<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended June 30, 2000
[_] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from to
---------------- --------------
Commission file number 000-30191
TSET, INC.
--------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Nevada 87-0440410
--------------------------------------------------------------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
333 South State Street, PMB. 111, Lake Oswego, Oregon 97034
--------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(503) - 293-1270
--------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock par value $ .001 per share
--------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer; (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, 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-K
or any amendment to this Form 10-K. [_]
State issuer's revenues for its most recent fiscal year: $306,071
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $42,152,909 as of August 30, 2000.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 30,656,661 shares of common
stock were outstanding as of August 30, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents incorporated by reference and the Part of the
Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated:
(1) any annual report to security holders; (2) any proxy or information
statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) under the
Securities Act of 1933.
-----------------------------------------------------------------------------
<PAGE>
TSET, INC.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information..................................................... 2
Part I
ITEM 1. Our Business..................................................... 2
ITEM 2. Description of Our Properties.................................... 15
ITEM 3. Legal Proceedings ............................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders ............. 16
Part II
ITEM 5. Market for Our Common Equity and Related Stockholder Matters..... 16
ITEM 6. Selected Financial Data.......................................... 18
ITEM 7A. Management's Discussion and Analysis of Financial Condition and
Plan of Operation................................................ 18
ITEM 7B. Quantitative and Qualitative Disclosures about Market Risk....... 18
ITEM 8. Financial Statements............................................. 18
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 18
Part III
ITEM 10. Our Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Act................ 19
ITEM 11. Executive Compensation .......................................... 21
ITEM 12. Security Ownership of Certain Beneficial Owners and Management... 21
ITEM 13. Certain Relationships and Related Transactions................... 21
ITEM 14. Exhibits and Reports on Form 8-K ................................ 21
(a) Financial Statements
(b) Information pertaining to any 8-K reports filed
during the last quarter.
(c) Exhibits
</TABLE>
1
<PAGE>
AVAILABLE INFORMATION
---------------------
We are subject to the reporting requirements of the Securities and Exchange
Commission (the "Commission"). We file periodic reports, proxy statements and
other information with the Commission under the Securities Exchange Act of 1934.
We will provide, without charge, to each person who receives a copy of this
filing, upon written or oral request, a copy of any information that is
incorporated by reference herein (not including exhibits to the information that
are incorporated by reference unless the exhibits are themselves specifically
incorporated by reference). Requests should be directed to: TSET, Inc., Attn:
Richard A. Papworth, Chief Financial Officer, 333 South State Street, PMB. 111,
Lake Oswego, Oregon 97034, voice: (503) 598-1900, fax: (503) 968-0867. Our
Internet address is www.tset-net.com. However, the information contained on our
web site is not part of this document.
For further information with respect to us, you may inspect without charge,
and copy our filings, at the public reference room maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of this material may
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Information
about the public reference room is available from the Commission by calling 1-
800-SEC-0330.
The Commission maintains a web site on the Internet that contains reports,
proxy statements and other information regarding issuers that file
electronically with the Commission. The Internet address of the site is
www.sec.gov. Visitors to the site may access such information by searching the
EDGAR archives on this web site.
Part I
ITEM 1. Our Business
Introduction; Overall Strategic Objectives
TSET, Inc., a Nevada corporation having its principal executive offices
located in Lake Oswego, Oregon (the "Company"), is in business to seek out
select business opportunities globally among a wide range of prospects that
either satisfy the Company's general acquisition and investment criteria
(collectively, the "Investment Criteria") or merit variation therefrom, enhance
the Company's asset base, and increase shareholder value.
The Company believes that the fundamental value to prospective investors of
an investment in the Company derives from two primary sources:
(1) A redirected, energetic, and aggressive business course charted
since April 1999 by new executive management, which turned the
Company in the direction of evaluating a broader, more
diversified range of investment and acquisition opportunities and
exploiting potentially large addressable markets, all as
evaluated through the application of the Investment Criteria
established by new management and management's flexibility of
discretion in the application or waiver thereof; and
(2) The significant accomplishments of new management during the
fiscal year ended June 30, 2000, despite limited resources, in
successfully negotiating and consummating a series of
investments, which are believed to have already
2
<PAGE>
created the potential for significant future economic value
to the Company and appreciation of shareholder value.
Simply stated, the Company's overall strategic objectives are to (a)
increase shareholder value through creation of a broad, diversified asset base,
(b) exploit potentially large addressable markets for the goods, services, and
technologies acquired by the Company, and (c) generate current income and
capital gains. To achieve these objectives, the Company plans to continue its
investment and acquisition activities for its own account, or facilitate
participation in such opportunities by other persons or entities with whom the
Company has, or wishes to establish, a business relationship. The Company does
not restrict its search for opportunities to any specific business, industry, or
geographical location, thus reserving maximum flexibility to participate in a
business venture of virtually any nature anywhere in the world.
Description of Business
Corporate History; Capitalization
TSET, Inc. (formerly, Technology Selection, Inc.), a Nevada corporation was
originally organized on September 17, 1980 as Penguin Petroleum, Inc. ("PPI")
under the laws of the State of Utah. Stockholders approved a name change of the
corporation on October 6, 1982 to Petroleum Corporation of America, Inc. On
December 29, 1996, stockholders approved a reorganization whereby they exchanged
their stock on a one-for-one basis with Technology Selection, Inc., a Nevada
corporation ("TSI"). TSI's shares began trading on the over-the-counter bulletin
board exchange on August 28, 1996 under the symbol "TSET." On November 19, 1998,
TSI changed its name to TSET. The Company has confined most of its activities to
classifying market and commercial targets, and investigating potential
investment and acquisition opportunities and has not, to date, generated
significant operating revenues. The Company has never been party to any
bankruptcy, receivership, or similar proceedings and, other than noted above,
has not been party to any material reclassification, merger, consolidation, or
purchase or sale of significant assets not in the ordinary course of its
business.
As of June 30, 2000, the authorized capital stock of the Company consisted
of 500,000,000 shares of common stock, par value $0.001 per share, of which
30,651,661 shares were issued and outstanding. No single stockholder owns 5% or
more of the Company's common stock. Although the Company's articles of
incorporation authorize a class of preferred stock, no shares of preferred stock
are outstanding as of June 30, 2000. The Company's transfer agent is Merit
Transfer Company in Salt Lake City, Utah.
More detailed information relating to the Company is set forth in the
Company's registration statement on Form 10-SB.
Corporate Business
Under previous management, the Company was focused on seeking diversified
import and export transactions involving select business opportunities,
technologies, and commodities in The Peoples' Republic of China, and to assist
and facilitate certain activities of a client company, Computerized Thermal
Imaging, Inc. ("CTI") (over-the-counter bulletin board symbol "COII"), in the
development of the Chinese market for CTI's thermal imaging medical diagnostic
systems (the "CTI Systems"). With the downturn experienced in most Asian
economies during the mid-to-late-1990s, the Company realized that a different
business approach was required for the Company to achieve positive operating
results. The Company's overall strategic objectives have evolved, since April
1999, under the direction of new executive management, to investigate and pursue
a broader range of investment and acquisition opportunities. While the
development of business opportunities in The Peoples' Republic of China remains
of interest to the Company, management realistically believes that the climate
for such opportunities will be more conducive when Chinese economic and
political conditions improve. If there is general and appreciable improvement in
the Asian economic climate, the Company believes these opportunities could
eventually form an important dimension of its business. Nevertheless, the
Company has expanded its strategic goals to seek out opportunistic scenarios,
which the Company believes may enable it to increase and compound its
3
<PAGE>
assets and stockholder value through investment, acquisition, merger, capital
gains, and current income.
The Company now seeks to participate in select transactions among a wide
range of prospects, both domestically and internationally, either for its own
account or as a principal in or facilitator of select transactions undertaken by
other persons with whom the Company has, or wishes to establish, a business or
contractual relationship. Taking an opportunistic approach, the Company will
also seek to match large addressable markets with products or services which the
Company believes will satisfy all or some element of such markets to create an
overall seamless business transaction, thus minimizing to the Company the risks
attendant in addressing such markets or inherent in the product or service in
question. The Company is in the early stages of implementing its expanded plan
of business and intends to focus its principal attention on the execution
thereof in the near term.
Occasionally the Company becomes aware of acquisition and investment
opportunities which, upon further review, do not satisfy the Investment Criteria
(and management does not elect, in its sole and absolute discretion, to waive
the Investment Criteria and proceed with the investment) or in which the Company
elects not to participate. In such circumstances, the Company may seek to obtain
a broker or agent relationship relating thereto, such that the Company can seek
the placement of such opportunities with qualified participants or otherwise
facilitate completion of the transaction by providing consulting, professional,
or financial resources.
In addition, the Company's chairman and chief executive officer, Jeffrey
D. Wilson, has had extensive experience in international business transactions,
foreign market entry, and government lobbying. The Company believes that Mr.
Wilson's experience may open new areas of opportunity in which the Company might
otherwise be unable to participate. In select cases, the Company may exploit
this capability by acting as a consultant or advisor in connection with such
transactions. Management believes that making these capabilities available may
enable the Company to participate in such transactions, or through such
relationships become aware of other business or investment opportunities which
the Company could pursue; however, the Company does not anticipate that these
activities will result in significant revenues in the near future, nor does it
intend to emphasize this line of activities at the expense of its investment and
acquisition objectives.
General Investment Policies and Criteria
In connection with its efforts to achieve its overall strategic goals, the
Company reviews numerous acquisition and investment opportunities introduced to
it by third parties, stockholders, and management. The Company has developed the
Investment Criteria to aid evaluation of such opportunities. Briefly summarized,
the Investment Criteria are as follows:
A. Established or mature goods, services, or technologies, or those
believed likely to be capable of commercialization in the near
future through further capital infusion and development.
B. Potentially large addressable markets.
C. Potential for current income (through sales, licensing, or other
activities) which can be distributed to the Company, or capital
gains.
D. Ability to acquire complete or controlling ownership.
E. Competent management in place, capable of continuing to handle
day-to-day operations and prudently manage financial resources
with minimal supervision or intervention by the Company.
F. Clear ownership of, or continuing lawful and contractual access
upon commercially reasonable terms to, intellectual property
rights upon which the enterprise relies, in whole or substantial
part, in the conduct of business; a coherent and achievable plan
of expanding intellectual property rights protections (through
patenting and other appropriate means); and effective security
and enforcement
4
<PAGE>
mechanisms and policies to protect against infringement.
The Investment Criteria are intended to be thematic in nature, providing
guidance in making investment decisions based upon the considerations addressed
thereby, but are not intended to be restrictive. Accordingly, in appropriate
cases and in order to give management greater flexibility to adapt to the
specific circumstances of the opportunity in question, the Company may change or
waive application of the Investment Criteria. Thus, the Investment Criteria
provide a useful tool for evaluation of opportunities, in a broad sense, but are
not always, of themselves, determinative of the Company's final investment
decision.
The Company utilizes the Investment Criteria initially in making a general
threshold determination whether an opportunity merits further, more detailed
evaluation. After making this initial determination, the Company applies the
Investment Criteria, as a form of template, to seek to further determine whether
and to what extent the opportunity conforms thereto. If the opportunity
satisfies some or all of the Investment Criteria, the Company may decide to
proceed further to negotiate investment or acquisition terms, enter into letters
of intent, perform due diligence investigations, and in due course negotiate and
conclude definitive legal documentation. In some cases, an opportunity may not
precisely satisfy all or any of the Investment Criteria, but the Company may
determine that such opportunity is unique and has significant potential value
such that the Company believes that waiver of all or certain of the Investment
Criteria is appropriate, and that the potential value to the Company of
participating in such opportunity may outweigh the risks inherent in such
participation.
Therefore, in certain cases where a particular opportunity is believed to
have significant potential value to the Company but does not precisely conform
to the Investment Criteria, the Company may nevertheless proceed with a
transaction even if the opportunity is still formative in nature (i.e., is an
entrepreneurial, start-up, or early development stage opportunity). For example,
the Company may determine that a waiver of the Investment Criteria is
particularly appropriate in cases where an opportunity complements or is
adjunctive to the technology or business of a Subsidiary or the Company's
strategic partners, or if the Company believes that capital infusions and
support from the Company's management, in conjunction with the opportunity's
existing management, may enhance the potential economic value of the
opportunity, or the technology or business of a Subsidiary or strategic partner.
To the maximum extent possible, the Company seeks to effect such
investments or acquisitions with shares of its common stock, thereby reserving
available cash resources for subsequent infusion to assist in the growth and
development of the underlying business.
