SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB/A
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 Commission File No. 333-83123
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Talisman Enterprises Inc.
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(Name of Small Business Issuer in Its Charter)
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Ontario N/A
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2330 Southfield Road, Unit 3-4 Mississauga, Ontario, Canada L5N 2W8
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(Address of principal executive offices) (Zip Code)
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(905) 826-3995
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act :
Common Stock, $.001 Par Value Per Share
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days:
Yes [] No [x]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of 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.
[]
The Company's revenues for its most recent fiscal year were $925,987.
The aggregate market value of the voting stock held by non-affiliates of the
Company was $6,965,355 as of March 1, 2000 based on the average bid and asked
prices of such stock as of that date.
There were 3,035,817 shares of Common Stock, $.001 par value outstanding as of
March 1, 2000.
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PART I
Item 1. DESCRIPTION OF BUSINESS.
OVERVIEW
Talisman, through our wholly-owned operating subsidiary, Talisman
International Inc., manufacturers high-quality AA size disposable alkaline
batteries for private label sale by retailers. We are currently, to our
knowledge, the only North American-based battery manufacturer that focuses
primarily on the private label market. Our objective is to leverage our unique
strategic position to build market share in the private label battery market and
capitalize on the significant growth in private label battery sales in North
America.
OUR HISTORY
Talisman was incorporated under the laws of the Province of Ontario
on July 28, 1978 under the name Firespur Explorations Ltd. In May 1989, we
changed our name to Firesand Explorations Ltd. and, in September 1997, our name
changed to our Talisman Enterprises Inc.
From 1978 to early 1997, Talisman operated as a mineral exploration
company in the Province of Ontario, Canada. During such period, Talisman
conducted various exploration programs on patented mining claims held by us on
lands situated in Esquega Township, Province of Ontario, Canada. In spite of our
exploration efforts, no significant ore deposit or other mineralized targets
were identified which justified additional exploration expenditures. Effective
January 1997, Talisman wrote-off the value of all mineral exploration assets
then held and, as a result of such actions, Talisman now has no mining assets or
other mineral related interests.
In August 1997, Talisman entered into a share exchange agreement
with the shareholders of Talisman International pursuant to which the
shareholders of Talisman International exchanged 11,959,265 common shares of
Talisman International for 478,371 of Talisman's common shares. Prior to the
share exchange, there was no affiliation between Firesand and Talisman
International. As a result of the share exchange, Talisman International became
a wholly-owned subsidiary of Talisman. Upon completion of such transaction in
September 1997, we changed our name from Firesand to our present name, Talisman
Enterprises Inc.
INDUSTRY BACKGROUND
The worldwide battery market is predominately comprised of four
major chemical systems:
1. Alkaline
2. Heavy Duty - Zinc Chloride
3. General Purpose - Zinc Carbon
4. Rechargeable - Nickel Cadmium
Alkaline batteries offer the best performance and are the most widely used type
of battery in North America with a greater than 65% market share. Industry
analysts estimate the North American market for disposable alkaline batteries
was approximately $3 billion in 1997, representing consumption of an estimated 4
billion batteries. An estimated 40% increase in battery-operated devices has
driven growth in the use of disposable batteries over the past 10 years.
Furthermore, industry data reveals that within the North American market, the
alkaline segment is the fastest growing. Consumption of alkaline batteries is
expected to continue to grow at a rate of 5-8% per year.
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The consumer battery market consists primarily of five major cell sizes,
AA, AAA, C, D and 9 volt. The AA cell accounts for approximately 65% of the
total unit sales, the AAA cell accounts for approximately 15% and the C, D and 9
volt cell sizes account for approximately 7% each. We believe branded
manufacturer gross margins on the AA and AAA (80%) are approximately double that
of the C, D and 9 volt (40%). We believe that, upon implementation of our
business plan, our gross margin for our AA batteries will be approximately 33%,
compared to an approximately 80% gross margin for branded manufacturers.
Duracell Inc. and Eveready Battery Co., Inc. are the major manufacturers of
alkaline batteries and currently supply approximately 83% of the alkaline
batteries sold in the North American market.
PRIVATE LABEL BATTERY MARKET OPPORTUNITY
The market for private label consumer products has grown
significantly in recent years. In order to generate greater customer loyalty,
many retailers have sought to develop private label or corporate brands in
numerous consumer product categories. Private label affords retailers an
opportunity to enhance their store's identity by offering high quality products
that are significantly less expensive than brand-name alternatives. According to
information supplied by the Private Label Manufacturers Association (PLMA), in a
number of product categories, including light bulbs, disposable cameras and
tape, private label items have achieved a market share of 20-25%. On average,
the study also shows retailers are projecting a private label category growth
rate of 24% over the next three years across all major product categories.
While private label batteries only comprise approximately 9% of the
overall disposable alkaline battery market, batteries are the fastest growing
segment within the private label market (source: PLMA). We believe, that despite
a limited supply of private label product, the battery segment has grown at
almost double the rate of other private label products. Currently, most private
label batteries are supplied either by offshore manufacturers or by brand-name
battery manufacturers such as Duracell and Eveready. It is our belief that
offshore battery suppliers, however, have limited available alkaline production
capacities, suffer from higher logistics costs, and typically produce batteries
with less than 25% of the life of alkaline batteries because of their use of
carbon zinc technology. Offshore manufacturers are those manufacturers not
located in the three North American Free Trade Agreement countries (USA, Mexico,
Canada). While there are several manufacturers in Europe, most are located in
Asia. Among the large number of manufacturers in Asia, a large majority,
particularly those located in the Peoples Republic of China, only produce old
technology general purpose or heavy duty batteries. Testing done by Talisman
identified fewer than ten high-quality producers comparable to North American
manufacturers.
Management of Talisman believes that, for brand-name manufacturers,
supplying private label batteries represents a significant conflict of interest:
the growth of private label sales comes at the expense of higher margin branded
product sales. To date, major companies such as Duracell and Eveready have, in
our opinion, participated in private label manufacturing only when pressured by
certain large retailers. This is primarily because it is not in the best
interests of current branded manufacturers to provide a private label product.
Due to the lower retail prices of private label batteries, profit margins are
lowered significantly and line changeovers result in manufacturing
inefficiencies. Accordingly, Talisman believes that brand-name manufacturers do
not actively solicit private label sales, but serve demand reactively in order
to maintain or secure large retail accounts for branded products. Accounts
requesting private label product from a major branded supplier are therefore
generally sold with the understanding that their branded product be carried as a
preferred product line.
Given the general reluctance of major suppliers to provide private
label product to their customers, Talisman believes that a tremendous growth
opportunity exists.
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OUR STRATEGY
Our objective is to become the industry leader in the marketing,
sale and manufacture of private label alkaline batteries in North America. We
believe we are the first and only dedicated private label alkaline battery
manufacturer in North America. We intend to utilize our unique market position
to capitalize on the growth in private label product sales.
Our manufacturing technology and expertise enables us to produce
batteries of comparable quality to leading brand-name batteries. In addition,
our location in Southern Ontario allows us to streamline logistics costs and
develop close working marketing and sales relationships with leading North
American retailers. We currently supply private label batteries to 17 customers.
The key elements of our strategy include plans to:
o Focus exclusively on alkaline batteries;
o Manufacture batteries that are equivalent in performance to brand
-name batteries;
o Sell batteries exclusively for private label purposes at a lower cost
than brand-name alternatives;
o Initially manufacture AA size batteries, which comprise the largest
percentage of the market and provide high gross margins;
o Expand into the production and marketing of AAA, C and D battery cell
sizes and increase production capacity of the AA cell size. We believe
that the addition of other cell sizes (i.e. AAA, C and D) will allow us
to expand existing customer sales and enhance sales opportunities
with new customers that require all cell sizes;
o Further develop an already established North American sales broker
network;
o Focus on private label retail customers with sales potential that
will optimize production run costs and thereby maximize margins.
In addition to selling high-quality products with the name of our
customers on them, it is our belief that our retail customers typically improve
their profitability from 30-35% on the sale of a branded equivalent product to
50-60% for private label. This also typically results in more profit per unit
measured in dollars and cents than typically realized from the sale of a branded
equivalent.
PRIVATE LABEL MANUFACTURING
We currently manufacture a high quality AA alkaline cell for sale to
an established and growing customer base.
We currently have two (2) cell lines capable of producing AA
alkaline cells at the rate of 100 pieces per minute per cell line. Management
estimates that we have the capacity to produce in excess of approximately 45
million batteries annually.
We believe that our AA cell is:
o Comparable in performance to the competition on a majority of applications
(source: ACTS Testing Labs Ltd.);
o Advantageously priced compared to branded products, resulting in prices
which are approximately 20-25% lower in retail price;
0 Environmentally friendly because we do not add mercury or cadmium.
Supply of the AAA, C, D and 9 volt is currently "out sourced" by
Talisman for certain accounts that desire to carry all five cell sizes. Such
sourced product is labeled, packaged and shipped by us. We intend to use a
portion of the proceeds from our public offering which we completed in January
2000 to complete the expansion of our operations into the production and
marketing of AAA batteries, to increase the production capacity of our AA
batteries, and to commence the expansion of our operations into the production
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and marketing of C and D battery cell sizes. Our ability to complete the
proposed expansion of our operations into the production and marketing of C and
D battery cell sizes is dependent upon obtaining additional financing. We intend
to continue to out source our need for 9 volt battery cells from other
manufacturers as the volume requirements for the 9 volt cell size are not
sufficient to justify the expense of producing the product in house.
Our strategy is to manufacture bare cell batteries in bulk in
anticipation of receipt of customer orders. Such bare cell batteries are kept on
hand and make up a substantial portion of our inventory. We are then in a
position to prepare finished goods upon receipt of customer orders. Further,
after such goods are packaged and labeled they are shipped to customers. To
date, we have been able to fill orders as they are received, and we have not
experienced any delays due to lack of manufacturing capacity or otherwise.
Moreover, as previously stated, we intend to expand our production capacity with
the proceeds from our financing activities.
BATTERY CUSTOMERS
The following is a list of customer accounts for the year ended
December 31, 1999 and the year ended December 31, 1998:
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Blockbuster Video - U.S. QDN - U.S.
Amcon Distribution Co. - U.S. Cash Convertors - Canada
Drug Emporium - U.S. Bradlees Distribution - U.S.
McLanes (a Subsidiary of WalMart) - U.S. Pirate Wholesale - U.S.
Discount Drug Mart - U.S. Daisytek - U.S.
A&P Fireco - Canada Murphy Distributor - Canada
Harris Teeter - U.S. Smoker Friendly - U.S.
Navarro Discount Pharmacy - U.S. Robert & James - U.S.
North Carolina Mutual Drug - U.S. Save-On - U.S.
Plus Distributors - U.S. Win - Leader - Canada
RedCell - Canada Best Buy - Canada
Romar - Canada Zellers - Canada
Myer Cox Co. - U.S.
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All of our sales are made to our customers pursuant to purchase orders. Our
company has several large customers upon which we depend on for the sale of our
battery products. For the fiscal year ended December 31, 1999, sales to
Blockbuster Video represented 30.0%, Drug Emporium represented 15.4%, Amcon
Distribution Co. represented 15.5%, McLanes (a subsidiary of WalMart)
represented 10.6%, Discount Drug represented 8.1% and A&P Fireco represented
8.0%. For the year ended December 31, 1998, sales to Discount Drug Mart
represented 28.6%, Drug Emporium represented 23.6%, Zellers Inc. represented
9.1% and A&P Fireco represented 6.6% of our overall sales. No other retail
customer accounted for more than 5% of our overall sales for either the fiscal
year ended December 31, 1999 or December 31, 1998.
COMPETITION
The manufacture and sale of alkaline batteries is highly competitive
and there are no substantial barriers to entry into the market. We believe that
the principal competitive factors affecting the market for battery products are
the quality of the product, price, environmental issues, turn around time for
production orders, payment terms for customers, and marketing and sales.
