U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998 Commission file number 0-10707
THERMODYNETICS, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 06-1042505
(State or other jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
651 Day Hill Road, 06095 (860) 683-2005
Windsor, Connecticut (Zip Code) (Issuer's telephone number)
(Address of Principal
Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock $.01 par value
Check whether the issuer has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
The issuer's revenues for its most recent fiscal year were $8,601,629.
As of June 12, 1998 the aggregate market value of the voting stock held by
nonaffiliates of the Issuer was approximately $1,350,000 based on the average of
the closing bid and asked prices as reported by the NASD OTC Bulletin Board
system.
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the close of the period covered by this report.
Class Outstanding as of March 31, 1998
- ----- --------------------------------
Common Stock $.01 par value 12,569,646 Common shares
Transitional Small Business Disclosure Format Yes [_] No [X]
<PAGE>
PART I
Item 1. Description of Business
(a) Business Development - Thermodynetics, Inc., a Delaware corporation
incorporated in 1981, is the successor by merger in 1981 to Spiral Tubing
Corporation which had been incorporated in 1972. Thermodynetics, Inc. is
referred to individually and collectively with its Turbotec Products, Inc.
("Turbotec"), TPI Systems, Inc. ("TPI") and National Energy Systems, Inc.
("NES") subsidiaries as the "Company". The Company is engaged in the design,
manufacture and sale of enhanced surface metal tubing and related assemblies
primarily for heat transfer applications using its patented and/or proprietary
technology. The Company's products are primarily used in heat pumps, chillers,
heat reclaimers and biomedical heat exchangers serving the heating, air
conditioning, refrigeration, food processing, beverage, medical equipment,
marine, plumbing, commercial and residential construction, and aerospace
industries and may be used in most applications where heat exchange is required.
(b) Business of Issuer
(1) Products and Marketing - The Company manufactures surface enhanced
metal tubing and related assemblies for heat transfer and plumbing applications.
The Company's patented and/or proprietary machinery transforms smooth metal
tubing using its patented and/or proprietary technology into surface enhanced
tubing. The Company's enhanced tubing is primarily used in applications
involving laminar or turbulent flow of fluids for efficient transfer of heat.
The enhanced tubing products have a significantly greater surface area than a
smooth tube of the same length which improves heat transfer efficiency and
reduces the amount of metal tubing required. The enhanced tubes are easily bent
or coiled without significant distortion into tight radii suited to the
formation of space-saving sizes and shapes.
The Company's products are presently used in heat pumps as condensers and
evaporators in heating, refrigeration, food processing and air-conditioning
systems; in the biomedical field (as blood or intravenous fluid heat
exchangers); in heat recovery units used to heat water with waste heat from air
conditioning, refrigeration systems, in ice production systems; in laser
coolers, beverage dispensers, food processing systems, chillers, heat pump
systems and boilers, and modules for use as components in large condensing or
desuperheater systems; and are generally usable in most applications where heat
transfer is required. The tubing, when used as a flexible connector, also
facilitates the installation of plumbing fixtures and modules.
The Company's heat recovery systems are installed in food processing
plants, restaurants, hotels, supermarkets, military bases and individual
residences, capturing waste heat (from refrigeration and air conditioning
equipment) which is used to produce hot water.
The Company's products are designed for specific customer requirements
taking into account such variables as allowable temperature and pressure
differentials, the nature of the fluids to be used (liquids or gases), the
required flow rates and the operational and environmental conditions. These
factors are considered to determine the type, length, diameter and degree of
enhancement of the metal tubing to be used (usually copper, copper nickel,
aluminum, carbon steel or stainless steel although any metal may be utilized),
and the physical characteristics of the tube. The Company's machinery permits
the manufacture of enhanced tubing ranging from 1/8 inch to six inches in
diameter, from four inches to 40 feet in length, and with tubing wall
thicknesses ranging from .005 to .125 inch.
After design, the Company usually manufactures a prototype for a customer
at prices ranging from approximately $500 to $3,000. After testing and customer
acceptance, the customer places purchase orders with the Company ranging from
$1,000 for small orders to as much as $250,000 for large orders. In addition,
certain customers have placed blanket purchase orders for shipments to be made
over extended periods at sales volumes ranging from approximately $1,000 to
$150,000 per month.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 2
The Company owns specially designed patented and/or proprietary machinery
which is used to enhance and coil its metal tubing products as well as tools and
dies and other nonproprietary machinery to perform normal fabrication functions.
The Company believes its present machinery at both of its Connecticut facilities
are adequate for it to manufacture and ship up to approximately $16 million per
year of its products based upon present prices.