Once the Company has made investments or acquisitions in what management
believes is a sufficient number of opportunities (taking into account the
Company's then-existing management and financial resources), the Company will
then concentrate its attention and efforts on the further growth, development,
and value enhancement of such opportunities. Because the Company tends to
emphasize investment or acquisition of opportunities having competent management
in place, the Company believes that the cross-benefits arising out of the
ability to then utilize the skills and experience of existing management (and
the potentially beneficial resulting continuity of management) will accelerate
the more rapid and efficient further growth, development, and enhancement of
such opportunities.
The Company has set no arbitrary substantive or geographical limits on the
type of business and investment opportunity it considers or has interest in, and
has during the past year reviewed opportunities in the healthcare, medical,
environmental, telecommunications, entertainment, and sports apparel areas. The
Company perceives that potentially valuable and viable opportunities exist in a
wide range of diversified industries and markets globally, and reviews each
opportunity on its own merits.
Investments and acquisitions will be made primarily for possible capital
gain as well as current income. The Company may also assist enterprises it
invests in or acquires in achieving access to public capital markets (either
through spin-offs into public vehicles or public financing) and, if successful,
intends to retain
5
<PAGE>
an appropriate ownership interest therein.
Meeting Capital Requirements
On May 5, 2000 the Company initiated a private placement to raise
$5,000,000 to $20,000,000. The proceeds of this Offering will be applied, among
other things, to (a) funding financial obligations to the Subsidiaries and
increasing shareholder value by seeking out and participating in additional
investment and acquisition opportunities which satisfy the Investment Criteria,
and (b) recruiting and hiring additional executive management, management and
employee compensation, administrative expenses, engagement of third party
professionals to assist in various aspects of the Company's financial and
financial reporting, legal, securities law compliance, and corporate activities
and investment and acquisition transactions, procurement of necessary policies
of insurance (including key person and director and officer liability coverage),
establishment and implementation of management and employee stock option,
incentive, and benefits plans, and satisfying applicable requirements for a
NASDAQ Large Capital National Market Listing.
Important Events
The Company has recently commenced implementation of its redirected plan of
business by making certain acquisitions and investments, and establishing
strategic relationships. Since April 1999, the Company has created several
relationships that are believed to be of potentially substantial value to the
Company, described below.
Strategic Relationship with Computerized Thermal Imaging, Inc. On November 19,
1998, the Company entered into a Marketing Agreement with Computerised Thermal
Imaging, Inc., a Nevada Corporation ("CTI), which was subsequently amended on
September 1, 1999 (collectively, the "Marketing Agreement"). The Marketing
Agreement provides that the Company will actively market the CTI Systems in
certain global markets. Under certain circumstances, the Company's marketing
rights can become exclusive and, if successful in placing CTI Systems within
these markets, the Company may earn commission revenues. The Marketing Agreement
was voluntarily terminated by the Company and CTI on August 29, 2000.
Acquisition of Kronos Air Technologies, Inc. On March 13, 2000, the Company
signed definitive agreements for the acquisition of Kronos Air Technologies,
Inc., a Nevada corporation ("KAT"), a research and development company having
headquarters in Redmond, Washington. KAT owns all of the intellectual property
rights, including certain patents pending, for a technology known as
"Kronos(TM)" (formerly named the "electron wind generator"). The Company
acquired all of the issued and outstanding shares of KAT in exchange for shares
of the Company's common stock (thus constituting KAT as a wholly-owned
subsidiary of the Company) and will be represented on KAT's board of directors.
KAT's executive management will remain in place and bear responsibility for
KAT's day-to-day operations.
KAT will engage in further development (including additional patent
applications), licensing, deployment, and exploitation of the Kronos(TM)
technology and devices incorporating the Kronos(TM) technology in a full range
of automotive,
6
<PAGE>
military, hospital/medical clinic, medical equipment, hotel, and home
applications (collectively, the "Core Applications"). Given the high degree of
versatility of the Kronos(TM) technology, KAT will focus initially on the
exploitation of the Kronos(TM) technology in the Core Applications; applications
beyond this initial focus will be evaluated subsequently. These activities will
be undertaken with a view to, among other things, direct the design,
prototyping, and commercialization of devices embodying the Kronos(TM)
technology in the Core Applications, examine manufacturing, production, and
marketing options, establish licensing relationships with strategic partners to
facilitate adaptation of the Kronos(TM) technology to the specific applications
desired by such partners, establish, perfect, and police U.S. and international
patent and intellectual property rights, and otherwise seek to maximize the
economic value of the Kronos(TM) technology. The Company believes that these
activities will enable exploitation of the potentially substantial economic
value of the Kronos(TM) technology and result in the generation of licensing and
product revenues, thus optimizing shareholder value from the Company's
acquisition of KAT. The Kronos(TM) technology is U.S. patent pending, and a
number of additional related patent filings for the U.S. and internationally are
planned for the coming year. New patents and other rights relating to the Core
Applications will be owned by KAT.
Kronos(TM) is a highly versatile and multiple use technology that enables the
movement of air and gases at potentially high velocities while, among other
things, removing odors, smoke, pollens, viruses, bacteria, and other pathogens
and particulates from the surrounding air supply; indeed, one of the most highly
beneficial characteristic of Kronos(TM) is its ability to kill (not simply
remove) pathogens. Kronos(TM) can be embodied in a silent, non-vibrating, non-
turbulence producing, energy-efficient, multi-functional device, which is easily
and wholly scalable and can be made into any shape and size; it is therefore
easily adaptable to existing infrastructure, hardware, and HVAC and other
ducting, and is capable of deployment in a wide range of applications. Because
it has no moving parts, a Kronos(TM) device is virtually maintenance free. A
Kronos(TM) device can be utilized wherever a clean, controlled, and uniform air
or other gas movement system is desirable; it combines the benefits of air
movement, air cleaning, odor removal, limited "oxygen plus" production, and
static control (as a Kronos(TM) device can produce either positive or negative
ions, as needed), all in one simple, universal, and efficient device. There are
a number of crucial advantages to the Kronos(TM) technology, which can
conceivably be used anywhere air movement is desired, from microelectronics to
large industrial blowers and fans. In summary, the primary distinctions of a
Kronos(TM) device are its ability to move air and gases at potentially high
velocities, its silence and energy efficiency, as well as the proprietary
concepts imbedded therein. The Company and KAT believe that there is very
limited, if any, competition for Kronos(TM) devices -- although there are
certain existing commercially available devices which purport to offer some of
the beneficial elements of Kronos(TM), the Company and KAT believe that none of
them combine and provide all of the unique combinations of technology and
performance characteristics and capabilities which are possible in devices
embodying the Kronos(TM) technology.
The Kronos(TM) technology has been developed to the point of simplicity and
elegance, but the underlying science is very sophisticated. Scientifically
speaking, Kronos(TM) employs ion generation in the field of corona discharge
with further acceleration of ions that in turn give a boost to air or other gas
molecules. When gas ions emit from the surface of so-called corona electrodes
and are accelerated by electric fields in a Kronos(TM) device, the ions entrain
the bulk gases, causing instantaneous air or gas movement at potentially high
velocities. Because the Kronos(TM) air movement system is a silent, non-
turbulent, and energy efficient air movement and cleaning system, it is ideal
for air circulation, cleaning and odor removal in all types of buildings as well
as compact, sealed environments such as airplanes and submarines. Additionally,
because it is inertialess (i.e., no moving parts or fans), a Kronos(TM) device
can instantly block or reverse the flow of air between adjacent areas for safety
in hazardous circumstances, such as the leakage of nuclear materials, and can
remove smoke, pollen, viruses, bacteria, and other pathogens and particulates
from the air supply. The Company and KAT believe that the benefits provided by
Kronos(TM) as described above cannot be matched by other known technologies. The
next generation Kronos(TM) device already designed and prototyped by KAT will
produce air movement exceeding the current velocity at 1,600 feet per minute.
Components for the manufacture of Kronos(TM) devices in virtually any
7
<PAGE>
application are readily available and inexpensive, thus enhancing its cost
competitiveness in the markets KAT will seek to address.
The general president of Sheetmetal Workers International Association (the
"SWIA") has endorsed the Kronos(TM) technology. The SWIA was among the first to
become aware of and appreciate the potential extensive applications of the
Kronos(TM) technology in the HVAC market. Early on, the SWIA organized meetings
with Deputy Secretary of Energy Gerald Boyd and an executive of Battelle Labs
(U.S. Department of Energy-funded labs, which includes the Pacific Northwest
National Laboratory (the "PNNL") in Richland, Washington), Billy Shipp. At this
meeting, Mr. Boyd indicated to Mr. Shipp and the SWIA that he wanted the
technology commercialized for several Department of Energy uses and requested
their cooperation to accomplish this goal. As a result, two years of Lab-
Directed Research and Development ("LDRD") funding at Battelle PNNL was provided
for further advancement of the technology. Such funding took the form of several
LDRD grants and Technical Assistance Program ("TAP") grants (administered by
Battelle PNNL and funded by the Department of Energy), and included the work of
as many as six scientists who were experts in the field of corona technologies
and air movement science. Additionally, an entire section in the new corona
laboratory at Battelle PNNL was constructed and equipped specifically for
testing devices embodying the Kronos(TM) technology. Under the TAP funding,
tests were done at the Battelle PNNL wind tunnel under the direction of Battelle
PNNL experts.
The tests performed demonstrated that the ozone (or "oxygen plus") levels
produced by the Kronos(TM) device tested were within NIOSH (a U.S. government
regulatory agency) standards even directly at the outlet. Further, contrary to
popular wisdom, these tests demonstrated that the tested device produced from
two to ten times as much cubic feet per minute ("cfm") per watt of electricity
the most efficient conventional fans available for comparison. Wind tunnels
tests showed the Kronos(TM) device to be very effective at removing particulate
materials, including dust and pathogens, from the air stream. Significantly,
when tested on a particularly difficult bacterial agent, the Bg bacteria which
the U.S. military uses as a simulant for anthrax, a 95% of such agent was killed
or removed on the first pass of the air stream through the Kronos(TM) device.
The affiliation with Battelle PNNL resulted in an introduction to the U.S.
government's National Security Division (the "NSD"), affiliated with Battelle
PNNL; the NSD is charged with the responsibility of bringing technologies
projects to the U.S. military from all national labs, and eventually to General
Dynamics Corporation ("General Dynamics"). KAT currently has in place a
development contract with Bath Iron Works, a General Dynamics company. The first
installation of a Kronos(TM) device under this contract will be on a U.S. naval
vessel, the battleship USS Winston Churchill which is scheduled for completion
in October 2000. General Dynamics has expressed an interest in licensing the
Kronos(TM) technology for military uses and negotiations are currently in
process. Another General Dynamics company, Advanced Technology Systems, has
joined with KAT and Bath Iron Works to write a joint proposal for funding from
the Office of Naval Research. Response to that proposal has thus far been
encouraging. In addition, KAT and Bath Iron Works have proposed directly to the
U.S. Navy a contract to evaluate the effectiveness of the Kronos(TM) device for
broader deployment on living spaces in destroyers in the DDG51 series.
A grant was also awarded by DARPA/U.S. Department of Defense-funded Spokane
Intercollegiate Research & Technology Institute ("SIRTI") for 18 months, being
one of only 17 companies (and the first from western Washington) ever to receive
this award. This SIRTI grant provided slightly more than $200,000 cash, and also
included the work of a full staff including attorneys, experienced business
persons, and a public relations company, all of which were assigned to assist in
advancing the commercialization of the Kronos(TM) technology; the SIRTI grant
also included the very valuable work of Dr. Lee Philipp, head of the electrical
engineering department at the Richland, Washington campus of Washington State
University, and a full-time graduate student. The graduate student was an expert
in computer modeling of electrical fields and accomplished hundreds of pages of
valuable computer-generated information. Under the SIRTI grant, another group in
the business department of Washington State University performed extensive
market research studies.
In February 1999, the Kronos(TM) technology was selected as one of twelve
top technologies to be presented at the National Renewable Energy Laboratories
forum held in Seattle, Washington. Considerable interest in the Kronos(TM)
technology was
8
<PAGE>
expressed at this forum.
Since 1996, six generations of prototype Kronos(TM) devices have been
developed. Funding to date has been provided by contributions from KAT's
stockholders and from the above-mentioned U.S. government grants. Through
capital infusions to be provided by the Company, KAT will, among other things,
design pre-manufacturing models of devices embodying the Kronos(TM) technology
and expand research and development in the Core Applications, arrange strategic
relationships in the area of the Core Applications, negotiate agreements for
licensing of the Kronos(TM) technology, and undertake other related activities
designed to exploit the economic value of the Kronos(TM) technology, all under
the planning, direction, and supervision of KAT's management.