The private label AA alkaline battery products which we currently
produce compete with products imported from the Pacific Rim countries of
Indonesia, China, Hongkong, Japan and South Korea. We believe we offer to our
customers key advantages over offshore suppliers. Such advantages include:
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o Providing superior and consistent product performance. It is our
observation that some Pacific Rim producers utilize domestic raw
materials which result in sub-standard performance.
o Price. Our private label batteries offer our customers an
attractively priced alternative to the batteries sold by their
competitors.
o We do not add mercury to our batteries. Mercury is considered to
be environmentally hazardous and, accordingly, the disposal of
used batteries to which mercury has been added is problematic.
o Efficient turn around time. It is our experience that offshore
suppliers generally require a minimum of 30 to 60 days notice
prior to producing an order. Delivery time is a minimum of 30 days
beyond that and full container loads are required. In contrast, we
inventory "bare" cells and can package required orders within a
2-10 day period, depending on the order size.
o Consumer products" industry standard payment terms. We provide
creditworthy customers with terms calling for payment within 30-45
days of shipment of its product to retailers. By comparison, it is
our experience that off-shore suppliers require either a deposit
in advance of shipping or full payment prior to shipping in the
form of a letter of credit or bank transfer.
o Marketing and sales support. We provide retailers with on-going
sales expertise and promotional concepts in order to maximize
sales and profits. Various pack sizes are available to meet the
needs of retailers and product displays are supplied to ensure
greater in-store visibility and product movement. In contrast,
offshore suppliers, generally speaking, only supply product and do
not offer any on-going marketing support.
We believe that approximately two-thirds (66.6%) of the private
label battery market is controlled by our three major competitors (Duracell,
Eveready and Ray-O-Vac), while the remaining one-third (33.3%) is controlled by
offshore manufacturers.
At present, we do not directly compete (nor do we seek to) with any
major North American battery manufacturer (such as Duracell, Eveready and
Ray-O-Vac) to supply private label batteries to large retail chains. This is
because we have, at present, limited production capability and limited marketing
resources compared to the significant and dominant market capabilities of the
established branded manufacturers. We believe that the overall private label
market is sufficiently large enough whereby we have an opportunity to penetrate
into this market, and thereby gain significant market share.
STRATEGIC PARTNERS AND KEY SUPPLIERS
Our battery manufacturing lines have been custom made by Pragmatek Inc. of
Mississauga, Ontario, Turning Point Inc. of Oakville, Ontario and Gwinnett
Industrial Machine Inc. of Norcross, Georgia. These companies have over 25 years
of combined experience in the manufacture of reliable battery equipment to
numerous established battery manufacturers. Pragmatek, Turning Point and
Gwinnett are all shareholders of Talisman.
We have a number of key suppliers of raw materials who are also
shareholders in Talisman. They include Burlington Stamping Inc. of Burlington,
Ontario and Hibar Systems Limited of Richmond Hill, Ontario. Burlington Stamping
supplies all of our battery cans while Hibar supplies all of our battery
pre-assemblies. James C. McGavin, a director of Talisman, is also a director,
officer and shareholder of Burlington Stamping.
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PERSONNEL
As of December 31, 1999, we employed a total of 47 full time
employees. Twelve of such persons are engaged in the areas of administration,
finance, production planning, marketing and sales. In addition, 18 of our 47
employees have prior battery industry experience. None of our employees are
represented by a union. Management considers its relations with its employees to
be satisfactory.
MARKETING, SALES AND DISTRIBUTION
Talisman currently has an established North American sales network
that is directed by individuals with considerable experience in selling private
label batteries to established customers. With the exception of Randy O. Curtis
and Christian H. Bunger, all sales agents and brokers are compensated on a
commission basis only (generally 5%). We currently have a full time sales
organization consisting of four qualified sales professionals who generate a
majority of business through a network of brokers. We have developed a
relationship with two out of the four major, national, private label brokers
dedicated to the food class of trade. In addition, we have established
relationships with twelve independent regional sales agencies, which handled a
myriad of non-food, and drug battery customers throughout Canada and the United
States.
In addition, we support our product merchandised in retail outlets
with a variety of packaging designs and displays intended to create consumer
interest in retail customers' private label disposable alkaline battery product
line. We also develop special pack sizes and styles intended to coincide with
peak buying periods such as back-to-school and Christmas.
We have made every effort to ensure that key positions at Talisman
are filled by qualified individuals with previous battery or private label
experience. These individuals include:
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Garry J. Syme, Sr. Vice President Former Project Manager Duracell
Duncan C. MacFadyen, VP Finance Former Controller Bossman
Randy O. Curtis, VP Mktg. Canada Former Managing Director - Eveready de Mexico
Christian Bunger, Vp Sales Former South East Regional Mgr.--Eveready
Dennis Hughey, Bus. Dev. Consultant Former President - Beatrice Private Label
Billie Burke, Purchasing Mgr. Former Purchasing Dept. Duracell
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For a more detailed description of the professional backgrounds of
many of the above noted persons, see "Management."
PRODUCT LIABILITY INSURANCE
We carry product liability insurance coverage on our battery
products in the amount of Cdn.$1,000,000, with an additional umbrella protection
of Cdn.$14,000,000. We believe that the amount of insurance which we maintain is
adequate.
ENVIRONMENTAL AND SAFETY ISSUES
We have made every attempt to ensure that our manufacturing
facilities do not contravene any environmental laws. Our AA battery cell is
mercury free and currently meets North American standards. Certain materials
used in our battery products, as well as one product used in the manufacturing
process, are considered hazardous under the Occupational Safety and Health Act
hazard communication standards as to workplace care and employee notification.
Employees handling these chemicals are required to wear appropriate over
protective gear. Once the product is assembled, chemicals are sealed within a
metal container that seals the chemicals from both the environment and the
atmosphere. All product designated for "waste disposal," including defective
goods, are neutralized immediately and stored in an isolated location at our
premises prior to final disposal. As required by provincial regulations, we have
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adopted a procedure of registering all hazardous waste products requiring
disposal. We receive a registration number for all such products and communicate
such registration number to the approved waste disposal company before the
product is transported to a certified landfill waste site. We have factored into
our budgeting process an average cost per battery of Cdn.$0.001 for waste
disposal purposes.
TECHNOLOGICAL ISSUES/SCIENTIFIC ADVISORS
We constantly test our product to ensure consistent quality of production.
Qualified Talisman employees test samples of each production run and additional
samples are sent to an independent consultant for evaluation. Our batteries also
meet the standard as set by the National Electronic Distributors Association and
the American National Standards Institute, which are European and North American
standardization groups that are comprised of representatives of battery
manufacturers around the world.
Product improvement is on-going through in-house quality control protocols
and through independent testing contracted to Dr. Klaus Tomantschger, President,
Rosecreek Technologies Inc., of Mississauga, Ontario. Dr. Tomantschger was the
co-inventor of the rechargeable alkaline battery and has a wealth of knowledge
in the area of battery performance improvements.
Item 2. DESCRIPTION OF PROPERTY.
We are currently housed in a 21,000 square foot leased head office and
production facility located at 2330 Southfield Road, Units 3-4, Mississauga,
Ontario, Canada. The location is situated close to major highways and is only 15
minutes from Toronto's Pearson International Airport. Significant leasehold
improvements have been undertaken to accommodate state-of-the-art quality
control facilities, manufacturing facilities, and sales and marketing offices.
Our current lease expires July 31, 2002; however, an understanding has been
reached with our landlord that should additional space be required, then a new
facility would be made available to us without penalty. In addition, we have
leased an additional 39,400 sq. ft. of manufacturing space adjacent to our
current facility. The extra space was considered necessary to accommodate the
planned addition of the AAA, C and D cell lines into our manufacturing
operations. We pay approximately Cdn.$43,000 rent per month.
Item 3. LEGAL PROCEEDINGS.
We are a named defendant in a legal action commenced on March 8, 2000 and
filed in the Superior Court of Justice in the Province of Ontario in relation to
a dispute over an amount owing to a former sales agent or ours, Charles Holt
(Cob Label Makers). The claim relates to amounts allegedly owing by us for the
delivery to us of certain battery labeling machinery and other supplies and
materials. The stated amount of the claim is $300,504. We intend to defend
ourselves vigorously with respect to the amount being claimed.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not Applicable.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The high and low bid price of the Company's common stock for each
quarter since its initial public offering which commenced on January 14, 2000,
through March 14, 2000 are as follows:
Start Date End Date High Low
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1/14/00 3/14/00 $6.00 $2.750
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The Company has not paid dividends to date.
(b) The Company made an initial public offering of 900,000 shares of
its common stock, no par value ("Common Stock"), pursuant to a registration
statement declared effective by the Commission on January 13, 2000, File No.
333-83123 ("Registration Statement"). The shares of common stock were sold at a
price of $5.00 per share. The public offering was completed with Capital West
Securities, Inc. and Institutional Equity Corporation, as underwriters.
The following are the Company's expenses incurred in connection with
the issuance and distribution of the Securities in the offering from the
effective date of the Registration Statement to the ending date of the reporting
period of this 10-KSB:
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Expense Amount
Underwriter's Discounts and Commissions $ 450,000
Registration and Filing Fees(1) 27,000
Printing and Engraving Expenses(1) 110,000
Legal Fees and Expenses(1) 91,000
Accounting Fees and Expenses(1) 43,000
Blue Sky Fees and Expenses(1) 39,000
Underwriter's Non-accountable expense allowance 135,000
Total(1) 895,000
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(1) Estimate.
None of the foregoing expenses were paid, directly or indirectly, to
any director or officer of the Company or their associates, to any person who
owns 10 percent or more of any class of equity securities of the Company, or to
any affiliate of the Company.
The net offering proceeds to the Company after deducting for the
foregoing expenses are $3,605,000.
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The following are the application of the net proceeds by the Company
from the sale of the Securities in the offering from the effective date of the
Registration Statement to the ending date of the reporting period of this
10-KSB:
Item Amount
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Expansion and Development of Battery Production Lines $ 257,000
Advertising and Sales Development ..................... $ 0
Temporary Investments(1) .............................. $1,427,000
Working Capital and General Corporate Purposes ........ $1,921,000
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Total Application of Net Proceeds ..................... $3,605,000
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(1) Money Market investments
The use of proceeds described above represents a material change to the
application of the net proceeds as described in the Company's Registration
Statement in the section "Use of Proceeds." Specifically, the Company has used a
materially greater amount of the net proceeds for working capital and general
corporate purposes. The change in the use of net proceeds was necessitated by
(i) Talisman's need to satisfy outstanding obligations which were accrued prior
to the completion of the public offering as a result of the delay in completing
such offering, (ii) Talisman's decision to temporarily pay down the outstanding
balance of its operating loan with General Electric Capital Canada Inc., and
(iii) Talisman's purchase of additional raw materials and sourced product.
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Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this prospectus that are not historical are
forward looking statements, including statements regarding our expectations,
intentions, beliefs or strategies regarding the future. Forward looking
statements include statements regarding liquidity, anticipated cash needs and
availability and anticipated expense levels. All forward looking statements
included in this prospectus are based on information available to us on the date
hereof and we assume no obligation to update any such forward looking
statements. It is important to note that our actual results could differ
materially from those in such forward looking statements.
GENERAL
Talisman was incorporated in July 1978 and for almost 20 years carried
on business as a junior mineral exploration company in the Province of Ontario,
Canada. In September 1997, Talisman (then known as Firesand Resources Ltd.)
entered into a share exchange agreement with Talisman International Inc.
pursuant to which Talisman acquired all of the issued and outstanding shares of
common stock of Talisman International in exchange for shares of Talisman. Upon
completion of the share exchange, Talisman changed its name to its current name,
Talisman Enterprises Inc. The share exchange was accounted for as a reverse
takeover and accordingly, the results of Talisman (formerly constituted as
Firesand) have been included with those of Talisman International from the date
of the share exchange.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1998
REVENUES. Total revenues for the fiscal year ended December 31, 1999
increased 23.8% to $925,987 from $748,254 for the fiscal year ended December 31,
1998. This increase was primarily attributable to the addition of two new
customers, namely Blockbuster Video and McLanes (a subsidiary of WalMart).
OPERATING EXPENSES AND GROSS MARGINS. Operating expenses increased
41.7% to $2,106,909 for the fiscal year ended December 31, 1999, from $1,487,052
for the fiscal year ended December 31, 1998. The increase was caused by
increases in variable overhead spending in relation to the growth in sales,
added direct and indirect labor in anticipation of stronger sales volume, and
the additional cost of leasing a 39,000 square foot facility in order to support
the planned growth of the manufacturing and packaging processes.
Gross margins, as a percentage of revenues, decreased to (127.5%) for
the fiscal year ended December 31, 1999, from (98.7%) for the fiscal year ended
December 31, 1998. The decrease in gross margin percentage resulted from the
increases in direct material, direct labor, indirect labor and the rental of the
additional facility outlined above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expense for the fiscal year ended December 31, 1999 increased 47.4% to
$1,675,282 from $1,136,516 for the fiscal year ended December 31, 1998. This
increase in selling, general and administrative expenses was primarily
attributable to the following:
o the hiring of three senior management positions, specifically, President
and CEO, Vice President and CFO, and Vice President sales - U.S.;
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o relocation costs associated with the retention of the above positions;
o the severance costs incurred in regards to the Vice President Sales -
Canada and the Vice President New Market Development positions;
o increased travel expense consistent with expanding the base of customers;
and
o a growth in marketing cost (i.e., customer artwork, printing and
reproduction) required to satisfy request from new customers.