(2) Distribution Methods
(a) Marketing and Sales - The Company markets its metal tubing
products in the United States, Canada and abroad through its Sales Manager
who, supported by other personnel, develop sales leads along with serving
existing customers. They are currently compensated on a salaried and
incentive basis. In addition, the Company uses independent sales
representatives and distributors. The Company advertises its products in
trade periodicals and at trade shows.
(b) Foreign Operations and Export Sales - The Company has had no
foreign operations and its export sales during the past fiscal year did not
exceed 5% of gross sales.
(c) Seasonal Nature of the Business - The Company believes its present
business is somewhat seasonal in nature as a significant portion of the
Company's revenues are derived from sales relating to space-conditioning
and heat pump applications.
(3) New Product Status - Inapplicable.
(4) Competition - Although the Company believes its products are
competitive in most applications based on cost and efficiency, many competing
products are offered by manufacturers and distributors who are longer
established, larger, and who possess substantially greater financial resources
and substantially larger administrative, technical and marketing staffs than the
Company. No assurances can be given that the Company will be able to
successfully compete with such firms.
(5) Raw Materials - The Company's surface enhanced metal tubing is
manufactured from smooth tubing, usually copper, cupronickel, aluminum, carbon
steel or stainless steel. The Company usually purchases tubing in mill
quantities manufactured to its specifications by various tube fabricating mills.
The Company does not believe that it is a major customer of any mill or
distributor and has no supply contracts. The Company has not experienced any
significant shortages or extended delays in deliveries of raw materials during
the past five years. There is no assurance that shortages or delays will not
occur in the future causing disruptions in production, shipments and
profitability.
(6) Dependence on Single or Few Major Customers - For the fiscal year ended
March 31, 1998, three (3) customers, 56% in the aggregate, each accounted for
more than 10% of the Company's net sales. There is no assurance the Company will
retain these customers and if it does not, the loss of one or more of these
customers could have a material adverse affect upon the Company.
(7) Patents, Trademarks, Licenses, Franchises and Concessions - The Company
currently owns two (2) United States Patents expiring in 2003 and 2008. The
Company also owns patents in Canada and trademarks in Canada and Australia all
related to manufacturing methods, machinery and types of tubing. The Company
does not believe that its business is materially dependent upon its patents as
in addition to its patent protection, the Company treats a substantial amount of
proprietary information concerning its manufacturing processes as confidential.
The Company also has registered various trademarks in the United States and
certain foreign countries. The Company believes that its registered U.S.
trademark "TURBOTEC(R)," both alone and accompanied by an impression or print of
a spirally fluted tube is of material importance to its business.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 3
(8) Governmental Approval - N/A
(9) Effect of Governmental Regulations - The Company's business does not
involve contracts or subcontracts with the United States Government in material
amounts.
(10) Research and Development - The Company charges research and
development costs to operations as incurred. As such costs do not exceed 10% of
sales, the Company does not regard such costs to be material in amount.
(11) Effect of Environmental Laws - During the fiscal year ended March 31,
1998, there was no material effect on the business of the Company with respect
to its requirements to comply with environmental laws.
(12) Employees - At March 31, 1998, the Company had 22 salaried employees
and 41 employees compensated on an hourly basis.
(13) Working Capital Items - At March 31, 1998, the Company had a positive
working capital position of $542,155. See Item 6 herein.
At March 31, 1998, the Company's credit facilities consisted of (a) a
$875,000 mortgage note payable, secured by the Company's Day Hill facility,
repayable in equal monthly installments of $7,292 with the balance due on
December 1, 2002; (b) a $460,000 term note payable in sixty equal monthly
installments of $7,667 through December 1, 2002; (c) a revolving line of credit
with a maximum credit availability which was increased in April, 1997 to
$1,800,000; (d) a $333,330 term note, which was amended, payable in fifty equal
monthly installments of $6,667 through March 1, 2002; and (e) a $400,000 term
note, payable in sixty equal monthly installments of $6,667 through December,
2001. All of the above credit facilities bear interest at the bank's base
lending rate plus 1%, and are secured by substantially all assets of the Company
except the Baker Hollow facility, and certain undeveloped land contiguous to the
Baker Hollow Facility, and shares of stock of another corporation that the
Company is holding as an investment. The revolving line of credit provides for
borrowings on a demand basis against the line based on an inventory and accounts
receivable collateral formula. At March 31, 1998 the Company owed $1,061,747
under the line of credit. See Item 2 herein.
The Company's Baker Hollow facility is subject to (f) a $1,100,000 ten year
mortgage from a second financial institution due July 1, 2006 with an interest
rate of 9.72% for five years and thereafter will be adjusted to equal the then
effective five year United States Treasury Constant Maturity Index plus three
percentage points. In addition to encumbering the 651 Day Hill Road facility, an
Intercreditor Agreement between the Company's two banks provides for a partial
subordination of the first bank's $1,000,000 mortgage to provide a second
priority lien of $150,000 in favor of the second bank's ten year $1,100,000
mortgage on the Day Hill Road facility. See Items 2 and 3 herein.