The Company and KAT believe that Kronos(TM) can be a viable solution to a
growing problem facing the hotel industry, known as the "sick building
syndrome." Apart from the various chemicals that are in walls and ceilings,
bacteria and viruses can grow undisturbed within the warm and humid air ducts
and supply air to the rooms. By integrating Kronos(TM) devices into each room,
hotels can prevent the "sick building syndrome" from occurring and reduce power
consumption, as compared with current air purification and air conditioning
systems. (For reference, published hotel industry statistics indicate that, as
of September 1998, the top ten hotel ownership and management companies had
approximately 2,500,000 rooms in the U.S.)
The Company and KAT believe that Kronos(TM) can also solve the air quality
problems associated with chemical contaminants and microbial agents in
hospitals, medical clinics, nursing homes, and assisted living facilities.
Current filtration systems used in hospital central HVAC units only filter and
collect, but, significantly, do not kill, airborne pathogens. If the filters in
these systems become full or clogged, airflow can be greatly reduced and some
amount of pathogens can actually escape and be re-circulated back through air
ducts, endangering the life and health of patients. The typical hospital
practice of simply exchanging large quantities of indoor air for outdoor air,
and the resulting heating or cooling of the incoming outdoor air, is inefficient
and costly, when compared with the benefits which could be achieved through use
of the Kronos(TM) technology. Kronos(TM) devices are able to kill airborne
bacteria, viruses, and other pathogens, are silent and energy efficient, and can
sterilize the circulating air, thus reducing incidences of airborne infections.
In addition, indoor air can be purified and re-circulated, thereby preventing
heat and energy loss. (For reference, published industry statistics indicate
that, as of 1999, there were more than approximately 1,000,000 registered
hospital beds in the U.S. The market opportunity for Kronos(TM) becomes more
compelling when the approximately 69,000 beds in the eight largest assisted
living facilities chains in the U.S. and approximately 3,300,000 beds in the
seven largest nursing facilities chains in the U.S. are added. KAT is conducting
market and industry research to determine the approximate number of medical
clinics in the U.S.; the number is believed to be substantial.)
Again indicating the importance of its strategic relationship with CTI and
its objective of augmenting the same, the Company plans to ensure the
coordination of development and deployment of Kronos(TM) technology so that it
can be integrated into CTI Systems in CTI's climate-controlled facilities as
well as in hospital rooms and medical clinics in which CTI Systems are used. The
Company's proposed acquisition of Cancer Treatment Centers, Inc. (see the
discussion below) and the objective of outfitting up to 100 cancer treatment
centers with CTI Systems for the integrated, seamless diagnosis and treatment of
cancer is one indicator of the Company's plans for the medical equipment and
hospital/medical clinic element of the Core Applications. The Company and KAT
are conducting market and industry research to determine the addressable market
for integration of the Kronos(TM) technology into medical equipment.
The Company and KAT believe that the Kronos(TM) technology will have
significant applications in residential dwellings and commercial buildings (to
combat the "sick building syndrome" and for air purification) and the automotive
industry (as a potential replacement for automotive fans and catalytic
converters), and that the addressable market for these applications will be
substantial. In the case of residential dwellings and commercial buildings, the
Company and KAT believe that a Kronos(TM) device will be clearly superior to any
other device purporting to provide
9
<PAGE>
the same benefits. In the case of the automotive industry, a Kronos(TM) device
will be wholly novel and revolutionary. The Company and KAT intend to adapt the
Kronos(TM) technology for these applications, and are presently conducting
research to determine the size of the addressable markets in the automotive
industry. (The concept of "addressable market" assists the Company and KAT to
quantify the potential market in which the Kronos(TM) technology and devices
could be deployed and the potential revenues which could be earned therefrom, to
enable informed decision-making about whether to expend management and financial
resources in the development of such market.)
Acquisition of Atomic Soccer USA, Ltd. On March 6, 2000, the Company signed
definitive agreements for the acquisition of all of the issued and outstanding
shares of Atomic Soccer USA, Ltd., ("Atomic"). The Company acquired all of the
issued and outstanding shares of Atomic in exchange for shares of the Company's
common stock (thus constituting Atomic as a wholly-owned subsidiary of the
Company) and will be represented on Atomic's board of directors. Atomic's
executive management will remain in place and bear responsibility for Atomic's
day-to-day operations.
Atomic, with headquarters in Madison, Wisconsin, makes and distributes
soccer uniforms under the "A" label, and basketball, volleyball, lacrosse,
and hockey uniforms under the "BAHR" label. Atomic's management believes that
the addressable U.S. market for these two lines of sports apparel is
approximately $250,000,000. Atomic's sports apparel is sold to catalog
companies, team sporting goods dealers, and screen printers, which in turn sell
such apparel primarily to schools and recreational athletes. Atomic seeks to
provide a high quality product at reasonable prices and, to accomplish these
goals, designs its own products, uses some of the same fabrics as are used by
larger brand names, and carefully monitors cost and quality.
A majority of Atomic's product line is sold through independent sales
representatives. Close relationships with these representatives and customers,
as well as control over its sewing operations, enables Atomic to keep readily
abreast of trends and opportunities in the sports apparel market. Atomic has to
date been successful in becoming a significant factor in the sports apparel
markets it addresses and believes there is room for considerable additional
expansion of its market share. The Company and Atomic are presently considering
certain acquisition opportunities in this regard. The "A" line of products
are sold in 17 states, with an estimated 10-15% market penetration in those
states; "BAHR" line products are currently sold in only 5 states, with an
estimated 5-10% market penetration therein. As cash flows permit, Atomic intends
to expand into the rest of the U.S. and other global markets. Heretofore, Atomic
has consciously limited growth in order to control cash flow and guarantee
timely delivery. With capital infusions from the Company, Atomic's management
believes more substantial market development, and further growth and market
penetration can occur. Atomic's management estimates that total potential
domestic sales for the "A" line products are approximately $30,000,000 per
year, and approximately $100,000,000 for "BAHR" line products.
The Company is contemplating the acquisition of Atomic S.A. de C.V., a
maquiladora cut-and-sew facility in Ensenada, Mexico, at which a majority of
Atomic's sports apparel is produced under a "sole source" arrangement. This
facility is sized to produce a constant amount of product, rather than produce
and hold sizable inventories to accommodate large spikes in seasonable demand.
As sales continue to grow and exceed the facility's capacity, the feasibility of
increasing that capacity or relocating to larger facilities will be explored.
Atomic contracts some goods to third party cut-and-sew vendors in the U.S.,
which enables Atomic to cope with the seasonality of sales and fill large orders
without exhausting existing inventory levels or causing delays in filling
customer orders. These vendors are able to quickly deliver large orders, which
in turn increase inventory turnover.
The Company's expected source of income from its acquisition of Atomic will
primarily be distributions of profits generated by Atomic's operations, and
capital gains as the value of Atomic's business appreciates.
10
<PAGE>
Acquisition of EdgeAudio.com, Inc. On May 4, 2000, the Company signed
definitive agreements for the acquisition of EdgeAudio.com, Inc., an Oregon
corporation ("EdgeAudio"), having its principal offices in Lake Oswego, Oregon
and its research and development group located in Ogden, Utah. The Company
acquired all of EdgeAudio's issued and outstanding shares in exchange for shares
of the Company's common stock (thus constituting EdgeAudio as a wholly-owned
subsidiary of the Company) and will be represented on EdgeAudio's board of
directors. EdgeAudio's executive management will remain in place and bear
responsibility for EdgeAudio's day-to-day operations.
EdgeAudio manufactures and sells home theater speaker systems
(collectively, the "Speaker Systems"). Sales of the Speaker Systems and certain
accessories are made directly to consumers via the Internet from EdgeAudio's web
site at www.edgeaudio.com. The Speaker Systems are manufactured from top-grade
materials at a 25,000 square foot, tariff-free maquiladora production facility
in Ensenada, Mexico. EdgeAudio seeks to address the rapidly growing market for
high quality, affordable home theater speaker systems. The initial Speaker
System offered by EdgeAudio are priced at $1,399 for a complete set, which
consists of four satellite speakers, one center speaker, and a powered, isobaric
subwoofer.
With corporate funding to be provided by the Company, EdgeAudio will seek
to, among other things, become a brand name widely known for the value and
performance of the Speaker Systems and capture up to 5% of the market for home
theater speaker systems; in addition, EdgeAudio will seek to accelerate
achievement of its business performance milestones. EdgeAudio plans to achieve
these objectives through, among other means, aggressive pricing while
maintaining high margins through efficient manufacturing and use of e-commerce
technology to reach prospective customers directly, and through expansion of its
product lines to cover the most popular home theater configurations. Unlike many
so-called "dot-com" companies that sell products at a loss and generate little,
if any, income, EdgeAudio has a defined product that can be sold at prices
within reach of ordinary consumers while retaining high margins. Indeed,
EdgeAudio's manufacturing-driven "click and mortar" strategy more closely
resembles that of Dell Computer (in that EdgeAudio has tangible products which
can be sold to consumers at a profit) than those of unprofitable so-called "e-
tailers." Based on its research, EdgeAudio believes that use of the Internet of
the Speaker Systems will be a particularly effective sales method and will
facilitate achievement of its growth objectives. EdgeAudio will further seek to
be a market leader by introducing new technology in the Speaker Systems, such as
the DiAural(R) Circuit (herein so called); the DiAural(R) Circuit has been
included in EdgeAudio's first line of Speaker Systems. EdgeAudio anticipates
achieving profitability within its first year of operations.
Most modern speaker systems contain multiple drivers, each specializing in
a limited range: woofers handling the low frequencies or bass; and tweeters
handling the high frequencies. Using a combination of specialized drivers to
reproduce the full spectrum of sound may seem appropriate in concept, but in
reality introduces certain difficulties. Faithful reproduction of the original
audio signal requires a careful division of wide frequency ranges into
controlled bands; moreover, the use of multiple drivers results in multiple
sources for sound waves that must arrive at the listener's ear in a coherent
manner in order to produce coherent, satisfying, high quality sound. Many
different electrical crossover circuits have been developed over the years to
attempt to resolve these difficulties, but the basic techniques for audio signal
division have remained virtually unchanged, or have not appreciably advanced,
since the 1970s.
The DiAural(R) Circuit is a new crossover technique that allows for proper
communication and interaction between transducers (woofer, mids, and tweeters).
The idea underlying the DiAural(R) Circuit is to overcome the biggest problem
faced in speaker design, namely the impracticality of reproducing a wide range
of audio wavelengths with a single driver. This new and innovative process,
embodied in the DiAural(R) Circuit, results in fewer parts, less distortion,
lower production costs, and renders the high frequency and mid-range transducers
virtually burnout-proof. The Speaker Systems center on a woofer/mid-range driver
that is engineered to handle a very wide frequency range, combined with a
smooth, accurate tweeter to produce the very high frequencies that are often not
captured in other speakers. By using the DiAural(R) Circuit to interconnect the
drivers, the Speaker Systems reproduce music and movies with a coherent, clear,
open, and natural sound that has previously been
11
<PAGE>
available only in speakers significantly more expensive than the Speaker
Systems. EdgeAudio hopes, over the next few years, to establish in the public's
mind the same strong identification between DiAural(R) and speakers
(specifically, the Speaker Systems sold by EdgeAudio) that currently exists
between Dolby(R) and sound processing. EdgeAudio is a licensee of the DiAural(R)
Circuit, and is the first speaker manufacturer in the world to introduce this
technology in speaker systems priced for the mass market.
EdgeAudio believes that the Speaker Systems have been designed to equate
with the finest speaker brands on the market, while being within the price reach
of ordinary consumers. EdgeAudio also believes that the appearance of a speaker
system (e.g., design, size, appearance, matching of room decor) factor
importantly into purchasing decisions as well as the more obvious considerations
(e.g., sound quality and cost). Accordingly, EdgeAudio has designed the Speaker
Systems to compete effectively with competitive speaker systems across the full
range of purchase considerations. Cabinets for the Speaker Systems are built
from solid planks of exotic South American hardwood (no veneer or vinyl wrap is
used), and then joined and braced so that they appear to have been carved from a
solid block of wood. The cabinet is also further dampened by the inclusion of
internal bracing and acoustic damping material to eliminate high-frequency sound
reflection. Each cabinet is then finished with a proprietary process that takes
three full days to complete. The end result is a Speaker System that is very
attractive, with an obvious quality appearance, and with a durable high quality
furniture finish.