AMORTIZATION EXPENSE. Amortization expense for the fiscal year ended
December 31, 1999 increased 212.9% to $951,739 from $304,182 for the fiscal year
ended December 31, 1998 primarily due to the amortization of financing charges
related to the outstanding convertible promissory notes which were issued in a
private placement offering.
INTEREST EXPENSE AND OTHER FINANCING CHARGES. Interest expense and bank
charges for the fiscal year ended December 31, 1999 increased 221.4% to $319,120
from $99,292 for the fiscal year ended December 31, 1998. This increase was a
consequence of the fee due to Spencer Trask for arranging Talisman's financing
facility with General Electric Capital Canada Inc. and the commencement fees
charged by G.E. Capital to establish such financing.
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE SEVEN MONTHS ENDED
DECEMBER 31, 1997
REVENUES. Revenues increased to $748,254 for the year ended December
31, 1998, from $139,646 for the seven month period ended December 31, 1997. This
increase in sales was attributable to a growth in Talisman's customer base from
11 to 34 customers, as a result of the increased ability of Talisman to supply
our customers.
For the year ended December 31, 1998, approximately 77% of Talisman's
sales (representing an aggregate of approximately $576,159 of revenues) were
made to customers located in the United States, including sales to Drug
Emporium, Discount Drug Mart, and Save-On. For the seven month period ended
December 31, 1997, Talisman had only minimal sales to customers located in the
United States (representing an aggregate of approximately $6,204 of revenues).
OPERATING EXPENSES AND GROSS MARGINS. Operating expenses increased to
$1,487,052 for the year ended December 31, 1998, from $180,582 for the seven
month period ended December 31, 1997. Gross margins, as a percentage of
revenues, decreased to (99%) for the year ended December 31, 1998, from (29%)
for the seven month period ended December 31, 1997.
The gross margin percentage (99%) is in a negative position because these
expenses were incurred in advance of the increase in the customers sales base
(approximately 50% of sales occurred during the last 2 months of the period).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased to $1,136,516 for the year ended December 31,
1998, as compared to $597,558 for the seven month period ended December 31,
1997. The increase reflects the impact of a full year of selling, general and
administrative expense compared to seven months manufacturing overhead and
selling, general and administrative expense for the prior period.
<PAGE>
AMORTIZATION EXPENSE. Amortization expense consisting exclusively of
equipment depreciation, was $304,182 for the year ended December 31, 1998, as
compared to amortization expense of $27,670 for the seven month period ended
December 31, 1997. This increase is attributable to the fact that manufacturing
did not begin until the last quarter of 1997. Therefore, only a small amount of
equipment depreciation was recognized for the period ended December 31, 1997.
INTEREST EXPENSE AND OTHER FINANCING CHARGES. Interest expense and bank
charges increased to $99,292 for the year ended December 31, 1998 from $11,236
for the seven month period ended December 31, 1997. For the year ended December
31, 1998, two loans were outstanding namely a term loan and an operating loan.
The term loan had an average principal balance for the period of $386,536
bearing interest at a rate of 7.75% per annum. The operating loan had an average
principal balance for the period of $221,563 bearing interest at a rate of 7.75%
per annum. Both loans were outstanding for the entire period consequently
interest expense totaled $47,137. The remaining $52,155 includes service charges
of $8,877, short term bridge loans of $12,415 and financing charges of $30,863.
The only interest charge relative to the seven month period ending December 31,
1997 is the term loan with a principal balance of $320,401 at December 31, 1997
bearing interest at a rate of 7.75%, which was outstanding from August 1997
through December 1997.
FOREIGN EXCHANGE
For the year ended December 31, 1998, Talisman had a foreign exchange
gain of approximately $500, which was included in Talisman's results from
operations. During the period ended December 31, 1999, Talisman experienced a
foreign exchange gain of $35,279 which was included in the results from
operations of gains on U.S. sales/receivables and funds on deposit, offset by
losses on U.S. purchase/payables from U.S. dollar suppliers. Currently, a
majority of revenues from sales are in U.S. dollars and a majority of expenses
from goods purchased for resale are purchased in U.S. dollars. Since Talisman is
based in Ontario, Canada, approximately 90% of Talisman's combined operational
and selling, general and administrative expenses for the period ended December
31, 1999, were incurred in Canadian dollars. Variations in the value of the
Canadian dollar, as compared to the value of the U.S. dollar, could adversely
effect Talisman's results.
STOCK BASED COMPENSATION
We account for our stock options and warrants under APB Opinion 25. If
Talisman was required to account for the stock options and warrants using the
fair value method, the net loss for the year ended December 31, 1999 would have
increased by $35,274. Such amounts represent the fair value of options and
warrants at the time they vested. Since some of the options vest over a period
of time there will be future charges to income with respect to the options
granted in 1999 of $295,000 over the next 7 years. There were no employee stock
options or warrants issued which vested during 1998.
INFLATION
Talisman has experienced minimal impact from inflation and changing
prices on its net sales and on its income from continuing operations for the
periods it has been engaged in business.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the completion of the share exchange with Talisman
International, Talisman had limited working capital and its prospects were
severely limited. Upon completion of the share exchange, Talisman International
became a wholly-owned subsidiary of Talisman. Up until the completion of the
share exchange, Talisman International had sustained its operations from its
<PAGE>
inception (September 26, 1996) primarily from the sale of equity. Specifically,
from September 1996 to immediately prior to the share exchange (September 1997),
Talisman International sold (i) 428,371 shares of common stock for an aggregate
of Cdn.$1,518,264 in cash, (ii) 50,000 shares of common stock for machinery and
equipment having a fair market value of Cdn.$200,000 and inventory having a fair
market value of Cdn.$50,000 and (iii) 3,300 Class A Special shares for machinery
and equipment having a fair market value of Cdn.$2,300,000 and technological and
intellectual property having a fair market value of Cdn.$1,000,000 for Canadian
GAAP purposes. It should be noted, however, that no value has been ascribed to
the technological and intellectual property assets for U.S. GAAP purposes.
International also had operating credit facilities (both term and revolving)
from the Hongkong Bank of Canada, such facilities being secured by all the
assets of International.
Subsequent to the completion of the share exchange, Talisman sold an
additional 542,787 shares of common stock for an aggregate of Cdn.$3,293,208 in
cash. Of this new equity, Cdn.$2,395,000 was provided by Talisman Partners, a
private investment partnership, through the completion of two separate private
placements. For a complete description of the private placement completed with
Talisman Partners, see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." The
proceeds of such financings were used by Talisman (i) to pay approximately
Cdn.$670,000 owing to a prior short term secured lender to Talisman, (ii) to
expand Talisman's battery manufacturing capabilities and (iii) for general
working capital purposes.
From December 1998 through March 1999, Talisman completed a $700,000
convertible note financing. The notes were converted into securities of Talisman
in connection with the first closing of Talisman's private placement offering
which was completed in March 1999. For a complete description of the private
placement completed in March 1999, see "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS." The holders of the notes also received warrants to acquire an
aggregate of 72,465 shares of common stock of Talisman exercisable at $7.50 per
share.
In July 1999, Talisman established new financing arrangements with
General Electric Capital Canada Inc. In connection with the implementation of
such new facilities, Talisman paid out, in full, its previous secured lender,
Canadian Imperial Bank of Commerce. The financing facilities provided by General
Electric Capital currently consist of (1) a Cdn.$940,800 term loan; (2) a
revolving credit line of up to Cdn.$7,500,000, and (3) a "capex" loan of up to
Cdn.$2,059,200. The term loan is due and payable on or before June 30, 2002.
Interest charged on the General Electric Capital facilities is, (i) with respect
to funds advanced in Canadian dollars, calculated at the average rate per annum
established by the Royal Bank of Canada as its discount rate for 30-day Canadian
bankers acceptances plus 4.0% per year, and (ii) with respect to funds advanced
in U.S. dollars, the latest rate for 30-day dealer placed commercial paper,
which normally is published in the "Money Rates" section of the Wall Street
Journal. Furthermore, all indebtedness of Talisman under the General Electric
Capital facilities is secured by Talisman's assets.
In November 1999, Talisman borrowed $350,000 from Kevin Kimberlin
pursuant to a promissory note in the principal amount of $350,000, bearing
interest at an annual rate of 10%, and due on February 17, 2000. Such loan was
converted into 70,000 shares of common stock at $5.00 per share simultaneously
with Talisman's January 2000 public offering.
Talisman's working capital deficit at December 31, 1999 was
($5,394,039). The negative working capital primarily represents the indebtedness
incurred in connection with a private placement offering completed in June 1999.
The private placement offering, which was completed with Spencer Trask
Securities, Inc. as placement agent, resulted in the sale of an aggregate of
50.72985 units solely to U.S. investors for gross proceeds to Talisman of
<PAGE>
$5,174,472.70 (such proceeds being inclusive of the $700,000 raised from
December 1998 through March 1999 described above). The units consisted of an
aggregate of (1) $5,073,135 principal amount of 8% convertible promissory notes,
and (2) 1,014,627 warrants to purchase shares of common stock, which warrants
are exercisable at $7.50 per share. In connection with such closings, Spencer
Trask received a placement fee equal to 10% of the aggregate purchase price of
the securities sold by it, plus a non-accountable expense allowance equal to
three percent of the aggregate purchase price of the securities sold and a
warrant, granted by Talisman for $1.00 consideration, to purchase an amount of
common stock equal to 20% of the common stock sold in the offering at an
exercise price equal to 120% of the price of the common stock sold.
Additionally, upon the first closing of the offering, Talisman entered into (1)
an agreement whereby Spencer Trask was granted a right of first refusal to act
as underwriter or agent for any proposed private or public offering of
Talisman's securities by Talisman or by any of its principal stockholders, and
(2) a non-exclusive finder's agreement pursuant to which Spencer Trask is
entitled to receive a fee based upon a percentage of the value of any business
combination or financing arrangement, including but not limited to a merger or
purchase of assets, which is introduced to Talisman by Spencer Trask. In
accordance with the non-exclusive finder's agreement, a fee in the amount of
$200,000 was paid to Spencer Trask Securities, Inc. for arranging the financing
with General Electric Capital Canada Inc.
In January 2000, we completed a public offering in which we sold a
total of 900,000 shares of common stock at a price of $5.00 per share. The
public offering, which was completed with Capital West Securities, Inc. and
Institutional Equity Corporation, as underwriters, resulted in the realization
of aggregate gross proceeds of $4,500,000. In addition, simultaneously with the
listing of our common stock on the Nasdaq SmallCap Market, the outstanding 8%
convertible promissory notes that were sold in our previous private placement
offering were automatically converted into an aggregate of 1,014,627 shares of
common stock, thereby resulting in a decrease in the current portion of our long
term debt and an increase in our working capital. After giving effect to the
approximately $3,605,000 of net proceeds realized from our public offering, and
the conversion of our debt simultaneously therewith, our pro forma working
capital would be approximately $2,822,594.
Except for the existing financing arrangements with General Electric
Capital Canada Inc., Talisman has no other current arrangements in place with
respect to financing. If additional financing arrangements are not obtained, we
may be unable to fully fund our operations, pursue our business strategy, take
advantage of new opportunities, develop or enhance our products, or respond to
competitive pressures and financial or marketing hurdles. Such inability could
have a materially adverse effect on Talisman's business, operating results and
financial condition. Moreover, the estimated cost of the proposed expansion of
our production and marketing activities is subject to numerous uncertainties,
including the problems, expenses, difficulties, complications and delays, many
of which are beyond our control, frequently encountered in connection with the
establishment and development of new business activities, and may be affected by
the competitive environment in which we are operating. Accordingly, there can be
no assurance that we will complete the proposed expansion of our production and
marketing activities described herein.
Talisman's management believes that upon full implementation of
Talisman's business plan, sufficient revenues will be generated to meet
operating requirements. However, no assurance can be given that such goal will
be obtained or that any expected revenues will be realized.
<PAGE>
YEAR 2000
Our business was not adversely impacted by information technology
issues related to Year 2000.
We have not, to date, encountered any long-term Year 2000 problems from
our customers, most of which are major retail corporations. Any loss of
information or data by such customers can be easily replaced by Talisman
manually providing them with relevant information. Except for three single
sourced vendors, Talisman utilizes multiple suppliers from whom we obtain the
raw materials which are used in the manufacturing process. Talisman intends to
monitor carefully these sources and carry additional inventory until the end of
the first quarter of Year 2000.