Item 2. Description of Properties
The Company's principal offices and manufacturing operations are located at
its approximately 40,000 square foot one story building constructed in 1981 on a
six acre site located at 651 Day Hill Road, Windsor, Connecticut. The Day Hill
facility is a steel frame structure with polystyrene and stucco outer walls, has
parking for approximately 75 cars and contains approximately 30,000 square feet
of factory space and approximately 10,000 square feet of office space. The Day
Hill facility, along with the Company's equipment and machinery, serves as
collateral for the Company's credit facilities. See Item 1(b)(13) herein and
Note 8 of Notes to Consolidated Financial Statements.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 4
The Company also conducts certain of its manufacturing operations in a
light industrial multi-purpose facility on approximately 3.5 acres located at 50
Baker Hollow Road, Windsor, Connecticut, contiguous to the Day Hill site. The
Baker Hollow facility was constructed in 1991 and is comprised of a steel frame
structure with concrete block and stucco outer walls, has parking for
approximately 95 cars and contains approximately 28,600 square feet of factory
space. The Company also owns 3.5 acres of unencumbered undeveloped land adjacent
to the Baker Hollow facility. The Baker Hollow facility serves as collateral for
a ten year mortgage. The Company is currently leasing the remaining square feet
of the Baker Hollow facility to an unaffiliated third party with annual rentals
ranging from $46,000 to $51,750, triple net; that lease will expire in July,
1999. See Item 1(b)(13), Item 9(a-b) and Notes 8 and 11 of Notes to Consolidated
Financial Statements.
The Company's manufacturing equipment includes specially designed patented
and proprietary machinery to enhance and coil metal tubing, as well as tools,
dies and other nonproprietary machinery and equipment to perform normal
fabrication functions. The Company believes its machinery and equipment is in
good condition, reasonable wear and tear excepted.
Item 3. Legal Proceedings
There are no material legal proceedings known or threatened against the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on Tuesday, November
11, 1997. At said meeting, the following individuals were elected to serve as
directors of the Company until the next annual meeting of stockholders and until
their successors are elected and qualified: John F. Ferraro, Robert A. Lerman
and Anthony C. Mirabella.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) The Company's Common Stock is quoted and traded in the over-the-counter
market on the NASD OTC Bulletin Board system under the symbol "TDYN." The
following table indicates high and low bid and asked quotations for the
Company's Common Stock for the periods indicated based upon information compiled
by the National Quotation Bureau from the Pink Sheets, and the OTC Bulletin
Board system and represent prices between dealers and do not include retail
mark-up, mark-down or commissions; and do not represent actual transactions.
Bid Prices Asked Prices
---------- ------------
Quarter Ended High Low High Low
June 30, 1996 $0.40 $0.25 $0.45 $0.32
September 30, 1996 0.30 0.20 0.35 0.22
December 31, 1996 0.23 0.15 0.25 0.18
March 31, 1997 0.19 0.15 0.21 0.16
June 30, 1997 $0.17 $0.11 $0.185 $0.129
September 30, 1997 0.18 0.15 0.185 0.16
December 31, 1997 0.175 0.12 0.19 0.135
March 31, 1998 0.145 0.115 0.155 0.125
(b) At March 31, 1998, the number of holders of the Company's Common Stock
was 2,516 (based upon the number of record holders).
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 5
(c) The Company has not paid any dividends on the Common Stock since
inception and does not expect to pay any dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
1998 Compared to 1997
Net sales for fiscal year 1998 were $8,601,629, which represented a slight
decline of $97,712 from the prior year. As detailed in previous filings during
the year, persistent moderate temperatures in the United States, resulting from
the "El Nino" effect, severely depressed requirements for heating and air
conditioning equipment. Overall industry statistics reflected a sales decline of
10-12% for HVAC-related products in 1998, primarily resulting from the absence
of temperature extremes in both the summer and winter seasons. Comparatively,
the Company's modest sales decline of only 1% between years actually represented
continued growth in its core product lines of approximately 10% in 1998, given
the adverse market conditions.
During the year the Company successfully introduced a new line of tube-in
tube heat exchangers which increase system performance and protect other
components. These suction line heat exchangers, used primarily in refrigeration
applications, open a new market for the Company's products and represent its
initial foray into the manufacture of high-volume, second tier system
components. Further developments in coaxial coil technology enabled the Company
to expand its presence into certain specialty markets, including swimming pool
heat pumps, subcoolers and marine chillers, all of which are forecasted to grow
over the next few years. Additional market diversification was provided through
the addition of a new line of products servicing the ice machine industry. These
coils are now specified exclusively by the largest domestic manufacturer on all
its water-cooled machines. The combination of continued growth in core markets,
coupled with the ongoing development of these new product applications is
expected to result in record sales levels for fiscal 1999.