The drivers utilized in the Speaker Systems are chosen for their smooth,
flat, transparent sound and are carefully matched to the characteristics of the
speaker cabinet. The woofers and tweeters are made by Vifa (a highly respected
Danish manufacturer), whose products are usually found only in high-end speaker
systems costing thousands of dollars more than the Speaker Systems.
The Company's expected source of income from its acquisition of EdgeAudio
will primarily be distributions of profits generated by EdgeAudio's Internet
sales of the Speaker Systems and accessories, and capital gains as the value of
EdgeAudio's business appreciates.
Acquisition of Cancer Detection International. On May 4, 2000, the Company
acquired 100% ownership of Cancer Detection International ("CDI"), in exchange
for shares of the Company's common stock. CDI engages in the business of
performing state-of-the-art blood laboratory analysis for the very early
detection of cancer (the "Blood Analysis"). CDI utilizes specialized processing
and handling of blood serums to be laboratory assayed in order to identify the
presence and the level of anti-malignin antibodies in the patient. The Blood
Analysis utilized by CDI has recently been approved by the FDA and is covered by
Medicare and most other insurances. As of June 30, 2000, the Company has not
implemented the CDI business plan.
12
<PAGE>
Agreement in Principle to Acquire Cancer Treatment Centers, Inc. The Company
has signed a letter of intent to aquire 100% ownership of Cancer Treatment
Centers, Inc., a Nevada corporation ("CTC"), in exchange for shares of the
Company's common stock. Definitive Agreements have not yet been reached. The
Company plans to make further progress to complete this transaction during the
fiscal year ending June 30, 2001.
13
<PAGE>
Agreement in principle to acquire American Composite Technology, Inc. On May
22, 2000, the Company entered into a letter of intent for the potential
acquisition of American Composite Technology, Inc., a Nevada corporation
("ACT"). ACT is in the business of researching, developing, marketing and
selling an array of industrial testing applications, protocols, and equipment
for the use of composite materials and laminates for enhancing and reinforcing
the structural integrity of public and private structures against seismic,
ballistic, and other destructive events. ACT also offers non-destructive testing
and quality control/quality assurance protocols for applied composite materials.
The letter of intent contemplates the Company's acquisition of 100% ownership of
ACT in exchange for shares of the Company's common stock. Definitive
agreements have not yet been reached. The Company plans to make further progress
to complete this transaction during the fiscal year ending June 30, 2001.
Acquisition of Electricity Measurement Unit Technology Patent. On August
19, 1999, the Company acquired U.S. patent no. 4,803,632 (issued February 7,
1989) and related intellectual property rights relating to a technology and
device referred to as the "Intelligent Utility Meter System" from M&M
Associates, in exchange for shares of the Company's common stock and a net
profits royalty on any future sales of the EMU. The actual device, which
requires further development, refinement, and marketing before being
commercially viable, is referred to herein as the "Electricity Management Unit"
(the "EMU").
The EMU is a low-cost, multifunctional device that provides a means of
processing the full spectrum of data and information contained or encoded on the
power line that delivers electrical power to consumers and, through "smart card"
technology, can be read remotely, thus eliminating on-foot data collection and
providing greater accuracies and efficiencies in accounting, billing,
collection, and cash management.
The Company's primary justification for making this acquisition was its
belief, based upon representations by the entity claiming to introduce the EMU
patent opportunity to the Company, that sizable supply contracts were
immediately available in certain markets in the Middle East once the Company had
completed its acquisition of the EMU patent, and that the further development
work required could be performed to "customize" the EMU for the desired
applications in those markets. Based upon these representations, the Company
believed that the initial deposits on such supply contracts would provide
funding sufficient to enable the additional development and modification work,
arrangement of low-cost manufacturing, and further patenting and intellectual
property protection activities, and the Company, in reliance upon these and
other representations made by such entity, proceeded to complete the acquisition
of the EMU patent. Ultimately, such entity failed to
14
<PAGE>
deliver the promised supply contracts and other relationships; accordingly, no
such contracts have yet been concluded, thereby delaying the progress the
Company had hoped to make with the EMU. The Company does not believe any such
supply agreement will be forthcoming through such entity, and the relationship
with such entity has been terminated. The Company has initiated litigation
regarding certain circumstances surrounding acquisition of the EMU patent;
however, such litigation does not involve any dispute as to the Company's
ownership thereof.
BioPulse International, Inc. On December 9, 1999, the Company signed a
letter of intent with BioPulse International, Inc. ("BioPulse"), a Nevada
corporation with its principal offices located in South Jordan, Utah (over-the-
counter bulletin board symbol "BIOP"), to jointly perform a study and evaluation
(the "Joint Study") to determine, among other things, whether a business
opportunity exists in The Peoples' Republic of China for BioPulse's cancer
treatment modality (the "Therapy"). BioPulse is obligated to bear all costs of
preparing the Joint Study, and the Company will receive a consulting fee in
exchange for its services relating to the Joint Study. The Joint Study will also
involve an examination of the Chinese legal and regulatory environment relating
to cancer therapies, practices, and procedures and the means by which any
approvals required for the deployment of the Therapy in the People's Republic of
China may be obtained.
ITEM 2. Description of Our Properties
The Company's offices are located at 333 South State Street, PMB
111, Lake Oswego, Oregon, 97034. The Company currently subleases office premises
and equipment in Lake Oswego, Oregon from CTI for $1,200 per year, which
sublease is automatically renewable for successive 12-month periods.
15
<PAGE>
The offices of Kronos Air Technologies, Inc. are located at 8549/8551
154th Avenue NE, Redmond, Washington 98052. Kronos is committed through June
30, 2003 to annual lease payments on operating leases for 4,000 square feet of
office/research lab premises of $47,028 per year.
The offices of Atomic Soccer USA, Ltd are located at 6045 Monona Drive,
Monona, Wisconsin 53716. Atomic is committed through the year 2003 to annual
lease payments on operating leases for 2,500 square feet office/warehouse
premises of $12,720 per year.
The offices of EdgeAudio.com, Inc. are located at 15615 74th Avenue,
Suite 100, Tigard, Oregon 97224. Atomic is committed through June 30, 2003 to
annual lease payments on operating leases for 2,600 square feet of
office/warehouse premises of $13,800 per year.
ITEM 3. Legal Proceedings
On January 13, 2000, the Company initiated legal proceedings in Clackamas
County, Oregon against Foster & Price Ltd., an Isle of Man corporation (the
"Defendant"), seeking, among other things, a judicial declaration that a certain
Term Sheet signed by the Company and the Defendant was lawfully terminated by
the Company due to the Defendant's failure to perform certain terms thereunder
and is null and void, and that the Company and the Defendant have no further
contractual obligations between them. The Defendant claimed entitlement to the
issuance of 10,000,000 shares of the Company's common stock, notwithstanding the
Defendant's nonperformance of certain important obligations under the Term
Sheet. Discussions between the Company and the Defendant failed to produce a
mutually satisfactory resolution of the matter, whereupon the Company initiated
the litigation.
On August 14, 2000, the Defendant filed an answer, in the State of Oregon,
denying the Company's allegations against the Defendant, alleging breach of
contract and seeking declaratory relief, asserting various affirmative defenses
and counterclaims, and seeking monetary damages. The Company intends to proceed
with the discovery process. The Company believes that the Defendant's demands
are without merit and intends to vigorously seek judicial declaration in its
favor.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
Part II
ITEM 5. Market for Our Common Equity and Related Stockholder Matters
Price Range of Our Common Stock
-------------------------------
16
<PAGE>
Our common stock trades on the OTC.BB under the trading symbol TSET.
The following table summarizes the quarterly low and high bid prices per share
for our common stock. The bid prices reflect inter-dealer prices, without
retail markup, markdown, or commission and may not represent actual
transactions.
Fiscal year ended June 30, 1999 Low Bid High Bid
------------------------------- ------- --------
First Quarter N/A N/A
Second Quarter $0.625 $1.562
Third Quarter $0.250 $1.000
Fourth Quarter $0.437 $1.000
Fiscal year ended June 30, 2000
-------------------------------
First Quarter $0.437 $0.875
Second Quarter $0.750 $2.625
Third Quarter $1.187 $6.750
Fourth Quarter $2.063 $3.370
On August 30, 2000, the closing price of our common stock as reported on
the OTC.BB was $1.375 per share. On August 30, 2000, we had approximately
850 beneficial stockholders of our common stock and 30,656,661 shares of
our common stock outstanding.
Transfer Agent and Registrar
----------------------------
The transfer agent and registrar for our common stock is Merit Transfer
Company, P.O. Box 292, Salt Lake City, Utah 84110, Phone (801) 531-7558, Fax
(801) 531-7558.
Our Dividend Policy
-------------------
We have not paid, and do not intend to pay, cash dividends on our common
stock in the foreseeable future. Our current dividend policy is to retain all
earnings, if any, to provide funds for operation and expansion of our
business. Our declaration of dividends, if any, will be subject to the
discretion of our Board of Directors, who may consider, without limitation,
factors such as our results of operations, financial condition, capital needs,
and acquisition strategy.
Securities Issued without Registration
--------------------------------------
During the year ended June 30, 2000, we issued the following equity
securities, none of which were registered as of the date of their issuance:
In August 1999, we issued 100,000 common shares, valued at $0.50 per share,
to twelve persons in exchange for U.S. patent no. 4,803,632 (issued February 7,
1989) and related intellectual property rights relating to a technology and
device referred to as the "Intelligent Utility Meter System". The above shares
were issued pursuant to the exemption provided for under Section 4(2) of the
Securities Act of 1933, as amended, as a "transaction not involving a public
offering."
In March 2000, we issued 1,037,555 common shares, valued at $1.81 per
share, to eight persons in exchange for common stock of Atomic Soccer USA, Ltd.
The above shares were issued pursuant to the exemption provided for under
Section 4(2) of the Securities Act of 1933, as amended, as a "transaction not
involving a public offering."
In March 2000, we issued 2,250,000 common shares, valued at $1.49 per share,
17
<PAGE>
to six persons in exchange for common stock of Kronos Air Technologies, Inc.
The above shares were issued pursuant to the exemption provided for under
Section 4(2) of the Securities Act of 1933, as amended, as a "transaction not
involving a public offering."
In May 2000, we issued 1,298,701 common shares, valued at $1.96 per share,
to five persons in exchange for common stock of EdgeAudio.com, Inc. The above
shares were issued pursuant to the exemption provided for under Section 4(2) of
the Securities Act of 1933, as amended, as a "transaction not involving a public
offering."
In May 2000, we issued 180,000 common shares, valued at $1.96 per share,
in exchange for common stock of Cancer Detection International, Inc. The above
shares were issued pursuant to the exemption provided for under Section 4(2) of
the Securities Act of 1933, as amended, as a "transaction not involving a public
offering."
In May 2000, we issued 14,815 common shares valued at $3.375 per share to
Richard A. Papworth based on his employment agreement dated May 19, 2000. The
above shares were issued pursuant to the exemption provided for under Section
4(2) of the Securities Act of 1933, as amended, as a "transaction not involving
a public offering."
In June 2000, we issued 768,860 common shares valued at $1.49 per share to
one person in exchange for cash. The above shares were issued pursuant to the
exemption provided for under Section 4(2) of the Securities Act of 1933, as
amended, as a "transaction not involving a public offering."
ITEM 6. Selected Financial Data
The following table presents selected financial information for the Company
at the dates and for the periods indicated. The historical income statement and
balance sheet data at and for the years ended June 30, 2000, 1999, and 1998 have
been derived from the audited financial statements of the Company.
2000 1999 1998
-------- -------- --------
Sales revenue $ 306,071 $ - $ -
Gross margin 49,478 - -
Net income (loss) (2,857,659 (351,674) (17,832)
Basic earnings per share (0.11) (0.01) (0.00)
Total assets 9,151,275 3,036 11,932
Long-term debt 176,342 - -
Cash dividends - - -
The business combinations in the year ended June 30, 2000 discussed in Item
1 above involving Atomic, KAT, EdgeAudio and CDI, significantly affect the
comparability of financial data from year to year. Prior to the current year,
the Company had no subsidiaries.