With the exception of the cost that we incurred for replacing nine
personal computers, we did not incur any additional costs in connection with
implementing solutions to year 2000 issues that had a material impact on our
financial results or position.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is set forth at the end of this report.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
James A. Ogle 53 President, Chief Executive Officer & Director
Norman R. Proulx 52 Chairman of the Board
Garry J. Syme 49 Senior Vice-President, Manufacturing
Thomas O'Dowd 40 Vice-President & Chief Financial Officer
Duncan C. MacFadyen 47 Vice-President, Finance & Controller
Randy O. Curtis 43 Vice-President, Global Marketing & Canada Sales
Christian H. Bunger 54 Vice-President, Sales--U.S.
James C. McGavin 57 Director
Donald L. Matheson 50 Director
Thomas A. Fenton 39 Director
</TABLE>
Set forth below is a brief background of the executive officers and
directors of the Company, based on information supplied by them.
JAMES A. OGLE, 53, has been the President, CEO, and a director of Talisman
since January 21, 1999. Prior thereto, from January 1998 to January 1999, Mr.
Ogle was Vice President of Operations for U.S. Industries, Inc., Elger
Plumbingware/U.S. Brass Division, a leading manufacturer of bath and kitchen
china and cast iron fixtures. From 1992 to 1997, Mr. Ogle was Senior Vice
President, Operations, for Tyco Toys, Inc., a leading international toy
manufacturer and distributor. From 1989 to 1992, Mr. Ogle was Vice President,
Operations for Wilkinson Sword, Inc., an international producer of shaving
products and disposable lighters. From 1978 to 1989, Mr. Ogle held various
positions with BIC Corporation, a leading producer of disposable pens, razors
and disposable lighters. Prior thereto, Mr. Ogle held various positions with
General Motors Corporation. Mr. Ogle obtained an Executive MBA from the
University of New Haven.
NORMAN R. PROULX, 52, is the Chairman of the Board of Talisman. Mr. Proulx
was first appointed a director of Talisman in August 1998. From December 1998
through January 1999, Mr. Proulx was the interim President and CEO of Talisman
replacing the former President and CEO, David R. Guy. Since March 1998, Mr.
Proulx has been a managing director of Spencer Trask Securities Incorporated, a
New York based venture capital investment firm that provides financial and
operational support to start-up and early-stage companies. In such position, Mr.
Proulx concentrates his efforts on consumer products and retailing. In 1997, Mr.
Proulx was a managing director of the Cortec Group ("Cortec"), a private New
York equity investment firm which makes controlling investments in middle-market
manufacturing and distribution businesses. In connection with same, Mr. Proulx
was responsible for overseeing Cortec's investment in Gemeinhardt, Inc., a US
based company which is a market leader in the manufacture and distribution of
flutes and piccolos. Mr. Proulx was also responsible for overseeing Cortec's
investment in Manco Products, Inc., a US based company which is a leading
designer and manufacturer of fun karts. From 1990 to 1996, Mr. Proulx was
President and CEO of Seymour Housewares Corporation of Seymour, Indiana, a
leading manufacturer of ironing boards. Prior thereto, Mr. Proulx was, from 1984
to 1990, the President, North America of Wilkinson Sword Limited. Prior thereto,
Mr. Proulx held different positions from 1969 to 1984 with Scripto/Wilkinson
Sword and The Gillette Company. Mr. Proulx obtained his Bachelor of Science,
Business Administration degree from Boston College in 1969.
<PAGE>
GARRY J. SYME, 49, is the Senior Vice President, Manufacturing of Talisman
and has been since September 1997. Between August 1996 and September 1997, Mr.
Syme was the Senior Vice President Operations for International, Talisman's
wholly-owned subsidiary. Prior thereto, Mr. Syme was the Vice President
Operations, from January 1996 to August 1996, at Infinity Plus Battery
Corporation of Mississauga, Ontario. Prior thereto, from 1992 to 1995, Mr. Syme
was President of GJS International Inc., a company providing consulting advice
to major battery manufacturers. In such capacity, Mr. Syme was responsible for
the development of manufacturing facilities for Cegasa (Spain), Power Plus
Battery Corporation (United States), Euram (Europe), Infinity Plus (Canada) and
two facilities in the Peoples Republic of China. In addition, Mr. Syme was
retained as President of Power Plus of America Inc. to implement a 100,000 sq.
ft. $20 U.S. million dollar manufacturing plant in Georgia, USA. Mr. Syme has
also spent approximately 20 years with Duracell, 8 years of which were with the
Duracell U.S. R&D Centre and 12 of which were with Duracell Canada Inc. of
Mississauga, Ontario.
THOMAS O'DOWD, 40, is Vice President and Chief Financial Officer of
Talisman and has been since July 1999. From August 1992 to June 1998, Mr. O'Dowd
was a Financial Analyst for Seymour Housewares Corporation, the world's largest
manufacturer of ironing boards and covers and pads. From October 1990 to August
1991, Mr. O'Dowd was a Senior Auditor for Forstman Little & Co. From April 1986
to September 1990, Mr. O'Dowd held senior level accounting positions for two
subsidiaries of GenCorp, a $3 billion Fortune 100 conglomerate. From June 1981
to March 1986, Mr. O'Dowd was a Corporate Audit Supervisor for AMF Incorporated.
Mr. O'Dowd obtained a B.S. in Accounting from Marist College.
DUNCAN C. MACFADYEN, 47, is Vice President Finance of Talisman and has been
since October 1, 1997. Prior thereto, Mr. MacFadyen was, from September 1996 to
September 1997, a financial planer with Investors Group, a Canadian based
financial planner and mutual fund company. Prior thereto, from May 1991 to
September 1996, Mr. MacFadyen was comptroller for Glen Oak Inc., a wholesale
supplier of various consumer products including "Bossman" batteries and
flashlights. Mr. MacFadyen obtained a C.M.A. and B.A. from the University of
Waterloo.
RANDY O. CURTIS, 43, is Vice President of Global Marketing and Canadian
Sales of Talisman, since May 1999. From January 1997 to April 1998, Mr. Curtis
was a Principal at R.O. Curtis Associates Inc. From February 1992 to December
1997, Mr. Curtis was Managing Director for Eveready de Mexico. From November
1979 to January 1992, Mr. Curtis held senior level positions at Eveready Canada.
Mr. Curtis obtained a degree in Industrial Engineering Technology from Ryerson
Polytechnical Institute.
CHRISTIAN H. BUNGER, 54, has been the Vice President of Sales--U.S., since
January 1999. Since 1992, Mr. Bunger has been the Southeast Regional Manager
(Atlanta, Georgia) for the Eveready Battery Company, a subsidiary of the Ralston
Purina Corporation. From 1986 through 1992, Mr. Bunger was the South East
Division Manager (Atlanta, Georgia) of the Eveready Battery Company and from
1980 through 1986 he had held the title of South Central Division
Manager(Atlanta, Georgia). Mr. Bunger joined the Eveready Battery Company in
1974 as a Manager of National Accounts (New York, New York) and has also held
positions of Product Manager as well as District Manager and merchandising
positions in Portland Oregon, Boston Massachusetts and Providence Rhode Island.
Mr. Bunger obtained a B.B.A. from Tulane University.
JAMES C. MCGAVIN, 57, is the President and a major shareholder of
Burlington Stamping Inc. of Burlington, Ontario and has been since December
1981. BSI manufacturers small deep drawn shells and stampings principally
sourcing the alkaline, rechargeable, military and OEM battery cell markets.
Prior to founding Burlington, Mr. McGavin was a partner in the public accounting
firm Ward Mallette (now BDO Dunwoody Ward Mallette) for approximately 10 years.
Mr. McGavin obtained his Chartered Accountant designation in 1970.
<PAGE>
DONALD L. MATHESON, 50, a director of Talisman, is the President of Imark
Corporation (a Toronto Stock Exchange listed company) and has been since August
1997. Prior thereto, Mr. Matheson was, from December 1994 to July 1997, Vice
President Finance and Chief Financial Officer of Imark Corporation. Prior
thereto, Mr. Matheson was, from January 1992 to December 1994, the Director of
Finance for a heating and air-conditioning business operated through Clare
Brothers of Cambridge, Ontario. Mr. Matheson is also an officer and director of
Animazing Entertainment Inc., a childrens entertainment company.
THOMAS A. FENTON, 39, a director of Talisman, is a partner in the Toronto
based law firm of Aird & Berlis and has been since June, 1997. Prior thereto,
Mr. Fenton was a partner in another Toronto based law firm and prior thereto, an
associate with such firm. His practice encompasses corporate and securities law.
Mr. Fenton acquired his LL.B. degree from the University of Western Ontario in
1986 and was called to the Bar in Ontario in 1988. Mr. Fenton is a director of a
number of public and private companies.
The term of office of each Director is until the next annual meeting of
stockholders and until a successor is elected and qualified or until the
Director's earlier death, resignation or removal from office. Executive Officers
hold office until their successors are chosen and qualified, subject to earlier
removal by the board of directors.
AUDIT COMMITTEE
The Board of Directors has established an Audit Committee consisting of
Donald L. Matheson, Thomas A. Fenton and James C. McGavin, all of whom are
directors who are not salaried officers of the Company. The purpose of the Audit
Committee is to review the results and scope of the audit and other services
provided by Talisman's independent accountants, and to provide general oversight
of legal compliance and potential conflict of interest matters.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5, and amendments thereto,
furnished to the Company during fiscal year 1999, the Company is not aware of
any director, officer or beneficial owner of more than ten percent of the
Company's Common Stock that, during fiscal year 1999, failed to file on a timely
basis reports required by Section 16(a) of the Securities Exchange Act of 1934.
<PAGE>
Item 10. EXECUTIVE COMPENSATION.
The following table sets forth certain summary information with respect
to the compensation paid to the Company's Chief Executive Officer, and the
Company's Senior Vice-President, Manufacturing, for services rendered in all
capacities to the Company for the fiscal period ended December 31, 1999. Other
than as listed below, the Company had no executive officers whose total annual
salary and bonus exceeded $100,000 for that fiscal year:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
AWARDS PAYOUTS
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK UNDERLYING LTIP PAYOUTS COMPENSTION
POSITION YEAR SALARY ($) BONUS ($) IOM ($) AWARD OPTIONS/SARS (#) ($) ($)
---------------- --- ---
JAMES A. OGLE, PRESIDENT
AND CHIEF EXECUTIVE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICER 1999 $262,052(1) - 70,285 (2) - 5,069 - -
GARRY SYME, SENIOR-VICE
PRESIDENT 1999 $119,316 - 10,216 (3) - 2,765 - -
</TABLE>
- ----------------
(1) Includes a tax gross up as per Mr. Ogle's employment agreement with
Talisman.
(2) Represents $4,357 in car allowance, $443 in car insurance and $4,071 in
insurance benefits paid to Mr. Ogle pursuant to his employment agreement with
the Company. Also includes $61,414 in moving expenses.
(3) Represents $6,752 in car allowance, $759 in car insurance and $2,705 in
insurance benefits paid to Mr. Syme pursuant to his employment agreement with
the Company.
The following table shows the option grants to the named executive officers
during fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
(Individual Grants)
Percent of Total
Number of Common Stock Options Granted to
Underlying Options Employees in Exercise Price
Name Granted Fiscal Year ($/Share) Expiration Date
<S> <C> <C> <C> <C>
10 Years from
James A. Ogle 5,069 44.5% CDN$1.25 date of grant
10 years from
Garry Syme 2,765 24.3% CDN$1.25 date of grant
</TABLE>
<PAGE>
The following table shows the value at December 31, 1999 of unexercised
options held by the named executive officers:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year-end Option Values
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired Value Options at In-the-Money Options at
On Realized Fiscal Year-end (#) Fiscal Year-end ($)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ - ---- ------------------------- -------------------------
<S> <C> <C> <C> <C>
James A. Ogle - - 5,069/77,886(1) $12,799/ $196,662(2)
</TABLE>
- ----------------
(1) Represents presently exercisable options to purchase 5,069 shares of common
stock at CDN$1.25 per share, and unexercisable options to purchase 77,886
shares of common stock at CDN$1.25 per share.
(2) As of December 31, 1999, there was no public market for Talisman's common
stock. On January 13, 2000, Talisman completed a public offering of its
common stock. Accordingly, the values presented assume a fair market value
of $3.375 per share of common stock which is the closing price for the
Company's common stock on March 1, 2000.
(3) Represents presently exercisable options to purchase 2,765 shares of common
stock at CDN$1.25 per share, and unexercisable options to purchase 38,712
shares of common stock at CDN$1.25 per share.
