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