Cost of sales declined slightly from 75% of net sales in fiscal 1997 to 74%
in 1998. During the current year additional conversions to manufacturing cells
on the shop floor increased labor efficiencies and provided more flexibility in
production scheduling. Cross-training of shop floor employees, together with
their realignment into production teams has enabled the Company to retain its
commitment to quality while creating opportunities for the introduction of new
products under accelerated prototyping schedules. Manufacturing overhead also
decreased slightly as general cost containment programs coupled with less
production scrap generated from the cellular configuration served as catalysts
to drive down costs.
Selling, general and administrative expenses in the current year increased
by $171,490 or 11% over fiscal 1997. The continued growth in existing markets,
coupled with the development of new products required additional investments in
overhead functions to support these programs. Further expansion of the
engineering and marketing departments is targeted during the next fiscal year.
Other expense consists primarily of interest charges on term and revolving
debt paid to banks. During the year, the Company refinanced certain term debt
relating to fixed assets and used a portion of the proceeds to reduce the
balance of its working capital line of credit. As a result, the overall debt
load increased slightly over fiscal 1997 and the corresponding interest expense
remained level during the two-year period.
During the prior year, the Company refinanced a mortgage loan secured by
one of its manufacturing facilities. Consequently, an extraordinary gain was
recorded in fiscal 1997. No similar transactions occurred in fiscal 1998.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 6
1997 Compared to 1996
Net sales totaled $8,699,341 for the 1997 fiscal year, which represented an
increase of $1,441,212, or 20%, over the prior year. During the past two fiscal
years, sales increased by an aggregate of $2,965,449, or 52%, for the period.
The Company has continued to aggressively market new, high efficiency
condenser/evaporator components utilizing its proprietary technologies. These
products have elicited a favorable reception from a widely diversified customer
base, which has opened new markets for penetration and enabled further expansion
of the Company's existing applications. The Company has also successfully
provided specialty heat exchangers by offering integrated value-engineered
designs into systems with demanding performance requirements. Additionally,
surfaced-enhanced tubing continues to offer the Company's customers advantages
in highly efficient heat transfer for various shell and tube, subcooler, and
chiller applications both in the United States and abroad; these markets are
expected to exhibit further growth in future years.
Cost of sales remained constant at approximately 74% of net sales for both
the current and prior years. Copper and copper alloys exhibited upward price
movement during the latter stages of 1997 after dropping significantly during
the March-July 1996 period. Costs of converting raw materials remained constant
between years as increased manufacturing efficiencies offset cost increases in
direct labor and manufacturing overhead.
Self-directed work teams operating in cellular configurations have enabled
the company to reduce both pre-production cycles and manufacturing lead times.
Improvements in employee productivity coupled with added flexibility resulting
from extensive cross training on the shop floor have increased manufacturing
capacity with a minimal outlay of capital. Further progress is anticipated as
the physical plant continues to be adapted to the reconfigured work flow
patterns.
Selling, general and administrative expenses increased by $378,350 over
fiscal 1996. The additional expenses reflect added administrative costs incurred
to support the expanded sales base as well as the prior year restructuring.
Selling and engineering expenses were consistent for all periods presented.
Other expense increased slightly in the current year as a reduction in
interest expense of $43,676 was offset by certain non-recurring, non-operating
income realized in fiscal 1996. Consequently, there was a net increase in other
expense of $15,753 in 1997.
In June 1996, the Company refinanced the mortgage on one of its
manufacturing facilities. An extraordinary gain of $72,731, net of related
expenses and income taxes, was recognized as a portion of the former debt
obligation was forgiven by the financial institution.
Liquidity and Capital Resources
Working capital at March 31, 1998 was $542,155 as compared to $274,868 at
March 31, 1997. Current assets increased by $217,507, primarily due to higher
levels of inventory and the recording of a deferred income tax benefit. Current
liabilities decreased by $49,780 as higher levels of trade payables were offset
by a shift in the aging of term debt from current to long-term.
Cash provided by operating activities was $286,098 for fiscal 1998 compared
to $29,326 for the prior twelve-month period. An improvement in collections from
customers resulted in a sharp decrease in accounts receivable from the prior
year-end. Increases in inventory and accounts payable during the last quarter
also impacted cash flow as raw material purchases were expedited to support a
strong level of orders scheduled for spring delivery.