EMPLOYMENT AGREEMENTS
On January 4, 1999, James Ogle entered into an employment agreement
with Talisman pursuant to which Mr. Ogle has been retained as the President and
Chief Executive Officer of Talisman. The term of the employment agreement
commenced on January 21, 1999 and continues until December 31, 2002; provided,
however, that the termination date may be extended for an additional one year
period at each anniversary of Mr. Ogle's employment agreement dated January 21,
1999. Pursuant to the employment agreement, Mr. Ogle will receive an annual
salary of $182,000 based on the exchange rate in effect on January 21, 1999. The
exchange rate upon which Mr. Ogle's annual salary is based shall be adjusted as
of June 14 and December 14 of each year during Mr. Ogle's employment by
Talisman. Mr. Ogle will also receive a bonus of a maximum of 50% of one year's
base salary, which bonus shall be payable within 30 days of the completion of
the audit of Talisman's financial statements, provided Talisman achieves
financial objectives as determined by the Talisman's board of directors. The
employment agreement also provides for additional compensation and/or benefits
to be paid or provided to Mr. Ogle as follows:
- On the first anniversary of January 21, 1999, Mr. Ogle shall receive an
additional bonus, to be paid in the form of shares of the Talisman's
common stock, in an amount equal to $45,000. The shares are to be valued
at the price per share at the close of the January 20, 1999 trading day.
<PAGE>
- On the first anniversary of January 21, 1999, Mr. Ogle shall also be
obligated to purchase from Talisman shares of common stock having a total
market value on January 21, 1999 equal to $55,000 and Talisman has agreed
to loan Mr. Ogle the necessary funds to purchase such shares.
- Talisman shall pay Mr. Ogle a tax adjustment in an amount equal to the
amount by which the actual income taxes to be paid by Mr. Ogle exceed his
hypothetical United States income tax (assuming certain deductions to
which he would be entitled to) if he were living in Texas.
- Mr. Ogle shall be granted options to purchase shares of Talisman's common
stock equal to 5% of Talisman's total outstanding shares as of January 21,
1999 (on a fully diluted basis), which options shall be exercisable at a
price equal to Cdn.$1.25 (which price is equal to 25% of the average of
the high bid and low asked prices per share on the Canadian Dealing
Network on January 21, 1999). The exercisability and vesting of such
options are subject to certain conditions, including, but not limited to
(i) Mr. Ogle's continued employment by Talisman, (ii) the achievement of
specified levels of annual performance to be established by the board of
directors, and (iii) the achievement of specified levels of investor
returns. The employment agreement also provides that in the event that Mr.
Ogle exercises any of the options while he is employed by Talisman,
Talisman shall loan him the amount of the exercise price for the options
at an interest rate equal to the applicable federal rate, such loan to be
repaid within six months of the exercise of the options. The note shall be
forgiven in the event that Mr. Ogle remains in the employment of Talisman
for a period of at least six months following the exercise of the options
or his employment is terminated as a result of death, disability or other
termination entitling Mr. Ogle to severance under the terms of the
employment agreement.
- Mr. Ogle is entitled to participate in any benefit plans extended to
Talisman's employees or executives.
- Mr. Ogle is entitled to receive reimbursement for all reasonable expenses
incurred by him in the course of his employment by Talisman.
The Employment Agreement may be terminated (i) by Talisman for cause; (ii) at
any time by Talisman, without cause, by paying to the employee up to a maximum
of his then current base salary and the annual bonus to be paid in an amount
pro-rated through the date of termination calculated as if all performance goals
for the year have been achieved; or (iii) at any time by the employee upon
written notice. The employment agreement also contains a prohibition against
competing with Talisman for a period of one year after the termination of the
agreement and soliciting customers or employees from Talisman for a period of
two years after the termination of the agreement.
On January 6, 1999, Garry J. Syme entered into an employment agreement with
Talisman. Mr. Syme has been retained as the Senior Vice President, Manufacturing
of Talisman. The term of his employment agreement is until January 4, 2002, and
thereafter, is renewable for successive one year terms. Pursuant to the
employment agreement, Mr. Syme will receive an annual salary of Cdn. $150,000,
which shall be reviewed annually, and Mr. Syme shall be entitled to receive a
bonus up to a maximum of 40% of his annual base salary, payable within 30 days
of the completion of the audit of Talisman's financial statements, provided
Talisman achieves financial objectives as determined by Talisman's board of
directors. The employment agreement also provides for additional compensation
and/or benefits to be paid or provided to Mr. Syme as follows:
<PAGE>
- Mr. Syme shall be granted options to purchase shares of Talisman's common
stock equal to 2% of Talisman's total outstanding shares as of January 21,
1999 (on a fully diluted basis), which options shall be exercisable at a
price equal to Cdn.$1.25 (which price is equal to 25% of the average of
the high bid and low asked prices per share on the Canadian Dealing
Network on January 21, 1999). The exercisability and vesting of such
options are subject to certain conditions, including, but not limited to
(i) Mr. Syme's continued employment by Talisman, (ii) the achievement of
specified levels of annual performance to be established by the board of
directors, and (iii) the achievement of specified levels of investor
returns. The employment agreement also provides that in the event that Mr.
Syme exercises any of the options while he is employed by Talisman,
Talisman shall loan him the amount of the exercise price for the options
at an interest rate equal to the applicable federal rate, such loan to be
repaid within six months of the exercise of the options. The note shall be
forgiven in the event that Mr. Syme remains in the employment of Talisman
for a period of at least six months following the exercise of the options
or his employment is terminated as a result of death, disability or other
termination entitling Mr. Syme to severance under the terms of the
employment agreement.
- Mr. Syme is entitled to participate in any benefit plans extended to
Talisman's employees or executives.
The employment agreement may be terminated (i) by Talisman for cause;
(ii) at any time by Talisman, without cause, by paying to the employee a maximum
of one year's current annual salary; or (iii) at any time by the employee upon
written notice. The employment agreement also contains a prohibition against
competing with Talisman for a period of one year after the termination of the
agreement.
On January 7, 1999, Christian H. Bunger entered into an employment
agreement with Talisman. Mr. Bunger has been retained as Vice President,
Sales--U.S. of Talisman. The term of the employment agreement commenced on
January 25, 1999. Pursuant to the employment agreement, Mr. Bunger will receive
an annual salary of $75,000, which shall be reviewed annually, and Mr. Bunger
shall be entitled to receive a bonus up to a maximum of 35% of his annual base
salary at the end of each calendar year. The bonus award will be based on the
attainment of profitability targets and other objectives approved by the board
of directors. The employment agreement also provides for additional compensation
and/or benefits to be paid or provided to Mr. Bunger as follows:
- Mr. Bunger shall be granted options to purchase shares of Talisman's
common stock equal to 1.5% of Talisman's total outstanding shares as of
January 21, 1999 (on a fully diluted basis), which options shall be
exercisable at a price equal to Cdn.$1.25 (which price is equal to 25% of
the average of the high bid and low asked prices per share on the Canadian
Dealing Network on January 21, 1999). The exercisability and vesting of
such options are subject to certain conditions, including, but not limited
to (i) Mr. Bunger's continued employment by Talisman, (ii) the achievement
of specified levels of annual performance to be established by the board
of directors, and (iii) the achievement of specified levels of investor
returns. The employment agreement also provides that in the event that Mr.
<PAGE>
Bunger exercises any of the options while he is employed by Talisman,
Talisman shall loan him the amount of the exercise price for the options
at an interest rate equal to the applicable federal rate, such loan to be
repaid within six months of the exercise of the options. The note shall be
forgiven in the event that Mr. Bunger remains in the employment of
Talisman for a period of at least six months following the exercise of the
options or his employment is terminated as a result of death, disability
or other termination entitling Mr. Bunger to severance under the terms of
the employment agreement.
- Mr. Bunger is entitled to receive a car allowance of $600 payable on the
first day of each month.
The employment agreement may be terminated (i) by Talisman for cause;
(ii) at any time by Talisman, without cause, by paying to the employee a maximum
of six months severance pay; or (iii) at any time by the employee upon written
notice. The employment agreement also contains a prohibition against competing
with Talisman for a period of six months after the termination of the agreement.
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 1, 2000, certain
information concerning beneficial ownership of shares of Common Stock with
respect to (i) each person known to the Company to own 5% or more of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii) the
executive officers of the Company, and (iv) all directors and officers of the
Company as a group:
<TABLE>
<CAPTION>
Name and Percentage of
Address of Common
Beneficial Owner Amount Owned* Stock**
---------------- ------------- -------------
<S> <C> <C> <C>
Kevin Kimberlin 896,416 (1) 26%
New York, New York
Norman R. Proulx 74,272 (2) 2.4%
New York, New York
James A. Ogle 5,993 (3) **
Burlington, Ontario
Garry J. Syme 43,121(4) 1.4%
Mississauga, Ontario
James C. McGavin 28,046 (5) **
Burlington, Ontario
Donald L. Matheson 4,046 (6) **
Toronto, Ontario
Thomas A. Fenton 4,092 (7) **
Mississauga, Ontario
John E. Aderhold 400,000 (8) 12.2%
Atlanta, Georgia
Directors and Officers as a 165,841(9) 5.4%
Group (9 persons)
- ------------------
</TABLE>
* Percentages are based upon the assumption that the named shareholder has
exercised all of the currently exercisable options he or she owns which are
currently exercisable or exercisable within 60 days and that no other
shareholder has exercised any options he or she owns. The information with
respect to shares owned beneficially by those named above not being within the
knowledge of Talisman, has been furnished by each shareholder respectively.
Unless otherwise provided herein, Talisman believes that all persons named in
the table have sole voting and investment power with respect to all shares of
common stock beneficially owned by them.
* * Less than One Percent.
<PAGE>
(1) Includes (i) 362,332 shares owned by Kimberlin Family Partners LP and
50,876 shares owned by Spencer Trask Securities, Inc., (ii) 362,332 shares and
50,876 shares which may be issued pursuant to options owned by Kimberlin Family
Partners LP and Spencer Trask Securities, Inc., respectively, which options are
currently exercisable, and (iii) 70,000 shares of common stock which was issued
upon conversion of a $350,000 promissory note concurrently with Talisman's
Public offering.
(2) Includes 35,613 shares which may be issued pursuant to options owned by Mr.
Proulx, which options are currently exercisable.
(3) Includes 5,993 shares which may be issued pursuant to options issued to Mr.
Ogle under the 1999 Senior Executive Stock Option Plan, which options are
currently exercisable. Does not include an additional 76,961 shares which may be
issued pursuant to options issued to Mr. Ogle under the 1999 Senior Executive
Stock Option Plan, which options are not currently exercisable.
(4) Includes (i) 3,902 shares which may be issued pursuant to options issued to
Mr. Syme under the 1997 Stock Option Plan, and (ii) 3,220 shares which may be
issued pursuant to options issued to Mr. Syme under the 1999 Senior Executive
Stock Option Plan, all of which options are currently exercisable. Does not
include an additional 38,257 shares which may be issued pursuant to options
issued to Mr. Syme under the 1999 Senior Executive Stock Option Plan, which
options are not currently exercisable.
(5) Includes 20,000 shares which may be issued pursuant to options owned by Mr.
McGavin, which options are currently exercisable.
(6) Includes 1,000 shares which may be issued pursuant to options owned by Mr.
Matheson, which options are currently exercisable.
(7) Includes (i) 3,046 shares of common stock own by Aird & Berlis, Barristers &
Solicitors, in which Mr. Fenton is a member, and (ii) 1,000 shares which may be
issued pursuant to options owned by Mr. Fenton, which options are currently
exercisable.
(8) Includes 200,000 shares to be issued upon the exercise of outstanding class
A common stock purchase warrants held by Mr. Aderhold.
(9) Includes 35,613 shares which may be issued pursuant to options beneficially
owned by Norman R. Proulx, which options are currently exercisable, (ii) 3,902
shares which may be issued pursuant to options owned by Garry Syme, which
options are currently exercisable, (iii) 20,000 shares which may be issued
pursuant to options owned by James C. McGavin, which options are currently
exercisable, (iv) 1,000 shares which may be issued pursuant to options owned by
Donald L. Matheson, which options are currently exercisable, (v) 1,000 shares
which may be issued pursuant to options owned by Thomas A. Fenton, (vi) 470
shares owned by Duncan C. MacFadyen and 4,000 shares which may be issued
pursuant to options owned by Duncan C. MacFadyen, (vii) 5,991 shares which may
be issued pursuant to options owned by James A. Ogle, which options are
currently exercisable, and (viii) 3,226 shares which may be issued pursuant to
options owned by Garry J. Syme, which options are currently exercisable and (ix)
1,797 shares which may be issued pursuant to options owned by Christian H.