ITEM 7a. Management's Discussion and Analysis of Financial Condition and Plan
of Operation
Overview
--------
During the year ended June 30, 2000, the Company began the implementation
of its overall strategic objectives to (a) increase shareholder value through
creation of a broad, diversified asset base, (b) exploit potentially large
addressable markets for the goods, services, and technologies acquired by the
Company, and (c) generate current income and Capital gains. The acquisition of
Kronos, Atomic, EdgeAudio and CDI form the foundation of achieving those
objectives.
The Company has generated no significant revenues since inception in 1996.
Although the recently acquired subsidiary, Atomic, has generated limited
revenues during the past several years, Kronos and EdgeAudio have primarily
been engaged in research and development activities, establishing sources of
supply, training personnel and developing markets since their inception. As a
result, the company's ability to achieve profitability will depend on its
ability to successfully develop applications for certain of its products, obtain
regulatory approvals, and develop the capacity to manufacture and extensively
market its products.
The Company can make no assurance that it will be able to successfully
transition from research and development to manufacturing and selling commercial
products on a broad basis. While attempting to make this transition, the Company
will be subject to all the risks inherent in a growing venture, including, but
not limited to, the need to develop and manufacture reliable and effective
products, develop marketing expertise and expand its sales force and its
presence on the internet.
Results of Operations
---------------------
This discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of the Company during the
fiscal year ended June 30, 2000 and should be read in conjunction with the
consolidated financial statements and notes thereto included in this report.
The discussion herein with respect to the consolidated statements of
operations does not contain comparable information and no analysis of the same
is being given herein since it is not properly susceptible to narrative
comparison by virtue of the facts that (a) as indicated in Item 1 of this Form
10-K, the company was basically inactive from the time that it discontinued
operations in 1996 until the time that it was reactivated during late 1999 and
(b) from inception through June 30, 1999 it had no significant revenues from
operations. For reasons comparable to those stated above, no comparable
information is provided herein with respect to the Company's consolidated
balance sheet.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended June 30, 2000
Sales for the year ended June 30, 2000, mainly from Atomic, were $306,071
while cost of sales were $256,593 resulting in a gross margin for the year of
$49,478. Expenses amounted to $2,868,251 of which general and administrative
expenses accounted for $2,005,117 or approximately 65%, in-process research and
development (Kronos) accounted for $633,229 or approximately 22%, and
intangibles amortization expense accounted for $229,904 or approximately 8%.
Primarily as a result of the above, the net loss for the year ended June 30,
2000 was $(2,857,659) thereby increasing the Company's accumulated deficit to
$(3,300,179) at June 30, 2000.
CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 2000
Total assets of the Company at year ended June 30, 2000 were $9,151,275 of
which $623,991 in inventory, $2,623,191 patents/intellectual property, and
$5,519,418 goodwill accounted for approximately 7%, 29% and 60% thereof. Total
current assets amounted to $894,099 while total current liabilities amounted to
$2,628,717 thereby creating a working deficit of $(1,734,618). This working
capital deficit is mainly attribute to Atomic current notes payable incurred to
finance operating deficits during its development stage and early operating
stage. Total liabilities as at June 30, 200 amounted to $2,805,059 and
shareholders equity (including the above accumulated deficit) was $6,346,216.
Liquidity and Capital Resources
-------------------------------
Net working capital was $(1,734,618) at June 30, 2000. The ratio of
long-term debt to total capitalization was 1% at that same date. The Company's
return on average equity was (92)% during the year ended June 30, 2000. Net cash
flow used on operating activities was $765,630 for the year ended June 30, 2000.
The Company has been able to satisfy its cash requirements for the year
ended June 30, 2000 though the issuance and sale of common stock. It will
continue to satisfy cash needs in this manner in the near term until it
finalizes its private placement offering which will provide working capital
until the company can provide such from its ongoing operations. Through the
issuance and exchange of common stock, the Company is engaged in other fund
raising activities and is attempting to gain access to additional capital
markets that could provide financial resources in the event the private
placement offering is not successful. There is no assurance that these fund
raising efforts will be successful.
Important Factors Relating To Forward-Looking Statements
--------------------------------------------------------
This document contains numerous forward-looking statements about the
Company's business and future. The United States Private Securities Litigation
Reform Act of 1995 provides a "safe harbor" for certain forward-looking
statements. Our forward-looking statements are expressed in good faith and we
believe that there is a reasonable basis for us to make them. However, readers
are cautioned not to place undue reliance an such statements about our: 1)
plans; 2) objectives; 3) goals; 4) strategies; 5) expectations for the future;
6) future performance and events; 1) underlying assumptions for all of the
above; and 8) other statements that are not statements of historical fact.
The Company makes these forward-looking statements based on its analysis of
internal and external historical trends and future expectations. However, such
statements involve risks and uncertainties that could cause our actual results
to materially differ from our forward-looking statements and there can be no
assurance that we will achieve the results set forth in these forward-looking
statements. In addition to other factors, the following are important factors
that could cause our actual results to materially differ from our
forward-looking statements: 1) the results of our product testing; 2) the time
and costs involved in obtaining regulatory approvals for our systems and
products; 3) develop or acquire new technologies; 4) competitive factors; 5) the
availability of financing on terms and conditions acceptable to us; 6) the
availability of personnel with requisite skills; and 7) the terms of any new
collaborative, licensing and other arrangements that we may establish.
ITEM 7B. Quantitative and Qualitative Disclosures About Market Risk
The Company does not own any market risk sensitive instruments.
ITEM 8. Financial Statements
See Item 14 of Part III of this Report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the preceding two years we have had no disagreements with
accountants on accounting and financial disclosure. The Company discontinued
our relationship with our principal auditor, Randy Simpson C.P.A., P.C. on
September 6, 2000 with the engagement of Grant Thornton LLP on that same date,
as reported on Form 8-K filed with the Securities and Exchange Commission on
September 15, 2000.
18
<PAGE>
Part III
ITEM 10. Our Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Act
Executive Officers and Directors
--------------------------------
Name Age Position
---- --- --------
Jeffrey D. Wilson 45 Chairman, Chief Executive Officer
Weijing Li 40 Director, Secretary & Treasurer
Charles D. Strang 79 Director
Richard A. Papworth 42 Chief Financial Officer
Erik W. Black 30 Executive Vice President
Jeffrey D. Wilson, 45, was appointed Chairman and Chief Executive Officer
of the Company on April 20, 1999. Mr. Wilson has had substantial international
transactions expertise in Asia, Europe, Latin America, Africa, and the U.S.,
having represented clients in a wide range of joint venture, corporate finance,
public and private securities, regulatory, asset acquisition, licensing,
franchising, technology, investment, merger and acquisition, leveraged buy-out,
and other transactions, and has assisted clients in gaining access to foreign
markets and in government lobbying activities. Mr. Wilson speaks Japanese
fluently. From 1992-1999, Mr. Wilson maintained a private international advisory
practice for select clients and engaged in entrepreneurial ventures. From 1990-
1992, he served as international legal advisor for GGS Co., Ltd., a Tokyo-based
Japanese investment company (and including its Hong Kong, Australian, Canadian,
and U.S. affiliates), having primary responsibility for its international
projects. Mr. Wilson continues to serve as managing director of The Pangaea
Group, LLC, a private international consulting firm of which he is the principal
owner. From 1982-1990, he engaged in the private practice of law. Mr. Wilson
received a B.A. from Brigham Young University in 1979 and a J.D. from the
University of Kansas in 1982, where he was also an associate editor of the
Kansas Law Review and president of the International Law Society.
Charles D. Strang, 79, has served as a director of the Company since
September 2000. Mr. Strang was named national commissioner of NASCAR (National
Association for Stock Car Racing) in 1998 and continues to serve in that
capacity. In 1989 Mr. Strang received President Bush's American Vocation Success
Award; in 1992 was elected to the Hall of Fame of the National Marine
Manufacturers Association; in 1990 was awarded the Medal of Honor of the Union
for International Motorboating; and is a life member of the Society of
Automotive Engineers. He also currently serves as a director of the American
Power Boat Association (the U.S. governing body for powerboat racing) and senior
vice president of the Union for International Motorboating (the world governing
body for powerboat racing, with approximately 60 member nations). He joined
Outboard Marine Corporation ("Outboard Marine") as director of marine
engineering in 1966, and retired as chief executive officer in 1990 and as
chairman in 1993 after a more than 40-year career in the marine industry. Mr.
Strang's accomplishments during this period include the invention of the modern-
day stern-drive (inboard/outboard) power system, the evolution of high
horsepower outboard motors, dozens of patents in the field of engine design,
marine propulsion devices, and powerboats, and the movement of the marine
industry to vertically integrate engine manufacturers with boat builders; these
efforts have accelerated the consolidation of the marine industry and the trend
to "packaged" boat and motor marketing. Under his leadership, Outboard Marine
was transformed into a vertically-integrated producer of complete, factory-
rigged and -powered boats; his engineering and management leadership has had a
lasting, substantial influence on the marine industry. Mr. Strang graduated with
a degree in mechanical engineering from Polytechnic University in 1943 and
worked for several years in the aerospace industry (including research and
testing projects on aircraft engines) and served on the mechanical engineering
staff of Massachusetts Institute of Technology. He spent 13 years with
Kiekhaefer Corporation (manufacturer of Mercury outboard motors), rising from
director of research to executive vice president, and was also
19
<PAGE>
proprietor of U.S. Executives, Inc., a management consulting firm, and Hydro-
Mechanical Development, an engineering firm.
Weijing Li, 40, has served as the Company's Treasurer, Secretary, and member
of its board of directors since 1996, having responsibility for procuring
international contracts and projects. From 1992-1995, Mr. Li served as vice
president/division manager, business information service, for United Information
Technology Corporation, Hualin International, and certain affiliates of Collins
Co., Ltd., in which capacities he was responsible for software product and
market development and business planning, led a 20-member team developing
multilingual word processor and database systems, served as an editorial member
for the industrial rating book, China Leading Companies, which was co-published
by China's statistics bureau, created industrial databases for business credit
services, and acted as liaison with foreign partners on all start-up projects.
From 1989-1991, Mr. Li was a systems analyst for the Center for European
Economic Studies at Northeastern University in Boston, and worked on the design
and implementation of database systems for labor market research. From 1986-
1988, he worked as a research and teaching assistant in the Computer Science
Department at the University of Massachusetts, developing CASE tools for
software engineering projects and designing and code programming in C. Mr. Li
received a B.S. from Changshi Institute of Technology in the Peoples' Republic
of China in 1982, an M.S. from the University of Massachusetts in 1986,
receiving a graduate research and teaching assistantship award, and an M.A. from
Northeastern University in 1991, receiving a university assistantship award.
Mr. Li's educational accomplishments have emphasized electrical engineering,
computer science, and economics. Mr. Li speaks both Mandarin and Cantonese
fluently.
Richard A. Papworth, 42, was appointed Chief Financial Officer of the
Company on May 20, 2000. Mr. Papworth has had diverse finance, tax, and
accounting experience in a range of industries, including real estate
development/construction, software development, publishing, distribution,
financial institutions, and investment companies. From 1997-2000, he was vice
president and controller of the U.S. and European operations of Wilshire
Financial Services Group ("WFSG"), a Portland, Oregon-based publicly held
specialty loan servicing and investment company with more than $2 billion under
management. In this capacity, Mr. Papworth was responsible for accounting and
control systems, financial reporting and analysis, and business decision support
for the worldwide organization. From 1996-97, he was chief financial officer of
First Bank of Beverly Hills, a $550 million banking subsidiary of WFSG. From
1995-96, Mr. Papworth was treasurer for Maintenance Warehouse America
Corporation, in which capacity he successfully negotiated more than $50 million
of real estate and working capital financing, and was responsible for management
of the company's insurance program and tax compliance. From 1994-95, he
maintained a private management and finance consulting practice for select
clients. From 1989-94, Mr. Papworth worked for Morrison Homes, the U.S. home
building division of U.K.-based George Wimpey Plc., during which period he held
various positions including assistant treasurer, treasurer, and chief financial
officer. From 1985-89, he engaged in tax consulting with Deloitte and Touche, a
Big Five accounting firm. Mr. Papworth speaks Spanish fluently. He received a
B.S. in accounting (with minors in business, economics, and Spanish) and a Macc
(Masters of Accountancy) with emphasis in tax law from Brigham Young University
in 1984. Mr. Papworth became licensed as a certified public accountant in the
State of California in 1987.