Cash used in investing activities increased slightly from $319,378 in
fiscal 1997 to $347,834 in the current year. Capital expenditures for 1998
reflected the need for additional production equipment to support new product
development and other manufacturing activities.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 7
Cash provided by financing activities in fiscal 1998 aggregated $61,209 as
compared to $290,073 in 1997. Refinancing of term debt in the current year was
primarily to consolidate existing debt. Prior year financing activities served
to establish long-term financing of fixed asset expenditures previously funded
through operating capital. Current financial resources appear adequate to
support the future growth plans of the Company.
Inflation and other cost increases have not been a significant factor for
the Company during the last two fiscal years. Prior thereto, prices for many of
the commodity products used in production exhibited significant fluctuation from
time to time. Copper and copper alloy products remain in relatively good supply
and prices have remained stable during the most recent fiscal year.
The Company has performed an extensive review of its information processing
systems and has determined that there are no significant issues concerning Year
2000-related computer problems. Further, discussions in this area with major
customers and suppliers have not revealed any issues that should have a material
impact on the Company's operations relating to Year 2000 compliance.
Considerations regarding Forward-Looking Disclosures. This annual report, in
particular this Item 6, contains certain forward-looking statements regarding
the Company, its business prospects and results of operations that are subject
to certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that may effect such forward-looking statements include,
without limitation: the Company's ability to successfully and timely develop and
finance new projects, the impact of competition on the Company's revenues, and
changes in unit prices, supply and demand for the Company's tubing products
especially in applications serving the commercial, industrial and residential
construction industries.
When used words such as "believes", "anticipates", "expects", "intends" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. The Company undertakes no obligation
to revise any forward-looking statements in order to reflect events or
circumstances that may subsequently arise. Readers are urged to carefully review
and consider the various disclosures made by the Company in this report, news
releases, and other reports filed with the Securities and Exchange Commission
that attempt to advise interested parties of the risks and factors that may
affect the Company's business.
Item 7. Financial Statements and Supplementary Data
Attached following Item 13.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No change in the Company's accountants occurred during the Company's two
most recent fiscal years or any subsequent interim period, nor did any
disagreements occur with the Company's accountants on any matter of accounting
principles or practices or financial statement disclosure that would require a
current report filing on Form 8-K.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 8
PART III
Item 9. Directors and Executive Officers of the Issuer
(a)-(b) The executive officers and directors of the Company are:
<TABLE>
<CAPTION>
Officer or
Name Age Position Director Since
- ---- --- -------- --------------
<S> <C> <C> <C>
John F. Ferraro 64 Chairman of the Board 1979
Chief Executive Officer and Secretary
Robert A. Lerman 63 President and Director 1979
Anthony C. Mirabella 56 Director 1985
Robert I. Lieberman 44 Treasurer and Chief Financial Officer 1986
</TABLE>
The term of each director and officer expires when his successor is elected
and qualified. The Company does not have an executive committee, audit
committee, investment committee or stock option committee; the Company relies
upon the full board approving matters related to such topics.
The following is a brief account of the business experience of each
director and executive officer of the Company during the past five years.
Robert A. Lerman holds the degrees of Bachelor of Mechanical Engineering,
College of the City of New York (1957), Master of Science in Mathematics,
Adelphi College (1961), and Master of Science in Electrical Engineering,
University of Connecticut (1964). In 1979, Mr. Lerman was elected Treasurer and
a Director and in 1980 President of the predecessor to the Company. Since the
Company's 1981 merger, Mr. Lerman has been President and a Director of the
Company, and from 1981 through 1992 served as Treasurer. In 1988, Mr. Lerman,
along with Mr. Ferraro, founded Pioneer Capital Corp., of which Mr. Lerman is
Secretary, Treasurer and a Director, a privately held venture capital
corporation. Mr. Lerman co-authored the text book, Nonlinear Systems Dynamics,
which was published in 1992 by Van Nostrand Reinhold, New York, New York. In
1993, Mr. Lerman, along with Mr. Ferraro, founded Pioneer Partners Corp.
("PPC"), of which Mr. Lerman is Treasurer and Managing Director; PPC is a
privately held corporation serving as the general partner of Bridge Investors I
Limited Partnership, a partnership formed by Messrs. Lerman and Ferraro for the
purpose of providing venture capital financing. In 1997, Mr. Lerman became
President and a Director of Pioneer Ventures Corp. and a manager of Ventures
Management Partners LLC, the general partner of Pioneer Ventures Associates
Limited Partnership, a partnership formed for the purpose of providing venture
capital financing to companies. In 1998, Mr. Lerman became a director of Initio,
Inc. Mr. Lerman has financial interests in other companies, none of which are
competitive with the Company. See Item 12.