Bunger, which options are currently exercisable. Does not include (i) an
additional 76,964 shares which may be issued pursuant to options issued to Mr.
Ogle, which options are not currently exercisable,(ii) an additional 38,251
shares which may be issued pursuant to options issued to Mr. Syme, which options
are not currently exercisable, (iii) an additional 23,089 shares which may be
issued pursuant to options issued to Mr. Bunger, which options are not currently
exercisable.
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Thomas A. Fenton, LL.B., a director of Talisman, is a partner of the
Toronto based law firm Aird & Berlis, Barristers and Solicitors, which is
Canadian legal counsel to Talisman. During the fiscal period ended December 31,
1998, Talisman paid to Aird & Berlis Cdn.$66,425 in consideration of legal
services performed, and during fiscal period ended December 31, 1999, Talisman
paid to Aird & Berlis Cdn.$118,590 in consideration of legal services performed.
James C. McGavin, a director of Talisman, is a director, officer and
shareholder of Burlington Stamping Inc., a key supplier to Talisman. During
fiscal period ended December 31, 1998, Talisman paid to Burlington Stamping an
aggregate of approximately $34,246 in consideration of battery cans manufactured
and sold by Burlington Stamping to Talisman, and during fiscal period ended
December 31, 1999, Talisman paid to Burlington Stamping an aggregate of
approximately $129,333 for battery cans. Talisman further paid to James C.
McGavin during the fiscal year ended December 31, 1998, Cdn.$6,480 in
consideration of a car allowance. During fiscal year ended December 31, 1999,
Talisman paid to James C. McGavin Cdn.$6,510.46 consisting of (1) Cdn.$6,480 car
allowance; and (2) Cdn.$30.46 in Director's fees.
On January and March 1998, Garry J. Syme exercised warrants to acquire
16,098 common shares, in aggregate, for gross cash consideration of Cdn.$104,098
and Cdn.$160,500 in property and equipment.
On August 5, 1998, Talisman raised Cdn.$1,495,000 in connection with a
private offering of 263,504 shares of Talisman's common stock and warrants to
purchase an additional 263,504 shares of common stock at an exercise price of
Cdn.$7.50 per share, with Talisman Partners. Prior to the private offering with
Talisman Partners, there was no affiliation between Talisman and Talisman
Partners. Talisman Partners is a private investment partnership located in New
York, New York. Effective with the completion of the private offering, Norman R.
Proulx, the appointed nominee of Talisman Partners, became a director of
Talisman. Effective December 4, 1998, Mr. Proulx was appointed Talisman's
interim President and Chief Executive Officer. Mr. Proulx was a partner with a
minority interest in Talisman Partners and an employee of Spencer Trask
Securities Inc., a securities dealer based in New York, New York. Talisman
Partners was majority owned by the Kevin Kimberlin Partnership, L.P., a New York
limited partnership, which was controlled by Kevin Kimberlin, Chairman of
Spencer Trask, and minority owned by certain other Spencer Trask employees.
On October 19, 1998, Talisman raised a further Cdn.$900,000 in
connection with a private offering of 240,000 shares of Talisman's Common stock
and warrants to purchase an additional 240,000 shares of Common stock at an
exercise price of Cdn.$5.00 per share, with Talisman Partners.
From December 1998 to March 1999, Talisman sold an aggregate of
$700,000 of 8% convertible promissory notes to nineteen persons. The principal
amount of the notes were converted into securities of Talisman in connection
with the completion of the first closing of Talisman's private placement
offering with Spencer Trask in March 1999. The holders of the notes, which have
now been converted into equity as a result of our January 2000 public offering,
also received warrants to acquire an aggregate of 72,465 shares of common stock
of Talisman exercisable at $7.50 per share.
During 1998, shareholders transferred 45,000 common shares to
individuals in exchange for machinery and professional services, the value of
which $309,233 was contributed to capital. This was adjusted to 40,000 common
shares with a value of $284,233 in 1999 in connection with the settlement of a
dispute.
On January 4, 1999, Talisman entered into an employment agreement with
James A. Ogle, a senior officer of Talisman. For a complete description of the
terms and conditions of the employment agreement between Talisman and Mr. Ogle,
see "Management--Employment Contracts."
<PAGE>
On January 6, 1999, Talisman entered into an employment agreement with
Garry J. Syme, a senior officer of Talisman. For a complete description of the
terms and conditions of the employment agreement between Talisman and Mr. Syme,
see "Management--Employment Contracts."
On January 7, 1999, Talisman entered into an employment agreement with
Christian H. Bunger, an officer of Talisman. For a complete description of the
terms and conditions of the employment agreement between Talisman and Mr.
Bunger, see "Management--Employment Contracts."
In March, April and June 1999, Talisman completed three closings of a
private placement offering, with Spencer Trask Securities, Inc., as placement
agent, in which it sold an aggregate of 50.72985 units solely to U.S. investors.
The units consisted of an aggregate of (1) $5,073,135 principal amount of 8%
convertible promissory notes, and (2) 1,014,627 warrants to purchase shares of
common stock, which warrants are exercisable at $7.50 per share. In connection
with such closings, Spencer Trask received a placement fee equal to 10% of the
aggregate purchase price of the securities sold by it, plus a non-accountable
expense allowance equal to three percent of the aggregate purchase price of the
securities sold and a warrant, granted by Talisman for $1.00 consideration, to
purchase an amount of common stock equal to 20% of the common stock sold in the
offering at an exercise price equal to 120% of the price of the common stock
sold. Additionally, upon the first closing of the offering, Talisman entered
into (1) an agreement whereby Spencer Trask has the right of first refusal to
act as underwriter or agent for any proposed private or public offering of
Talisman's securities by Talisman or by any of its principal stockholders, and
(2) a non-exclusive finder's agreement pursuant to which Spencer Trask is
entitled to receive a fee based upon a percentage of the value of any business
combination or financing arrangement, including but not limited to a merger or
purchase of assets, which is introduced to Talisman by Spencer Trask. In
accordance with the non-exclusive finder's agreement, a fee in the amount of
$200,000 was paid to Spencer Trask Securities, Inc.
In November 1999, Talisman borrowed $350,000 from Kevin Kimberlin
pursuant to a promissory note in the principal amount of $350,000, bearing
interest at an annual rate of 10% and due on February 17, 2000. Such loan was
converted into 70,000 shares of common stock at $5.00 per share simultaneously
with Talisman's January 2000 public offering.
None of the transactions with officers or shareholders of Talisman and
their affiliates were made on terms less favorable to Talisman than those
available from unaffiliated parties. In future transactions of this nature,
Talisman will ensure that more favorable terms are not available to it from
unaffiliated third parties before engaging officers or shareholders of Talisman
or their affiliates. Talisman presently has four independent directors and
Talisman will continue to maintain at least two independent directors on its
board of directors. Transactions Talisman entered into with its officers and
directors and their affiliates were unanimously approved by Talisman's board of
directors, which included at least two independent directors who were
uninterested with respect to each respective transaction. Such independent
directors had access to Talisman's counsel at Talisman's expense. All future
material affiliated transactions and loans will be made or entered into on terms
that are no less favorable to Talisman than those that can be obtained from
unaffiliated third parties. All future material affiliated transactions and
loans, and any forgiveness of loans, will be approved by a majority of
Talisman's independent directors who do not have an interest in the transactions
and who had access, at Talisman's expense, to Talisman's counsel or independent
legal counsel.
<PAGE>
Item 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
(a) Exhibits are listed on the Index to Exhibits on page 31 of this
report. The Exhibits required by Item 601 of Regulation S-B are listed on such
Index in response to this Item and are incorporated herein by reference.
Financial Statements required by Regulation S-X are listed in response to
this Item and are set forth at the end of this report and are incorporated
herein by reference.
(b) Reports on Form 8-K:
None.
<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.
TALISMAN ENTERPRISES INC.
By: /s/ JAMES A. OGLE
---------------------
James A. Ogle,
President & Chief Executive Officer
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 dates indicated.
<TABLE>
<CAPTION>
<S> <C>
Date: March 30, 2000 /s/ JAMES A. OGLE
-----------------
James A. Ogle, President & Chief Executive Officer
Date: March 30, 2000 /s/ NORMAN R. PROULX
--------------------
Norman Proulx, Chairman of the Board
Date: March 30, 2000 /s/ THOMAS O'DOWD
-----------------
Thomas O'Dowd, Vice President & Chief Financial Officer
Date: March 30, 2000 /s/ JAMES MCGAVIN
-----------------
James McGavin, Director
Date: March 30, 2000 /s/ DONALD L. MATHESON
----------------------
Donald L. Matheson, Director
Date: March 30, 2000 /s/ THOMAS A. FENTON
--------------------
Thomas A. Fenton, Director
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
3.1 Articles of Incorporation, as amended*
3.2 By-Laws*
4.1 Form of Underwriter's Warrants**
4.2 Form of Common Stock Certificate*
10.1 Registrant's 1997 Stock Option Plan *
10.2 1999 Senior Executive Stock Option Plan**
10.3 1999 Directors Company Stock Plan**
10.4 Employment Agreement with Gary J. Syme*
10.5 Employment Agreement with James A. Ogle*
10.6 Employment Agreement with Christian H. Bunger**
21.1 List of Subsidiaries of the Registrant**
23.1 Consent of Sichenzia, Ross & Friedman LLP **
23.2 Consent of Ernst & Young LLP**
23.3 Consent of Sichenzia, Ross & Friedman LLP**
23.4 Consent of Aird & Berlis**
27.1 Financial Data Index - Year Ended December 31, 1999
</TABLE>
* Incorporated by reference to the Form 20-F filed by the registrant with
the Commission on January 19, 1999 under SEC File No. 0-29972.
** Incorporated by reference to the Registration Statement on Form SB-2
filed by the registrant on January 13, 2000 under SEC file No. 333-83123.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
TALISMAN ENTERPRISES INC.
December 31, 1999 and 1998
With Report of Independent Auditors
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Talisman Enterprises Inc.
We have audited the accompanying consolidated balance sheets of Talisman
Enterprises Inc. as at December 31, 1999 and 1998 and the related consolidated
statements of loss and deficit, shareholders' equity (deficiency) and cash flows
for the years then ended. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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 consolidated financial position of Talisman
Enterprises Inc. as at December 31, 1999 and 1998 and the consolidated results
of its operations and cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the company has suffered recurring losses
from operations and has an accumulated deficit. These conditions raise
substantial doubt about the company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Hamilton, Canada, /s/ ERNEST & YOUNG LLP
March 9, 2000. Chartered Accountants
<PAGE>
Talisman Enterprises Inc.