Erik W. Black, 30, was appointed Executive Vice President - Business
Development on May 1, 2000. Before joining the Company, Mr. Black served from
1997-2000 as a business and corporate strategy consultant to the office of the
chairman of Funding Selection, Inc., an investment banking and mergers and
acquisitions company. He also developed, launched, and managed GI Bill
Express.com LLP in February 1999 until its acquisition by Military.com in April
2000. Mr. Black has also worked as an e-business associate consultant for IBM
Global Services in Phoenix, Arizona, from March 1999 until April 2000. In
addition, Mr. Black was the sole proprietor of E.B. Web Designs, an Internet
development services and consulting company founded in 1998. Mr. Black worked
as the communications coordinator for the Synthetic Organic Chemical
Manufacturers Association in Washington, D.C. from 1996-1997 and as an associate
consultant for Robert Charles Lesser & Co., a real estate consulting firm, from
1995-1996. He received an M.B.A. and Masters of Information
20
<PAGE>
Management degrees from Arizona State University in 2000 (where he received the
ASU MBA Kiplinger Foundation Prize for outstanding scholarship, service and
contribution, and served as vice president - communications of the ASU MBA
Student Body Association in 1999-2000), a Global Leadership Certificate from
Thunderbird -The American Graduate School of International Management in 2000, a
B.A. from Pomona College in 1995 where he graduated magna cum laude and was
elected to Phi Beta Kappa. Mr. Black speaks Russian fluently.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
--------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on its review of the copies of such
reports furnished to the company and written representations that no other
reports were required during the fiscal year ended June 30, 2000, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.
ITEM 11. Executive Compensation
A definitive proxy statement of the Company will be filed not later than 120
days after the end of the fiscal year with the Securities and Exchange
Commission. The information regarding executive compensation will be included
in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders and
is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be included in the Company's
Proxy Statement for the 2000 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 13. Certain Relationships and Related Transactions
For the fiscal year ended June 30, 2000 there have not been any material
transactions between the Company and any director, executive officer, security
holder or any member of the immediate family of any of the aforementioned which
exceeded $60,000 other than as may be indicated in this Form 10-K and the
consolidated financial statements and footnotes thereto which are a part hereof.
ITEM 14. Exhibits and Reports on Form 8-K
(a) Financial Statements
See Index to Financial Statements immediately following this Item 13.
(b) Reports on Form 8-K
No forms 8-K were filed during the fiscal year ending June 30, 2000.
(c) Exhibits
See Exhibit Index immediately following the signature page.
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
TSET, Inc. and Subsidiaries
Report of Independent Certified Public Accountants......................... F-2
Independent Auditors report................................................ F-3
Consolidated Financial Statements
Consolidated Balance Sheet
June 30, 2000 and 1999......................................... F-4
Consolidated Statements of Operations
June 30, 2000, 1999 and 1998................................... F-5
Consolidated Statements of Cash Flows
June 30, 2000, 1999 and 1998................................... F-6
Consolidated Statements of Shareholders Equity
June 30, 2000, 1999 and 1998................................... F-7
Notes to Consolidated Financial Statements................................. F-8
F-1
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Shareholders
TSET, Inc.
We have audited the accompanying consolidated balance sheet TSET, Inc. and its
subsidiaries as of June 30, 2000, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatements. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of TSET,
Inc. and its subsidiaries as of June 30, 2000, and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $2,857,659 during the year ended December 31,
2000, and, as of that date, the Company's current liabilities exceeded its
current assets by $1,734,618. These factors, among others, as discussed in Note
3 to financial statements, 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 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
Portland, Oregon
October 18, 2000,
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of directors and Stockholders of TSET, Inc.
We have audited the balance sheet of TSET, Inc. (formerly Technology
Selection, Inc.) as of June 30, 1998 and the related statements of operations,
changes in shareholders' equity and cashflows for the two years ending June 30,
1999 and 1998. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of TSET,
Inc. (formerly Technical Selection, Inc.) as of June 30, 1999 and the results of
operations and its cashflows for the two years ending June 30, 1999 and 1998 in
conformity with generally accepted accounting principles.
/s/ Randy Simpson C.P.A., P.C.
March 17, 2000
Salt Lake City, Utah
F-3
<PAGE>
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
2000 1999
Assets
<S> <C> <C>
Current Assets
Cash $ 102,949 $ 536
Accounts receivable, net 130,654 -
Inventories 623,991 -
Prepaid expenses 36,505 2,500
Total Current Assets 894,099 3,036
Property and Equipment 165,696 -
Less: Accumulated Depreciation (51,129) -
Net Property and Equipment 114,567 -
Other Assets
Intangibles 8,142,609 -
Total Other Assets 8,142,609 -
Total Assets $ 9,151,275 $ 3,036
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 225,521 $ -
Accrued expenses 1,288,364 30,150
Notes payable, current portion 1,114,832 49,691
Total Current Liabilities 2,628,717 79,841
Long-Term Liabilities
Notes payable 176,342 -
Total Long-Term Liabilities 176,342 -
Shareholders' Equity
Common stock, authorized 500,000,000 shares of $.001 30,652 24,997
par value
Capital in excess of par value 9,615,743 340,718
Retained earnings (accumulated deficit) (3,300,179) (442,520)
Total Shareholders' Equity (deficit) 6,346,216 (76,805)
Total Liabilities and Shareholders' Equity $ 9,151,275 $ 3,036
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
2000 1999 1998
<S> <C> <C> <C>
Sales $ 306,071 $ - $ -
Cost of sales 256,593 - -
Gross Margin 49,478 - -
Selling, General and Administrative expenses:
Compensation and benefits 1,510,646 343,150 5,000
In process technology 633,229 - -
Amortization of intangibles 229,904 - -
Other selling general & administrative expenses 494,471 8,796 12,978
Total Selling, General and Administrative expenses 2,868,251 351,946 17,978
Income or (loss) from Operations (2,818,772) (351,946) (17,978)
Other Income / (Expense) 2,898 272 146
Interest Expense (41,784) - -
Net Income (loss) Before Taxes $ (2,857,659) $ (351,674) $ (17,832)
Provision for Income Taxes - - -
Net Income (loss) $ (2,857,659) $ (351,674) $ (17,832)
Basic and Diluted Earnings (Loss) Per Share $ (0.11) $ (0.01) $ (0.00)
Weighted Average Shares Outstanding 25,820,688 25,119,571 17,832,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income (loss) $(2,857,659) $(351,674) $ (17,832)
Adjustments to reconcile Net Income to net cash
(used in) provided by operations:
Depreciation and amortization 242,469 1,000 1,000
Unrealized loss on patent technology 50,000 - -
In-process technology 633,229 - -
Provision for doubtful accounts 75,645 - -
Common stock issued as compensation 50,000 310,000
Change In:
Inventories (168,550) - -
Accounts receivable (299) - -
Prepaid expenses and other assets (13,523) - -
Accounts Payable 22,059 - -
Accrued Expenses and other liabilities 1,201,000 30,150
Net cash (used in) provided by Operating Activities (765,630) (10,524) (16,832)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of cash accounts of subsidiaries (4,030) - -
Purchases of property and equipment (36,994) - -
Pre-acquisition investment in subsidiaries (225,125) - -
Net cash (used in) provided by Investing Activities (266,149) - -
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 1,124,125 - -
Proceeds from short-term borrowings 50,491 7,297 19,619
Repayments of short-term borrowings (40,424) - -
Proceeds from notes payable - - -
Net cash (used in) provided by Financing Activities 1,134,192 7,297 19,619
NET (DECREASE) INCREASE IN CASH 102,413 (3,227) 2,787
CASH
Beginning of year 536 3,763 976
End of year 102,949 536 3,763
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 44,658 - -
Income taxes - - -
Supplemental schedule of non-cash investing and financing activities:
</TABLE>
The Company purchased all of the outstanding stock of its subsidiaries and
other technology with shares of its own common stock. The total purchase price
of $8,106,555 was allocated to assets acquired and liabilities assumed as
follows:
<TABLE>
<S> <C>
Fair value of tangible assets $ 771,102
Marketing intangibles 587,711
In-process research and development 633,229
Patent technology 2,125,935
Goodwill 5,708,867
Liabilities assumed (1,720,289)
-----------
$ 8,106,555
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock
Retained Total
Capital In Earnings Shareholders'
Excess of Par (Accumulated Equity
Shares Amount Value Deficit) (Deficit)
<S> <C> <C> <C> <C> <C>
BALANCE at June 30, 1997 23,976,730 $ 23,976 $ 31,743 $ (73,014) $ (17,295)
Net loss for the year ended June 30, 1998 (17,832) (17,832)
BALANCE at June 30, 1998 23,976,730 23,976 31,743 (90,846) (35,127)
Shares of restricted common stock
issued to Pangaea Group, LLC per CEO
management agreement 1,000,000 1,000 299,000 300,000
Shares of restricted common
stock issued for services rendered 25,000 25 9,975 10,000
Shares certificate cancelled (4,000) (4) (4)
Net loss for the year ended June 30, 1999 (351,674) (351,674)
BALANCE at June 30, 1999 24,997,730 24,997 340,718 (442,520) (76,805)
Shares reissued from prior year cancellation 4,000 4 4
Shares issued on August 31, 1999 to
acquire the patents and technology
of the utility meter 100,000 100 49,900 50,000
Shares issued on March 14, 2000 to acquire
Atomic Soccer USA, Ltd 1,037,555 1,038 1,805,212 1,806,250
Shares issued on March 14, 2000 to acquire
Kronos Air Technologies, Inc. 2,250,000 2,250 3,344,625 3,346,875
Shares issued on for May 9,2000 to acquire
EdgeAudio.com, Inc. 1,298,701 1,299 2,548,701 2,550,000
Shares issued on May 9, 2000 to acquire
Cancer Detection International Inc. 180,000 180 353,250 353,430
Shares issued on May 19, 2000 as compensation 14,815 15 49,985 50,000
Shares of restricted common stock
issued on June 30, 2000 for cash 768,860 769 1,123,352 1,124,121
Net loss for the year ended June 30, 2000 (2,857,659) (2,857,659)
BALANCE at June 30, 2000 30,651,661 $ 30,652 $9,615,743 $(3,300,179) $ 6,346,216
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
TSET, Inc. (formerly, Technology Selection, Inc.), is a Nevada corporation
and was originally organized on September 17, 1980 as Penguin Petroleum, Inc.
("PPI") under the laws of the State of Utah. Stockholders approved a name change
of the corporation on October 6, 1982 to Petroleum Corporation of America, Inc.
On December 29, 1996, stockholders approved a reorganization whereby they
exchanged their stock on a one-for-one basis with Technology Selection, Inc., a
Nevada corporation ("TSI"). TSI's shares began trading on the over-the-counter
bulletin board exchange on August 28, 1996 under the symbol "TSET." On November
19, 1998, TSI changed its name to TSET.
The Company now seeks to participate in select transactions among a wide
range of prospects, both domestically and internationally, either for its own
account or as a principal in or facilitator of select transactions undertaken by
other persons with whom the Company has, or wishes to establish, a business or
contractual relationship. The Company also seeks to match large addressable
markets with products or services which the Company believes will satisfy all or
some element of such markets to create an overall seamless business transaction,
thus minimizing to the Company the risks attendant in addressing such markets or
inherent in the product or service in question. The Company is in the early
stages of implementing its expanded plan of business.
In March 2000, the Company purchased Atomic Soccer USA, Ltd. (Atomic), a
sports apparel manufacturer and distributor. In March 2000, the Company also
acquired Kronos Air Technologies, Inc. (KAT) which is developing applications
for its patented air movement and purification process via electrostatic
precipitation. In May 2000, the Company purchased EdgeAudio.com,Inc.
(EdgeAudio), a manufacturer and distributor of home theater speaker systems
incorporating licensed DiAural(R) crossover circuitry. In May 2000, the Company
also purchased Cancer Detection International (CDI) which performs state-of-the-
art blood laboratory analysis for the very early detection of cancer.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method. The Company's financial statements are prepared using the
accrual method of accounting. The Company has elected a June 30 fiscal year end.
Principles of Consolidation. The consolidated financial statements of the
Company include those of the Company for the entire fiscal year and of each of
its wholly-owned subsidiaries for the period subsequent to acquisition by the
Company. The wholly-owned subsidiaries are Atomic Soccer USA, Ltd., Kronos Air
Technologies, Inc., EdgeAudio.com, Inc., and Cancer Detection International. All
significant intercompany accounts and transactions have been eliminated in the
preparation of the consolidated financial statements.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the periods.
Actual results could differ from those estimates.
Concentrations of Credit Risk. Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of trade and
other receivable. The Company manages its exposure to risk through ongoing
credit evaluations of its customers and generally does not require collateral.