John F. Ferraro holds the degree of Bachelor of Science in Industrial
Engineering, New York University (1962). In 1979, Mr. Ferraro was elected
Secretary and a Director of the predecessor to the Company. Since the Company's
1981 merger, Mr. Ferraro has been Chairman of the Board and Chief Executive
Officer of the Company. In 1988, Mr. Ferraro, along with Mr. Lerman, founded
Pioneer Capital Corp. of which Mr. Ferraro is President and a Director. In 1993,
Mr. Ferraro, along with Mr. Lerman, founded both Bridge Investors I Limited
Partnership and its general partner Pioneer Partners Corp., of which he is
Treasurer, Secretary and a Director. In 1997, Mr. Ferraro became Secretary and a
Director of Pioneer Ventures Corp. and a manager of Ventures Management Partners
LLC, the general partner of Pioneer Ventures Associates Limited Partnership. Mr.
Ferraro has financial interests in other companies, none of which are
competitive with the Company. See Item 12.
Anthony C. Mirabella holds the degrees of Bachelor of Mechanical
Engineering, Stevens Institute of Technology (1962) and Master in Business
Administration, Western New England College (1969). He was elected a Director of
the Company in 1985. Mr. Mirabella has been employed by
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 9
Connecticut Natural Gas Corporation since 1971, and is a Senior Vice President
of said concern, responsible for the Energy Network, Inc. and its district
heating and cooling operations.
Robert I. Lieberman is a certified public accountant. He holds the degree
of Bachelor of Science in Accounting and Business Administration from the State
University of New York (1975). Mr. Lieberman joined the Company as corporate
controller in 1986, in 1987 was elected Controller and Chief Financial Officer,
and in 1992 was elected Treasurer. In 1995 Mr. Lieberman was elected President
of Turbotec Products, Inc., the Company's principal operating subsidiary.
(c) Family Relationships between Directors and Officers - None.
(d) Legal Proceedings. None of the described events occurred.
Certain Rights to Proceeds
Two of the Company's three directors, Messrs. Ferraro and Lerman, currently
own 656,334 shares in which the Company has certain rights to the proceeds to be
received upon the sale of such shares which they received pursuant to 1984 stock
subscription agreements, as amended in 1988 and in 1994. Upon the sale of any of
these shares, the selling director shall pay directly to the Company at the time
of receipt of the net proceeds of such sale, an amount equal to (i) such net
sales proceeds ($0.40 for Messrs. Ferraro and Lerman) less (ii) the purchase
price paid by the subscriber for each share sold (approximately $0.21). The
directors retain full voting and dispositive control over these shares. The
Company has no other rights with respect to such shares.
A total of 121,641 shares of a former director, R. Robert Googins, shares
are subject to similar restrictions as described above with the company
receiving the difference between approximately $0.21 and $1.00.
Section 16(a) Beneficial Ownership Reporting Compliance
At the fiscal year end and through the date hereof, the Company had not
received any reports from any director, officer or principal shareholder which
indicated on the report, or by calculation based on the transaction receipt
dates, that any report was not filed on a timely basis.
Item 10. Executive Compensation and Transactions
(a)-(b) Summary of Compensation - The following table sets forth on an
accrual basis for the three most recently ended fiscal years, the remuneration
of each of the Company's officers whose remuneration exceeded $100,000 and for
all officers of the Company as a group.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 10
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term Compensation
------------------------------------------------------
Compensation Awards Payouts Other
------------------------------------------------------------------------
Company
Contri-
Restricted bution
Other Stock Options/ LTIP to
Name/Position Fiscal Year Salary/Bonus Compensation Awards SARS Payouts 401(k)
- ------------- ----------- ------------ ------------ ------ ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
John F. Ferraro (1) 1998 $149,029 $3,137 $0 0 shs $0 $398
Chairman of the Board, 1997 $158,576(3) $2,413 $0 0 shs $0 $0
Secretary & Director 1996 $ 85,402(2) $2,350 $0 2,000,000 shs $0 $0
Robert A. Lerman(1) 1998 $144,685 $3,450 $0 0 shs $0 $776
President & Director 1997 $157,191(3) $3,450 $0 0 shs $0 $970
1996 $ 85,402(2) $3,985 $0 2,000,000 shs $0 $466
Robert I. Lieberman(4) 1998 $112,561 $15,330 $0 0 shs $0 $0
Treasurer and CFO & 1997 $108,775 $750 $0 0 shs $0 $0
President of Turbotec 1996 $ 81,926 $750 $0 150,000 shs $0 $0
</TABLE>
- ----------
(1) Messrs. Ferraro and Lerman entered into five year employment contracts with
the Company effective April 1, 1996. Each employment contract provides for
a basic salary at an annual rate of $150,000 with an annual increase at
April 1st of each year based on increases in the Consumer Price Index. Each
employment contract requires the Company to provide medical insurance
coverage for the employee as well as $50,000 of group term insurance, and
$1,500,000 of additional life insurance. During the fiscal year ended March
31, 1998, the Company paid $108,909 in net premiums on the two life
insurance policies which provide that upon death or termination of each
such insured's employment, the Company will be repaid by the insurer and/or
the insured the lesser of the then existing cash surrender value of the
policy or the aggregate net premiums paid by the Company. At March 31,
1998, the amount receivable for premiums paid on the policies was $923,790.