Incorporated under the laws of Ontario
CONSOLIDATED BALANCE SHEETS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
As at December 31
<TABLE>
<CAPTION>
1999 1998
$ $
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Current
<S> <C> <C>
Cash 16,557 16,701
Accounts receivable 400,672 361,826
Inventories [note 2] 1,035,006 409,180
Prepaid expenses and other assets [note 14] 511,193 51,952
Deferred financing costs 366,505 --
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 2,329,933 839,659
- ---------------------------------------------------------------------------------------------------------------------------
Capital assets [note 3] 3,430,218 2,752,663
- ---------------------------------------------------------------------------------------------------------------------------
5,760,151 3,592,322
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current
Bank indebtedness [note 5] 539,872 423,656
Accounts payable and accrued liabilities 1,622,594 905,169
Note payable [note 4] 358,003 --
Current portion of long-term debt [notes 5 and 14] 5,203,503 574,221
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,723,972 1,903,046
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt [note 5] 314,640 --
Future tax liabilities 491,111 546,815
Shareholders' equity (deficiency) [statement]
Share capital [note 6] 4,277,540 4,277,370
Warrants 101,463 --
Contributed surplus 284,233 309,233
Deficit (7,279,842) (3,238,982)
Accumulated other comprehensive loss (152,966) (205,160)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficiency) (2,769,572) 1,142,461
- ---------------------------------------------------------------------------------------------------------------------------
5,760,151 3,592,322
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commitments and contingencies [notes 1 and 10]
See accompanying notes
On behalf of the Board:
Director Director
<PAGE>
Talisman Enterprises Inc.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
Years ended December 31
<TABLE>
<CAPTION>
1999 1998
$ $
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues 925,987 748,254
Operating expenses [exclusive of
amortization shown separately below] 2,106,909 1,487,052
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit (1,180,922) (738,798)
- ---------------------------------------------------------------------------------------------------------------------------
Expenses
Selling, general and administrative 1,675,282 1,136,516
Amortization 951,739 304,182
Interest and other financing charges [note 5] 319,120 99,292
- ---------------------------------------------------------------------------------------------------------------------------
2,946,141 1,539,990
- ---------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (4,127,063) (2,278,788)
Income taxes (86,203) (4,586)
- ---------------------------------------------------------------------------------------------------------------------------
Loss for the year (4,040,860) (2,274,202)
Deficit, beginning of year (3,238,982) (964,780)
- ---------------------------------------------------------------------------------------------------------------------------
Deficit, end of year (7,279,842) (3,238,982)
- ---------------------------------------------------------------------------------------------------------------------------
Loss per share (3.87) (3.69)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
<PAGE>
Talisman Enterprises Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
Years ended December 31
<TABLE>
<CAPTION>
1999 1998
$ $
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Loss for the year (4,040,860) (2,274,202)
Charges to income not affecting cash
Amortization 951,739 304,182
Future tax liabilities (86,203) (4,586)
Change in non-cash working capital items (424,686) 114,490
- ---------------------------------------------------------------------------------------------------------------------------
Cash used in operating activities (3,600,010) (1,860,116)
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITY
Purchase of capital assets (861,274) (286,862)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issue of convertible promissory note and warrants 5,074,598 --
Deferred financing costs (943,111) --
Issuance of other long-term debt 432,279 609,430
Repayment of other long-term debt (488,472) (325,894)
Increase (decrease) in note payable 347,763 (77,233)
Issue of common shares 170 1,493,441
Bank indebtedness 88,028 437,196
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 4,511,255 2,136,940
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (50,115) --
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in cash during the year (144) (10,038)
Cash, beginning of year 16,701 26,739
- ---------------------------------------------------------------------------------------------------------------------------
Cash, end of year 16,557 16,701
- ---------------------------------------------------------------------------------------------------------------------------
Non-cash investing activity
Contribution by shareholders of capital assets -- 68,000
- ---------------------------------------------------------------------------------------------------------------------------
Non-cash financing activity
Contribution by shareholders of professional services (25,000) 241,233
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION
Cash interest paid 78,969 26,431
Cash income taxes paid -- --
</TABLE>
See accompanying notes
<PAGE>
Talisman Enterprises Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
<TABLE>
<CAPTION>
Accumulated
Number of Class "A" Number of Contributed
Number of Common Class "A" special warrants Warrants surplus
common shares special shares # $ $
shares $ shares $
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 .................... 515,956 1,338,147 3,300 1,687,083 -- -- --
Issued for exercise of warrants .............. 10,893 119,391 -- -- -- -- --
Issued for cash [net of expenses],
services and capital assets [note 6] 503,481 1,132,749 -- -- -- -- 309,233
Cumulative translation
adjustment ................................ -- -- -- -- -- -- --
Net loss ..................................... -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 .................... 1,030,330 2,590,287 3,300 1,687,083 -- -- 309,233
- ------------------------------------------------------------------------------------------------------------------------------------
Share adjustment [note 6] .................... -- -- -- -- -- -- (25,000)
Shares issued pursuant to
1999 Directors company
stock plan ................................ 15,230 103 -- -- -- -- --
Shares issued for professional
services .................................. 10,000 67 -- -- -- -- --
Warrants ..................................... -- -- -- -- 1,014,627 101,463 --
Cumulative transaction
adjustment ................................ -- -- -- -- -- -- --
Net loss ..................................... -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 .................... 1,055,560 2,590,457 3,300 1,687,083 1,014,627 101,463 284,233
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes
<PAGE>
Talisman Enterprises Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
(CONTINUED)
Other
comprehensive
Deficit loss Total
$ $ $
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1997 ............. (964,780) (99,082) 1,961,368
Issued for exercise of warrants ....... -- -- 119,391
Issued for cash [net of expenses],
services and capital assets [note 6] -- -- 1,441,982
Cumulative translation
adjustment ......................... -- (106,078) (106,078)
Net loss .............................. (2,274,202) -- (2,274,202)
----------
Balance December 31, 1998 ............. (3,238,982) (205,160) 1,142,461
----------
Share adjustment [note 6] ............. -- -- (25,000)
Shares issued pursuant to
1999 Directors company
stock plan ......................... -- -- 103
Shares issued for professional
services ........................... -- -- 67
Warrants .............................. -- -- 101,463
Cumulative transaction
adjustment ......................... -- 52,194 52,194
Net loss .............................. (4,040,860) -- (4,040,860)
----------
Balance December 31, 1999 ............. (7,279,842) (152,966) (2,769,572)
----------
See accompanying notes
</TABLE>
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
December 31, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Talisman Enterprises Inc. is a company incorporated to primarily produce premium
private label alkaline batteries. The consolidated financial statements have
been prepared by management in accordance with accounting principles generally
accepted in the United States on a going concern basis, which contemplates the
realization of assets and the discharge of liabilities in the normal course of
business for the foreseeable future. The company has incurred significant losses
and negative cash flow from operations in each of the last two years and has an
accumulated deficit of $7,279,842 at December 31, 1999 [1998 - $3,238,982]. The
company's ability to continue as a going concern is in substantial doubt and is
dependent upon achieving a profitable level of operations and, if necessary,
obtaining additional financing. Management of the company has undertaken steps
as part of a plan to improve operations with the goal of sustaining company
operations for the next 12 months and beyond. These steps include (i) focusing
sales and marketing on specific markets and customers and (ii) controlling
overhead and expenses. There can be no assurance the company can attain
profitable operations in the future. These consolidated financial statements do
not give effect to any adjustments which would be necessary should the company
be unable to continue as a going concern and therefore, be required to realize
its assets and discharge its liabilities in other than the normal course of
business and at amounts different from those reflected in the accompanying
consolidated financial statements.
Basis of presentation
The consolidated financial statements have been prepared in U.S. dollars and in
accordance with accounting principles generally accepted in the United States
and include certain estimates based on management's judgements. These estimates
affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amount of revenues and
expenses during the year. Actual results may differ from those estimates.
For purposes of these consolidated financial statements, the company has adopted
the U.S. dollar as the reporting currency. This improves investors' ability to
compare the company's results with those of most other publicly traded
businesses in the industry. These consolidated financial statements have been
translated from Canadian dollars to U.S. dollars by translating assets and
liabilities at the rate in effect at the respective balance sheet date and
revenues and expenses at the average rate for the year. Any resulting foreign
exchange gains or losses are recorded in accumulated other comprehensive income
(loss).
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Principles of consolidation
The consolidated financial statements include the accounts of the company and
its wholly-owned subsidiary, Talisman International Inc.
Inventories
Inventories are valued at the lower of average cost and net realizable value.
Capital assets
Capital assets are stated at cost. Amortization is provided at rates designed to
write-off the assets over their estimated useful lives at the following rates:
<TABLE>
<CAPTION>
<S> <C>
Production and warehouse equipment 10 years straight-line basis
Dies and molds 5 years straight-line basis
Furniture and fixtures 5 years straight-line basis
Computer equipment 3 years straight-line basis
Leasehold improvements Straight-line basis over the term of the lease
</TABLE>
Revenue recognition
Revenue from the sales of products is recognized at the time title transfers,
which is generally when the goods are shipped.
Loss per share
The calculation of loss per common share is based on the reported net loss
divided by the weighted average number of shares outstanding during the year.
The weighted average number of common shares outstanding for the year ended
December 31, 1999 was 1,042,945 [December 31, 1998 - 615,581].
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Financial instruments
The carrying amount of cash, accounts receivable, bank operating line and
accounts payable and accrued liabilities are considered to be representative of
their respective fair values due to their short maturities.
The company has no derivative financial instruments or any financial instruments
that potentially subject the company to concentrations of credit risk. The
company is exposed to credit risk on the accounts receivable from its customers.
Management has adopted credit policies in an effort to minimize those risks. At
December 31, 1999, three customers accounted for 17%, 15% and 11% of the
accounts receivable balance.
Income taxes
The company follows the liability method of accounting for income taxes. Under
this method, future income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
2. INVENTORIES
<TABLE>
<CAPTION>
1999 1998
$ $
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and packaging 316,829 243,801
Finished goods 718,177 165,379
- ---------------------------------------------------------------------------------------------------------------------------
1,035,006 409,180
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
1999
Accumulated Net book
Cost amortization value
$ $ $
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Production equipment 3,352,298 629,574 2,722,724
Warehouse equipment 48,499 7,762 40,737
Computer equipment 37,891 13,353 24,538
Dies and molds 47,358 10,742 36,616
Furniture and fixtures 21,905 9,180 12,725
Leasehold improvements 123,675 44,092 79,583
Construction in progress 513,295 -- 513,295
- ---------------------------------------------------------------------------------------------------------------------------
4,144,921 714,703 3,430,218
- ---------------------------------------------------------------------------------------------------------------------------
1998
Accumulated Net book
Cost amortization value
$ $ $
- ---------------------------------------------------------------------------------------------------------------------------
Production equipment 2,741,827 292,910 2,448,917
Warehouse equipment 32,568 3,196 29,372
Computer equipment 11,763 4,028 7,735
Dies and molds 26,112 2,968 23,144
Furniture and fixtures 20,657 4,525 16,132
Leasehold improvements 59,718 12,355 47,363
Construction in progress 180,000 -- 180,000
- ---------------------------------------------------------------------------------------------------------------------------
3,072,645 319,982 2,752,663
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain of the above production equipment was acquired pursuant to a s.85
rollover under Canadian tax laws. Although the equipment was recorded in the
financial statements based on its fair value, it has no tax basis to the
company.
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
4. NOTE PAYABLE
The note payable is due to a shareholder, bears interest at 10% per annum with
interest and principal due on February 17, 2000.
5. LONG-TERM DEBT AND LINES OF CREDIT
<TABLE>
<CAPTION>
1999 1998
$ $
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Term loan, bearing interest at prime plus
1 1/4% with monthly principal repayments of $12,500 Cdn.,
maturing October 23, 2003, repaid in 1999 -- 474,221
Term loan, interest payable at index rate [established by the
Royal Bank of Canada discount rate for 30-day
Canadian bankers acceptances] plus 4% per annum
with monthly principal repayments of $15,680 Cdn.,
maturing July 31, 2002 445,008 --
Convertible U.S. dollar promissory notes bearing
interest at 8%, interest and principal on the note
shall be paid in cash one year from the date
of issuance of the note. No interest is payable if the
notes are converted into common shares of the company 5,073,135 100,000
- ---------------------------------------------------------------------------------------------------------------------------
5,518,143 574,221
Less current portion 5,203,503 574,221
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt 314,640 --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
5. LONG-TERM DEBT AND LINES OF CREDIT [continued]
The company has available revolving credit facility of $7,500,000 Cdn.
which bears interest at index rate [established by the Royal Bank of Canada
discount rate for 30-day Canadian bankers acceptances] plus 4%. The facility is
available up to 75% on eligible accounts receivable and the lesser of $3,000,000
Cdn. or 60% of eligible inventory. At December 31, 1999, the company had
utilized $779,197 Cdn. [$539,872 U.S.] of the line.
The company has pledged as security for its revolving credit facility and term
loan, a first priority on all of its existing real and tangible and intangible
assets of the company.
Pursuant to a confidential private placement memorandum prepared by the company
dated January 28, 1999, 50.72985 units were sold to accredited investors for
proceeds of approximately $5,174,000, before deducting agent fees and placement
allowance and expenses of the offering which are included in deferred financing
costs are being amortized over the life of the debt. Each unit consists of an 8%
convertible subordinated promissory note in the principal amount of $100,000 and
20,000 Class "A" common stock purchase warrants to purchase common shares of the
company until 2004. The notes are convertible into common shares at a conversion
rate of one common share for every $5 in principal amount of note, and the
warrants are exercisable at a price of $7.50 per share, subject to adjustments
in certain events. In addition, the notes shall be automatically converted into
common shares of the company upon the company's common shares becoming traded on
the OTC Bulletin Board in the United States or any other U.S. based securities
exchange.
Subsequent to the year-end, the notes were converted into common shares in
connection with the company's listing on NASDAQ [note 14].
The fair value of the long-term debt has been calculated on the contractual cash
flows of the financial instruments discounted using market rates currently
available to the company. At December 31, 1999, the fair value of the long-term
debt approximated the carrying value. During the year, interest on long-term
debt amounted to $40,222 [December 31, 1998 - $26,431].