The Company maintains an allowance for doubtful accounts for potential losses
and does not
F-8
<PAGE>
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
believe it is exposed to concentrations of credit risk that are likely to have a
material adverse impact on the Company's financial position or results of
operations.
Cash and Cash Equivalents. The Company considers all highly liquid short-term
investments, with an original maturity of three months or less when purchased,
to be cash equivalents.
Accounts Receivable. The Company provides an allowance for losses on trade
receivables based on a review of the current status of existing receivables and
management's evaluation of periodic aging of accounts. Accounts receivable are
shown net of a $33,537 allowance for doubtful accounts at June 30, 2000.
Inventories. Inventories consist of finished goods held for sale which are
stated at the lower of cost or market, with cost determined on a first-in, first
out basis and market based on the lower of replacement cost or realizable value.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the assets, which
range from three to seven years. Expenditures for major renewals and betterments
that extend the original estimated economic useful lives of the applicable
assets are capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The cost and related accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts, and any gain
or loss is included in operations.
Intangibles. Intangible assets include goodwill, marketing intangibles and
patent technology which are being amortized over 10 years. Patent technology
represents acquired patents which are being further developed to achieve
commercial viability and generate revenue. The carrying value of intangibles are
reviewed whenever circumstances occur that indicate the carrying values may not
be recoverable. Total accumulated amortization related to these intangible
assets is $229,904 at June 30, 2000.
Income Taxes. Income taxes are accounted for in accordance with the provisions
of SFAS No. 109. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized.
Research and Development Expenses. Costs related to research and development are
charged to research and development expense as incurred.
Earnings Per Share. Basic (loss) earnings per share is computed using the
weighted average number of shares outstanding. Diluted (loss) earnings per share
is computed using the weighted average number of shares outstanding adjusted for
the incremental shares attributed to outstanding options to purchase common
stock. Per share amounts disclosed in these Consolidated Financial Statements
are not shown on a dilutive basis but rather on a basic basis as there are no
stock options outstanding.
Revenue Recognition. Revenue from product sales is recognized upon shipment.
Sales are reported net of applicable cash discounts and allowances for returns.
NOTE 3 - REALIZATION OF ASSETS
F-9
<PAGE>
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. The Company has sustained losses from operations in
recent years, and such losses have continued through the current year ended June
30, 2000. In addition, the Company has used, rather than provided cash in its
operations. The Company is currently using its resources to raise capital
necessary to complete research and development work, and to provide the working
capital needs of itself and its subsidiaries.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the asset amounts shown in the accompanying balance sheet
is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its financing requirements on a
continuing basis, to maintain present financing and to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Management has taken the following steps with respect to its operating and
financial requirements, which it believes are sufficient to provide the company
with the ability to continue in existence:
1. On May 5, 2000 the Company initiated a private placement to raise $5.0
million to $20.0 million. On August 31, 2000, the offering was extended
for an additional 90 days to November 29, 2000. The proceeds of this
Offering will be applied, among other things, to (a) funding financial
obligations to the Subsidiaries and increasing shareholder value by
seeking out and participating in additional investment and acquisition
opportunities which satisfy the Company's investment criteria, and (b)
recruiting and hiring additional executive management, management and
employee compensation, administrative expenses, engagement of third
party professionals to assist in various aspects of the Company's
financial and financial reporting, legal, securities law compliance, and
corporate activities and investment and acquisition transactions,
procurement of necessary policies of insurance (including key person and
director and officer liability coverage), establishment and
implementation of management and employee stock option, incentive, and
benefits plans, and satisfying applicable requirements for a NASDAQ
Large Capital National Market Listing. To date no funds have been
accepted by the Company for this private placement.
2. The Company is attempting to restructure accounts and notes payable of
Atomic and have commitments to convert approximately $400,000 of such
payable into approximately 200,000 shares of common stock of the
Company.
3. The Company brought in an investor to provide $700,000 of working
capital for EdgeAudio via issuance of 25,000 shares of a newly
authorized class of EdgeAudio preferred stock.
4. Subsequent to June 30, 2000, the Company has raised additional capital
of $820,000 through issuance of the Companies Common Stock to provide
short-term funding of working capital requirements until the private
placement can be completed. (See note 17)
NOTE 4 - BUSINESS COMBINATIONS
On March 13, 2000, the Company acquired Kronos Air Technologies, Inc.
(a development stage company), a Nevada corporation ("KAT"). KAT is a research
and development company having headquarters in Redmond, Washington. KAT owns all
of the intellectual property rights, including certain patents pending, for a
technology known as "Kronos(TM)" (formerly named the "electron wind generator").
The consideration for the acquisition was 2,250,000 shares of the Company's
common stock. The Company acquired all of the issued and outstanding shares of
KAT. The transaction was accounted for using the purchase method of accounting,
accordingly, the results of operations from March 13, 2000 are included in the
consolidated statement of operations. The total purchase price of $3.3 million
was determined based upon the market value of stock issued which incorporates
the restrictions on the transferability of the shares and was allocated to the
net assets acquired based on their fair market values at the date of
F-10
<PAGE>
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquisition. Of the purchase price, $600,000 was allocated to in-process
technology which had not reached technological feasibility which the Company
expensed as of the acquisition date. The remainder of the purchase price was
allocated to purchased technology ($2.1 million) and identifiable intangibles
($600,000), which are being amortized on a straight line basis over 10 years.
On March 6, 2000, the Company acquired of all of the issued and outstanding
shares of Atomic Soccer USA, Ltd. ("Atomic"), a Wisconsin corporation. Atomic,
with headquarters in Madison, Wisconsin, makes and distributes soccer uniforms
under the "Atomic" label, and basketball, volleyball, lacrosse, and hockey
uniforms under the "BAHR" label. The consideration for the acquisition was
1,000,000 shares of TSET common stock. The transaction was accounted for using
the purchase method of accounting, accordingly, the results of operations from
March 6, 2000 are included in the consolidated statement of operations. The
total purchase price of $1.8 million was determined based upon the adjusted
market value of stock issued which incorporates the restrictions on the
transferability of the shares and was allocated to the net assets acquired based
on their fair market values at the date of acquisition. The fair value of the
tangible assets acquired and liabilities assumed were $700,000 and $1.6 million,
respectively. The remainder of the purchase price was allocated to goodwill
($2.7 million) which is being amortized on a straight line basis over ten years.
On May 4, 2000, the Company acquired EdgeAudio.com, Inc. (a development stage
company), an Oregon corporation ("EdgeAudio"), having its principal offices in
Lake Oswego, Oregon and its research and development group located in Ogden,
Utah. EdgeAudio manufactures and sells home theater speaker systems
(collectively, the "Speaker Systems"). Sales of the Speaker Systems and certain
accessories are made directly to consumers via the Internet. The Company
acquired all of EdgeAudio's issued and outstanding shares in exchange for
1,298,701 shares of the Company's common stock. The transaction was accounted
for using the purchase method of accounting, accordingly, the results of
operations from May 5, 2000 are included in the consolidated statement of
operations. The total purchase price of $2.6 million was determined based upon
the adjusted market value of stock issued which incorporates the restrictions on
the transferability of the shares and was allocated to the net assets acquired
based on their fair market values at the date of acquisition. At the time this
acquisition was completed, the purchase price was allocated to goodwill ($2.6
million) which is being amortized on a straight line basis over ten years.
On May 4, 2000, the Company acquired 100% ownership of Cancer Detection
International ("CDI"), in exchange for 180,000 shares of the Company's common
stock. CDI engages in the business of performing state-of-the-art blood
laboratory analysis for the very early detection of cancer. CDI utilizes
specialized processing and handling of blood serums to be laboratory assayed in
order to identify the presence and the level of anti-malignin antibodies in the
patient. The blood analysis utilized by CDI has recently been approved by the
FDA and is covered by Medicare and most other insurances. The transaction was
accounted for using the purchase method of accounting, accordingly, the results
of operations from May 5, 2000 are included in the consolidated statement of
operations. The total purchase price of $353,000 was determined based upon the
adjusted market value of stock issued which incorporates the restrictions on the
transferability of the shares and was allocated to the net assets acquired based
on their fair market values at the date of acquisition. Since CDI is a
development stage company, the purchase price was allocated to goodwill
($353,000) which is being amortized on a straight line basis over ten years. As
of June 30, 2000 CDI had not yet begun commercial operations.
The following table reflects the unaudited proforma combined results of
operations of the Company, KAT, Atomic, EdgeAudio and CDI as if the acquisitions
had taken place at the beginning of the fiscal year for each of the periods
presented, excluding the effects of the one time charge of in-process
technology:
F-11
<PAGE>
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, June 30, June 30,
In thousands, except per share data 2000 1999 1998
------- ------- -------
Revenue $ 960 $ 730 $ 192
======= ======= =======
Net Income (loss) $(3,284) $(1,434) $(1,079)
======= ======= =======
Basic earnings (loss) per share $( 0.13) $( 0.06) $( 0.06)
======= ======= =======
Number of shares used in computing
basic earnings per share 25,821 25,120 17,832
======= ======= =======
In managements opinion, the unaudited pro forma combined results of
operations are not necessarily indicative of the actual results that would have
occurred had the acquisitions been consummated at the beginning of the
respective years under the management of the Company.
NOTE 5 - INVENTORIES
Inventories are valued at their lower of cost or market. The FIFO (first-
in, first out) method is used to determine the cost of inventories. Inventories
at June 30, by major classification, are as follows:
2000 1999
--------- ---------
Raw materials $ 203,921 $ -
Work in process 22,228 -
Finished goods 362,222 -
Freight in 35,620 -
--------- ---------
$ 623,991 $ -
========= =========
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at June 30 consists of the following:
2000 1999
--------- ---------
Leasehold improvements $ 2,212 $ -
Office furniture and fixtures 48,094 -
Machinery and equipment 115,390 -
--------- ---------
165,696 -
Less accumulated depreciation ( 51,129) -
--------- ---------
Net property and equipment $ 114,567 $ -
========= =========
Depreciation expense for the years ended June 30, 2000 and 1999 was $10,095
and $0, respectively.
F-12
<PAGE>
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7 - INTANGIBLES
Intangible assets at June 30 consists of the following:
2000 1999
----------- -----------
Patent technology $ 2,125,935 $ -
Marketing intangibles 587,711 -
Goodwill 5,658,867 -
----------- -----------
8,372,513 -
Less accumulated amortization (229,904) -
----------- -----------
Net intangibles $ 8,142,609 $ -
=========== ===========
Amortization expense for the years ended June 30, 2000 and 1999 was
$229,904 and $0, respectively.
NOTE 8 - ACCRUED EXPENSES
A accrued expenses at June 30 consists of the following:
2000 1999
---------- --------
Accrued cash compensation $ 82,654 $ 30,150
Accrued stock compensation 892,476 -
Deferred compensation 180,000 -
Accrued interest 57,785 -
Accrued professional services 75,000 -
Other accrual 450 -
---------- --------
$1,288,365 $ 30,150
========== ========
NOTE 9 - NOTES PAYABLE
Notes payable at June 30 consists of the following:
2000 1999
---------- ----------
Notes to banks (Atomic) $ 460,000 $ -
Notes to individuals 350,491 -
Notes to corporations 65,183 49,692
Current portion, long-term debt 239,158 -
---------- ----------
$1,114,832 $ 49,692
========== ==========
Atomic has available a $500,000 line of credit with a bank, which matures
March 31, 2001 and is collateralized by accounts receivable, inventory, and
personal guarantees of the officers of Atomic. Interest on the unpaid balance
accrues at the rate of prime plus 1.0% (10.5%) and is payable monthly. The
amount outstanding was $460,000 on June 30, 2000. The line of credit agreement
contains financial covenants including covenants relating to restrictions on
dividends, mergers, acquisitions, and sales of assets. Atomic was in compliance
with these covenants at June 30, 2000.
F-13
<PAGE>
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10 - LEASES
The Company has entered into noncancelable operating leases for facilities.