In addition, each employment contract contains a provision providing that
in the event of disability, the employee will receive disability payments
of $100,000 per year for ten years (with proportional reductions in the
event of partial disability); and $5,000 per year for tax planning
services. The contract may be terminated by the employee on 120 days prior
written notice. The contract may also be terminated by the Company in which
event the employee will be paid termination compensation equal to each
employee's then current salary for either the longer of the remainder of
the unrenewed term or three years; in the event there is a change in
control of the Company and the employee is terminated, the employee shall
receive twice the amount of termination compensation which would otherwise
be due.
(2) Messrs. Ferraro and Lerman waived all of their salaries and benefits for
the months of April through September of 1995 to assist the Company in its
cash flow needs.
(3) In 1997, Messrs. Ferraro and Lerman each received cash bonuses of $17,500.
(4) Mr. Lieberman entered into a 5 year employment contract with the Company's
primary operating subsidiary effective April 1, 1996. Under the contract
Mr. Lieberman is to be paid a base salary of $110,000 for the first year,
increased by $5,000 annually for each of the following two years. In
addition, he may be paid a bonus based on performance targets established
by the board of directors. The employment contract requires the Company to
provide certain other benefits including life and disability insurance,
subject to a maximum cost per year. The contract may be terminated for
"cause" immediately or by the employee on 90 days prior written notice. The
contract may also be terminated by the Company in which event the employee
will be paid termination compensation for 180 days.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 11
(b) Remuneration - For the fiscal year ending March 31, 1999, the Company
anticipates paying aggregate direct remuneration (based on current salaries and
anticipated bonuses) of approximately $430,000 to all officers as a group (three
persons) of which Mr. Ferraro and Mr. Lerman will each be paid approximately
$155,000, Mr. Lieberman will be paid approximately $120,000.
(c) Stock Option Plans
1992 Incentive Stock Option Plan - On December 16, 1991, the Company's
stockholders approved the adoption of the Company's 1992 Incentive Stock Option
Plan (the "1992 Plan") reserving 500,000 shares of the Company's Common Stock
for issuance pursuant to ISOs which may be granted under the 1992 Plan at
exercise prices at least equal to 100% of the fair market value of the Common
Stock on the date of the effective date of the grant of the option.
At June 2, 1998 no 1992 Plan ISOs were outstanding. No options under the
1992 Plan were granted in fiscal year ended March 31, 1998.
(d) Aggregated Option/SAR Exercises and Fiscal Year End Option/SAR Values -
No options were exercised by any executive officers of the Company during fiscal
year ended March 31, 1998. See also Item 10(f) and Item 12. The following table
reflects the aggregated option exercise values at year end held by the executive
officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Shares Options at Options at
Acquired FY-End FY-End ($)
Name of on Value Exercisable ("E") Exercisable ("E")
Officer or Director Exercise Realized Unexercisable ("U") Unexercisable ("U")
- ------------------- -------- -------- ------------------- -------------------
<S> <C> <C> <C> <C>
John F. Ferraro 0 $0.00 2,000,000 E $240,000 E
Robert A. Lerman 0 $0.00 2,000,000 E $240,000 E
Anthony C. Mirabella 0 $0.00 50,000 E $ 6,000 E
Robert I. Lieberman 0 $0.00 150,000 E $ 18,000 E
</TABLE>
(e) 1990 Non-Qualified Stock Incentive Plan - On February 28, 1990, the
Company's stockholders approved the adoption of the Company's 1990 Non-Qualified
Stock Incentive Plan ("1990 Plan") reserving 750,000 shares of the Company's
Common Stock for issuance pursuant to the 1990 Plan in the form of a stock
option, a stock bonus, or a stock appreciation right ("SAR"). The purchase price
for the exercise of shares subject to any option shall not be less than 33.33%
of the fair market value ("FMV") of the shares of common stock of the Company on
the effective date of the option and in no event shall be less than the par
value of the common stock; the value of the shares subject to any bonus shall be
equal in value to a fixed dollar amount and such value shall not be less than
33.33% of the FMV of the shares of common stock of the Company on the effective
date of the bonus and in no event shall be less than the par value of the common
stock; the value of an SAR award of stock is equal to or less than (as the Board
may determine) the excess of the FMV of one share of stock on the date of the
exercise of the SAR less the
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 12
FMV of one share of stock on the effective date of the award, the result of
which is multiplied by the number of shares with respect to which the SAR shall
have been exercised.