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
5. LONG-TERM DEBT AND LINES OF CREDIT [continued]
Estimated repayments of long-term debt over the next 3 years are as follows:
<TABLE>
<CAPTION>
$
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
2000 5,203,503
2001 130,000
2002 184,640
- ---------------------------------------------------------------------------------------------------------------------------
5,518,143
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
6. SHARE CAPITAL
Authorized
Unlimited 6% non-cumulative, non-voting Class "A"
special shares, redeemable at the company's
option, with a redemption value of $1,000 each
Unlimited common shares without nominal par value
On January 27, 1999, the company implemented a consolidation of the outstanding
common shares on the basis of exchanging 1 new common share for each 25 common
shares previously held. All prior information has been adjusted to reflect this
consolidation.
During 1998, shareholders transferred 45,000 common shares to individuals in
exchange for machinery and professional services, the value of which [$309,233]
was contributed to capital. This was adjusted to 40,000 common shares with a
value of $284,233 in 1999.
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
6. SHARE CAPITAL - continued
The company has in place a sStock Option Plan [the "Stock Option Plan"] as an
incentive for directors, officers and key employees and other persons who
provide ongoing services to the company and its subsidiaries. Under the Stock
Option Plan, non-assignable options may be granted by the board of directors of
the company, to directors, officers, key employees and other persons who provide
ongoing services to the company to purchase common shares of the company for a
term not exceeding 5 years [subject to earlier termination of the optionee's
employment, upon the optionee ceasing to be a director, officer or other service
provider, as applicable, or upon the optionee retiring, becoming disabled or
dying] at an exercise price not less than the market price for common shares of
the company. The granting of options is subject to the further conditions under
the Stock Option Plan that: [i] not more than 10% of the number of shares issued
and outstanding from time to time [the "Outstanding Issue"] may be reserved for
the granting of options to insiders at any time or to insiders in any one-year
period; [ii] that no more than 5% of the outstanding issue may be issued to any
one insider of the company in a one-year period; and, [iii] the maximum number
of common shares issuable under the Stock Option Plan is 31,200 shares. The
options are non-transferable.
In addition, the company has an annual Senior Executive Stock Option Plan
["senior plan"] offered to selected senior executives and employees of the
company and any of its subsidiary companies. The maximum number of shares that
may be granted under the senior plan is, initially, not to exceed 225,000. Under
the terms of the senior plan, options are non-transferrable, except pursuant to
the laws of descent and distribution. Any options granted under the senior plan
is subject to certain vesting and other requirements contained in the senior
plan. Specifically, any options granted under the senior plan will vest: [i]
with respect to one-third of all options granted, in 60 equal monthly
installments, [ii] with respect to one-third of all options granted, upon
attainment of prescribed annual performance targets over a five-year period
[notwithstanding anything to the contrary herein, all such unexercisable options
become exercisable on the 7th anniversary of the employment date), [iii] with
respect to the remaining one-third of all options granted only in the event of
an "Investor Sale" as defined by the senior plan [notwithstanding anything to
the contrary herein, all such unexercisable options become exercisable on the
seventh anniversary of the employment date]. During the year, the company
granted 199,091 options under this senior plan. Such options vest incrementally
over a period of 5 years commencing on the date of the individuals employment
agreement.
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
6. SHARE CAPITAL - continued
Also, the company has in place an annual Directors Stock Compensation Plan
["directors plan"] whereby each non-employee director of Talisman who serves as
such on the day the directors plan is ratified by shareholders of the company,
will earn the right to receive, subject to certain conditions, 15,230 common
shares of the company for no consideration. For each director, 3,046 of such
shares will be received upon shareholder ratification of the directors plan
while additional installments of 3,046 shares will be granted to each
non-employee director upon the first, second, third and fourth anniversary dates
of the date of initial shareholder ratification. In order to earn the right to
receive subsequent installment grants on the aforesaid anniversary dates, each
direct recipient must have continuously served as a director for the year ending
on such anniversary. During the year, the company issued 15,230 common shares
under this directors plan.
The company options and warrants to acquire common shares at various exercise
prices are summarized below:
<TABLE>
<CAPTION>
Exercise Expiration
Number price date
$
- ---------------------------------------------------------------------------------------------------------------------------
[Canadian]
<S> <C> <C> <C>
Options 6,000 16.25 Nov. 13, 2001
760 31.25 Nov. 13, 2001
199,091 1.25 Jan. 31, 2009
Warrants 2,000 12.50 Apr. 15, 2000
2,000 20.00 Apr. 15, 2000
83,902 16.25 Aug. 15, 2000
12,000 12.50 June 7, 2001
263,504 7.50 July 31, 2001
240,000 5.00 Oct. 14, 2001
- ---------------------------------------------------------------------------------------------------------------------------
24,000 7.50 April 1, 2002
1,014,627 7.50 March 19, 2004
Total options and warrants 1,847,884
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
7. SHAREHOLDERS RIGHTS PLAN
On September 26, 1997, the shareholders approved a Shareholders Rights
Protection Plan [the "Plan"]. The Plan applies to all common shares and all
future issues of common shares. The term of the Plan is for 5 years, subject to
reconfirmation by the shareholders at the first annual meeting of shareholders
called after September 26, 2000. The Plan is intended to ensure that, in the
event of a bid which could affect control of the company, holders of common
shares will receive full and fair value for their shares and that there will be
sufficient time for the fairness of the bid to be properly assessed, to
negotiate with the bidder and to explore, develop and evaluate alternatives to
maximize shareholder value.
Under the terms of the Plan, one Right has been granted for each common share.
Each Right entitles the registered holder to purchase additional shares of
common stock for $1,500 Cdn. but is not exercisable until certain events occur.
If a person or group wishes to acquire 20% or more of the company's common
shares [an "acquiring person"], the Plan effectively requires the acquiring
person to [i] negotiate terms which the Directors approve as being fair to the
shareholders or, alternatively, [ii] without Board approval, make a "permitted
bid" which must contain certain provisions and which must be accepted by more
than 50% of the common shares not held by the acquiring person.
In the event that an acquiring person acquires 20% or more of the company's
voting shares other than as described in [i] and [ii] above, then the Rights
become exercisable and will automatically change to allow all holders except the
acquiring person to purchase, upon payment of the exercise price, shares of
common stock with a total market value of two times the exercise price [ie. at a
50% discount from the then current market price of the common stock].
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
8. STOCK BASED COMPENSATION
The company applies APB Opinion 25 in accounting for its employee stock options
and warrants.
During the year, the company recorded compensation expense of $23,163 with
respect to options which had an exercise price less than market price at the
time of granting.
For purposes of meeting requirements of FASB Statement No. 123, the fair value
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1999 and 1998, respectively;
risk-free interest rates of 6%, 6%, dividend yields of 0%, 0%, volatility
factors of the expected market price of the company's common stock of 30%, 30%,
and weighted average expected life per option and warrant of 4 years.
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the company's employee stock options and warrants have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's options, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and warrants.
For purposes of the pro-forma disclosures, the estimated fair value of the
options and warrants is amortized to expense over their vesting period. The
company's pro-forma net loss would be [$4,076,134] for the year ended December
31, 1999. The company's pro-forma loss per share would be [$3.91] for the year
ended December 31, 1999. There were no employee stock options and warrants
issued or which vested during 1998.
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
8. STOCK BASED COMPENSATION [continued]
A summary of the company's stock option and warrant activity and related
information is as follows:
<TABLE>
<CAPTION>
1999 1998
$ $
- ---------------------------------------------------------------------------------------------------------------------------
[Canadian] [Canadian]
Weighted Weighted
-average -average
exercise price exercise price
Employee options
<S> <C> <C> <C> <C>
Outstanding, beginning of year 10,760 17.25 10,760 17.25
Granted 199,091 1.25 -- --
Cancelled (4,000) (16.25) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding and exercisable, end of year 205,851 1.79 10,760 17.25
- ---------------------------------------------------------------------------------------------------------------------------
Employee warrants
Outstanding, beginning of year 33,902 16.25 44,798 16.25
Exercised -- -- (10,896) 16.25
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding and exercisable, end of year 33,902 16.25 33,902 16.25
- ---------------------------------------------------------------------------------------------------------------------------
Total employee options and
warrants outstanding and
exercisable, end of year 239,753 3.83 44,662 16.50
- ---------------------------------------------------------------------------------------------------------------------------
Other warrants
Outstanding, beginning of year 584,104 8.35 68,600 8.35
Granted 1,038,627 7.50 515,504 8.35
Cancelled (14,600) (30.82) -- --
- ---------------------------------------------------------------------------------------------------------------------------
1,608,131 7.60 584,104 8.35
- ---------------------------------------------------------------------------------------------------------------------------
Total options and warrants outstanding,
end of year 1,847,884 7.11 628,766 8.93
Total options and warrants outstanding
and exercisable, end of year 1,661,936 7.76 628,766 8.93
- ---------------------------------------------------------------------------------------------------------------------------
The weighted - average fair value of the 199,091 employee options granted during
the year is $2.51 Cdn.
</TABLE>
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
9. INCOME TAXES
The significant components of the company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
1999 1998
$ $
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax assets
<S> <C> <C>
Income tax losses available for carryforward 2,535,000 537,500
Share issue costs 57,581 191,441
- ---------------------------------------------------------------------------------------------------------------------------
2,592,581 728,941
- ---------------------------------------------------------------------------------------------------------------------------
Less valuation allowance 2,592,581 728,941
Net deferred tax assets -- --
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities
Temporary differences on capital assets 491,111 546,815
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 491,111 546,815
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The company has available non-capital loss carryovers of approximately
$7,025,000 [$10,139,000 Cdn.] available to offset future taxable income. These
non-capital loss carryovers expire as follows:
<TABLE>
<CAPTION>
$
- ---------------------------------------------------------------------------------------------------------------------------
[Canadian]
<S> <C>
2002 551,000
2003 1,763,000
2004 1,374,000
2005 1,137,000
2006 5,314,000
- ---------------------------------------------------------------------------------------------------------------------------
10,139,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
10. COMMITMENTS AND CONTINGENCIES
The minimum lease payments for building and equipment leases are as follows:
<TABLE>
<CAPTION>
$
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
2000 240,500
2001 102,500
2002 37,300
thereafter --
- ---------------------------------------------------------------------------------------------------------------------------
380,300
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
$ $
- ---------------------------------------------------------------------------------------------------------------------------
Rent expense 205,696 125,480
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the ordinary course of business activities, the company may be contingently
liable for litigation and claims with third parties. Management believes that
adequate provisions have been recorded in the accounts where required. Although
it is not possible to estimate the potential costs and losses, if any,
management believes that the ultimate resolution of such contingencies will not
have a material adverse effect on the financial position or results of
operations of the company.
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
11. SEGMENTED INFORMATION
The company is organized and managed as a single business segment being the
production of batteries and the company is viewed as a single operating segment
by the chief operating decision maker for the purposes of resource allocations
and assessing performance.
The geographic sources of the company's revenues based on location of customers
is as follows:
<TABLE>
<CAPTION>
1999 1998
$ $
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Canada 87,969 172,098
United States 838,018 576,156
- ---------------------------------------------------------------------------------------------------------------------------
925,987 748,254
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition, sales to the company's four largest customers accounted for 30%,
16%, 15% and 11% of revenues for the year ended December 31, 1999. In 1998, the
company's two largest customers accounted for 29% and 24% of revenues.
12. RELATED PARTY TRANSACTIONS
The company had the following transactions with a company that is a shareholder,
key supplier and whose president is also a director and officer of the company:
<TABLE>
<CAPTION>
1999 1998
$ $
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Acquisition of raw materials 129,333 34,246
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Talisman Enterprises Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the United States]
13. RECENT REPORTING DEVELOPMENTS
The Financial Accounting Standards Board has issued FAS133, Accounting for
Derivative Instruments and Hedging Activities which introduces revised standards
for the recognition and measurement of derivatives and hedging activities. The
company must adopt this standard in the first quarter of fiscal 2001.
Implementation of this standard is currently expected to have no impact on the
company's financial position or results of operation since the company has no
derivative financial instruments or hedging activities.
14. SUBSEQUENT EVENTS
Subsequent to year-end, the company was approved to begin trading on NASDAQ. As
a result of this listing, the convertible U.S. promissory notes in the amount of
$5,073,135 were converted into 1,014,627 common shares of the company.
In connection with the listing, the company issued 900,000 common shares for net
proceeds of approximately $3,600,000. Costs incurred to December 31, 1999
relating to the issuance of common shares, have been deferred and included in
prepaid expenses and other assets.
In addition, the note payable to a shareholder was settled in full through the
issuance of 70,000 common shares.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27 - Financial Statement Data
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> dec-31-1999
<PERIOD-END> dec-31-1999
<CASH> 16,557
<SECURITIES> 0
<RECEIVABLES> 400,672
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0
0
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</TABLE>