Rental expense was approximately $12,000 and $0 for years ended June 30 2000 and
1999, respectively. Future minimum lease payments under these operating leases
for the years ending June 30 are as follows:
Year Ended
June 30 Redmond, Wa Madison, WI Tigard, OR Total
---------- ----------- ----------- ---------- ----------
2001 $ 47,028 $ 12,720 $ 13,225 $ 72,973
2002 42,670 12,720 13,800 69,190
2003 36,633 6,360 13,800 56,793
Thereafter - - - -
----------- ----------- ---------- ----------
Total $ 126,331 $ 31,800 $ 40,825 $ 198,956
=========== =========== ========== ==========
NOTE 11 - LONG-TERM DEBT
Long-term debt consists of the following:
2000 1999
--------- ---------
Notes related to Atomic stock repurchase $ 415,500 $ -
Current portion (239,158) -
--------- ---------
Noncurrent portion $ 176,342 $ -
========= =========
Future payments of the debt outstanding for the years ended June 30 are as
follows:
2002 $ 136,514
2003 39,828
----------
Total 176,342
==========
F-14
<PAGE>
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 12 -- INCOME TAXES
The composition of deferred tax assets and the related tax effects at June
30, 2000, 1999 and 1998 are as follows:
1999
2000 (Restated)
---------- ----------
Benefit from carryforward of net
operating losses $ 783,073 $ 26,541
Other temporary differences 80,920 10,200
Less valuation allowance (863,993) (36,741)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
The difference between the income tax benefit in the accompanying
statements of operations and the amount that would result if the U.S. Federal
statutory rate of 34% were applied to pre-tax loss is as follows:
June 30,
---------------------------------------------
2000 1999
--------------------- ----------------------
% of % of
Pre-tax Pre-tax
Amount Loss Amount Loss
----------- -------- ----------- ---------
Benefit for income tax at
federal statutory rate $ 971,604 34.0% $ 119,569 34.0%
Non-deductible expenses (537,407) (18.8%) (102,000) (29.0%)
Acquired NOL and other 393,055 13.8% - -
Increase in valuation
allowance (827,252) (29.0%) (17,569) (5.0%)
---------- ------- ---------- -------
Total $ - 0% $ - 0%
========== ======= ========== =======
The non-deductible expenses shown above related primarily to accrued and
deferred compensation and to the accrual of restricted shares of common stock
for compensation using different valuation methods for financial and tax
reporting purposes.
At June 30, 2000, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $2.3 million of unused net
operating losses available for carryforward to future years. The benefit from
carryforward of such net operating losses will expire in various years between
2011 and 2020 and could be subject to severe limitations if significant
ownership changes occur in the Company. Of the $2.3 million of unused net
operating losses noted above, approximately $1.1 million relates to losses
incurred by the Company's subsidiaries, Atomic and EdgeAudio. In fiscal years
prior to June 30, 2000, Atomic and EdgeAudio did not file their tax returns on a
consolidated basis with the Company. Accordingly, the $1.1 million loss incurred
by Atomic and EdgeAudio is further subject to separate limitations that restrict
the ability of the Company to use such losses.
NOTE 13 -- PURCHASED IN PROCESS RESEARCH AND DEVELOPMENT
Purchased in process research and development (IPR&D) represents the value
assigned in a purchase business combination to research and development projects
of the acquired business that had commenced but had not yet been completed at
the date of acquisition and which have no alternative future use. In accordance
with SFAS No. 2, "Accounting for Research and Development Costs," as clarified
by FASB Interpretation No. 4, amounts assigned to IPR&D meeting the above stated
criteria must be charged to expense as part of the allocation of the purchase
price of the
F-15
<PAGE>
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
business combination. Accordingly, charges totaling $633,000 were recorded
during fiscal 2000 as part of the allocation of the purchase price related to
the acquisition of KAT.
The method used to determine the purchase price allocations of IPR&D was an
income or cash flow method. The calculations were based on estimates of
operating earnings, capital charges (representing the effect of capital
expenditures), trade name royalties, charges for core technology, and working
capital requirements to support the cash flows attributed to the technologies.
The after tax cash flows were bifurcated to reflect the stage of development of
the technology. A discount rate reflecting the stage of development and the risk
associated with the technology was used to value IPR&D. The Company believes
there is limited risk that the projects described below will not be concluded
within reasonable proximity to the expected completion date.
The allocation of the purchase price of KAT resulted in the recording of an
IPR&D charge of $600,000, which has been included in the Kronos segment (see
Note 15). Projects associated with the Kronos(TM) technology acquired include
development of the technology and development of devices incorporating the
Kronos(TM) technology in a full range of automotive, military, hospital/medical
clinic, medical equipment, hotel, and home applications. These projects were
approximately 40 percent complete, with expected completion in years 2000
through 2004.
Note 14 - COMMITMENTS AND CONTINGENCIES
Litigation. On January 13, 2000, the Company initiated legal proceedings
in Clackamas County, Oregon against Foster & Price Ltd., an Isle of Man
corporation (the "Defendant"), seeking, among other things, a judicial
declaration that a certain Term Sheet signed by the Company and the Defendant
was lawfully terminated by the Company due to the Defendant's failure to perform
certain terms thereunder and is null and void, and that the Company and the
Defendant have no further contractual obligations between them. The Defendant
provided assistance to the Company in the acquisition of a technology patent
known as Intelligent Utility Meter System. The Defendant claimed entitlement to
the issuance of 10,000,000 shares of the Company's common stock, notwithstanding
the Defendant's nonperformance of certain important obligations under the Term
Sheet. Discussions between the Company and the Defendant failed to produce a
mutually satisfactory resolution of the matter, whereupon the Company initiated
the litigation.
On August 14, 2000, the Defendant filed an answer, in the State of Oregon,
denying the Company's allegations against the Defendant, alleging breach of
contract and seeking declaratory relief, asserting various affirmative defenses
and counterclaims, and seeking monetary damages. The Company intends to proceed
with the discovery process. The Company believes that the Defendant's demands
are without merit and intends to vigorously seek judicial declaration in its
favor.
EdgeAudio "Earn-out" provision. Part of the consideration given by the
Company for EdgeAudio is related to an earn-out provision in which the Company
would award $3.75 million of additional common stock of the Company as EdgeAudio
achieves stipulated revenue milestones over a five year period commencing on May
4, 2000. The earn out provides five cumulative gross revenue milestones that
range between $1,764,271 and $22,187,203. Upon achieving each milestone, an
additional $750,000 of TSET, Inc. common stock will be issued. The share
conversion is to be based on an average of the closing price of the shares for
the five trading days immediately preceding the date that the revenue milestone
is achieved.
Funding commitments to subsidiaries. As of June 30, 2000, the Company is
committed to provide additional funding to its subsidiaries as follows:
F-16
<PAGE>
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (continued)
Remaining End of
funding funding
Subsidiary requirement period
-------------- -------------- -----------
KAT $165,500 9/13/2000
Atomic $459,875 3/13/2001
EdgeAudio $213,900 12/31/2001
Employment agreements. An employment agreement exists with the Company's
chairman of the board whereby he will serve in such capacity as well as chief
executive officer through May 1, 2004, with a five year "evergreen" provision.
The terms of the employment agreement provide for an annual base salary and
certain other benefits which include a 3.98% non-dilutable interest in the
Company. Compensation continuation agreements exist with other officers of the
Company whereby each receives compensation and benefits in the event their
employment is terminated following certain events relating to a change in
control of the Company. The maximum amount of cash compensation that could be
paid under the agreements, based on present salary levels, is approximately $1.4
million.
NOTE 15 - SEGMENTS OF BUSINESS
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company operates principally in three
segments of business: the sports apparel segment manufactures and distributes
sports apparel to team organizations and retailers. The Kronos segment licenses,
manufactures and distributes air movement and purification devices utilizing the
Kronos(TM) technology. The speaker segment manufactures and distributes home
theater speakers and speaker systems. Although there are future plans for
expansion into foreign markets, in the year ended June 30, 2000, the Company
operated only in the U.S. The following tables provide a comparison of revenues,
net profit, total assets, amortization expense, in-process research and
development expense and interest expense for the year ended June 30, 2000:
Sports
Apparel Kronos Speaker Other Total
---------- ---------- ---------- ----------- -----------
Revenue $ 292,889 $ - $ 33,182 $ - $ 306,071
Interest expense $ 41,784 $ - $ - $ - $ 41,784
Amortization $ 90,270 $ 90,455 $ 43,289 $ 5,891 $ 229,904
In Process R&D $ - $ 633,229 $ - $ - $ 633,229
Net loss $ (357,406) $ (926,676) $ (222,182) $(1,351,395) $(2,857,659)
Total assets $3,423,341 $2,776,912 $2,603,334 $ 347,688 $ 9,151,275
Segment information has not been provided for prior years as neither the
Kronos or speaker segments had commenced operations. Atomic has revenue from a
single customer that represents $101,538 of the Company's consolidated revenue.
This customer is served by the sports apparel operating segment. (See note 17
regarding the customer's filing for bankruptcy protection)
NOTE 16 - RELATED PARTIES
During the year ended June 30, 2000, the Company received advances from
officers and directors of the Company of $109,213. At June 30, 2000 the amount
due the officers and directors was $81,213.
The Company has a liability at June 30, 2000 to an officer/director of the
Company of $893,896 for regular and deferred compensation
NOTE 17 - SUBSEQUENT EVENTS
F-17
<PAGE>
TSET, INC. AND SUBSIDIARIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
On August 29, 2000, the Company and Computerized Thermal Imaging, Inc.
(CTI) mutually terminated their marketing agreement. The marketing agreement had
provided the Company with marketing rights for CTI thermal imaging systems in
certain global markets.
During September 2000 the Company issued approximately 700,000 shares of
its common stock to raise $820,000.
On September 12, 2000, EdgeAudio sold twenty-five thousand (25,000) shares
of newly-authorized convertible preferred stock equal to twenty percent (20%) of
the total outstanding shares of EdgeAudio (the "Preferred Shares") to a private
investor for $500,000 cash and a 90-day note for $200,000. The Company and the
investor also entered into a Shareholders Agreement which provides, among other
things, for rights of first refusal between the Company and the investor in
connection with any proposed transfer of the EdgeAudio common shares owned by
the Company or the Preferred Shares owned by the investor. EdgeAudio's articles
of incorporation were also amended to provide that the Preferred Shares be
entitled to, among other things, certain dividend and liquidation preferences,
conversion rights, and voting power such that the Preferred Shares will
represent voting control of EdgeAudio; however, the Company retains the right to
veto a certain class of transactions. Registration rights were also granted with
respect to the Preferred Shares. Certain provisions of the Agreement and Plan
of Reorganization, dated as of May 4, 2000, pursuant to which the Company
acquired sole ownership of EdgeAudio, were also amended to, among other things,
reflect changes in executive management, composition of EdgeAudio's board of
directors, and vesting authority in EdgeAudio's board of directors for certain
actions that previously were subject to the Company's control or consent.
On September 13, 2000, Charles D. Strang accepted an appointment as a
director of the Company. His annual compensation will be 50,000 shares of common
stock of the Company. Mr. Strang is also currently serving as Commissioner of
the National Association of Stock Car Auto Racing (NASCAR).
On October 3, 2000, Big Toe Sports, a significant customer of Atomic, filed
for Chapter 11 bankruptcy protection. On October 9, 2000, the assets of Big Toe
Sports were purchased by HCC Sports LLC, a subsidiary of Hycite Corporation of
Madison, Wisconsin. HCC Sports has reached agreements with all of its vendors,
including Atomic, regarding the disposition of outstanding payables and
inventory. Atomic recorded a provision for bad debts of $90,000 in anticipation
of the agreement with HCC Sports which results in a remaining receivable from
Big Toe of $38,923. HCC Sports will continue to operate using the Big Toe Sports
name and will operate under Big Toe Sports' existing business plan. Atomic will
remain a vendor of Big Toe Sports and continue to regularly evaluate that
relationship.
On October 5, 2000, Weijing Li resigned as director and treasurer of the
Company. On October 6, 2000, Richard Tusing accepted an appointment as director
of the company. His annual compensation will be 50,000 shares of common stock of
the Company. Mr. Tusing is currently providing business consulting services
to select clients. The Company engaged Mr. Tusing to provided various consulting
services prior to his appointment as director.
F-18
<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, on this 24th day of October 2000.
TSET, INC.
By /s/ Jeffrey D. Wilson
-----------------------------------
Jeffrey D. Wilson, Chairman of
the Board of Directors and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below on
October 24 by the following persons on behalf of the registrant and in the
capacities indicated.
/s/ Jeffrey D. Wilson Chief Executive Officer
------------------------------------ and Chairman of the
Jeffrey D. Wilson Board of Directors
/s/ Weijing Li Treasurer, Secretary and a Director
------------------------------------
Weijing Li
/s/ Charles D. Strang Director
------------------------------------
Charles D. Strang
/s/ Richard A. Papworth Chief Financial Officer
------------------------------------
Richard A. Papworth
/s/ Erik W. Black Executive Vice President
------------------------------------
Erik W. Black
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this report.
27.1 Financial Data Schedule