No stock incentives were issued under the 1990 Plan in fiscal year ended
March 31, 1998.
(f) 1995 Stock Options - On May 15, 1995, the Company's Board of Directors
approved the adoption of the 1995 Stock Options ("1995 Options") reserving
4,920,000 shares of the Company's Common Stock for issuance in the form of stock
options. The purchase price for the exercise of shares subject to the options
equaled the fair market value ("FMV") of the shares of common stock of the
Company on the effective date of the option, May 19, 1995. The expiration date
of the options has been extended through September, 2002. See also Item 10(d)
and Item 12.
The compensation values of the stock incentives received by the named
executive officers and directors of the Company during the last three fiscal
years are reflected in the Summary Compensation Table at the column labeled
"Restricted Stock Awards" at Item 10(a) hereof.
(g) Directors' Fees - During the fiscal year ended March 31, 1998,
directors' fees of $3,900 were paid to the Company's one director who is not an
officer or employee. It is anticipated that such director will be paid an
aggregate of approximately $4,000 in directors' fees in the fiscal year ending
March 31, 1999.
(h) Employee Retirement Savings Plan - Effective April 1, 1991, the
Company adopted the Thermodynetics, Inc. 401(k) Retirement Savings Plan (the
"401(k) Plan"). The 401(k) Plan allows full-time employees of the Company to
defer two to fifteen percent of their earnings on a pre-tax basis through
earnings or salary reduction contributions to the 401(k) Plan. The Company may
in its discretion make matching contributions in the form of the Company's
common stock equal to a percentage of the employees' aggregate contributions.
The Company has not yet determined its matching contributions to the 401(k) Plan
for the plan year ending December 31, 1998. See Note 15 of Notes to Consolidated
Financial Statements.
The assets of the 401(k) Plan are held in trust for the exclusive benefit
of the participants by the trustees of the Plan, Messrs. Ferraro, Lerman and
Mirabella. The Board of Directors may remove the trustees and appoint their
successors at any time. The Company administers and pays all costs and expenses
of the 401(k) Plan. The Company presently intends to continue the 401(k) Plan
indefinitely; however, the Company has reserved the right to terminate the
401(k) Plan by vote of its Board of Directors. Upon such termination,
participants will become fully vested and will receive the amounts in their
respective accounts in accordance with the terms of the 401(k) Plan. The Company
may also amend the 401(k) Plan at any time by a majority vote of its Board of
Directors.
The compensation value of the 401(k) participation received by the below
listed officers and directors is reflected in the Summary Compensation Table at
the column labeled "Company Contribution to 401(k) Plan" at Item 10(a) hereof.
The following table sets forth the number of shares of Common Stock contributed
to the below referenced persons or groups of persons during the 401(k) Plan year
ended December 31, 1997, Column (1), and for all years from inception of the
Plan through Plan year ended December 31, 1997, Column (2).
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 13
Shares Contributed by the Company
Name and Held in Trust Under 401(k) Plan
---- -----------------------------------
Officers and Directors Column (1) Column (2)
---------------------- ---------- ----------
(Aggregate)
John F. Ferraro(a) 6,511 37,120
Robert A. Lerman(a) 12,688 49,251
Robert I. Lieberman -0- 16,939
Anthony C. Mirabella(a) -0- -0-
All officers and directors
as a group(a) (4 persons) 19,199 103,310
Total Matching Contribution 95,362 634,803
to all employees (32 persons)
- ----------
(a) Trustees of the 401(k) Plan. Excludes the aggregate shares held in
trust by the trustees of the 401(k) Plan for all participating
employees.
(i) Compensation Committee Interlocks and Insider Participation - The Board
of Directors has not established a compensation committee. The compensation of
both the Chairman and the President is determined by their employment contracts.
The compensation of the Treasurer was determined by an employment contract. See
Footnotes (1) and (4) to Summary Compensation Table in Item 10(a) hereof. The
executive officers of the Company serve in a variety of executive capacities and
as directors for other corporations as described in Item 9 hereof. No activities
performed by any executive officer of the Company for any corporation or entity,
other than the Company, were related to or were a factor in determining the
compensation of the officers and directors of the Company.
(j) Other Plans and Employment Contracts - The Company does not have any
other pension or similar plan. See Item 10(a) footnotes (1) and (2) herein as to
the Company's employment contracts with Messrs. Ferraro and Lerman which provide
for the terms of their compensation and disability and termination payment
provisions.
(k) Recent Sales of Unregistered Securities - The Company has not made any
recent sales of any unregistered securities.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of June 2, 1998, the number of shares of
the Company's Common Stock owned beneficially to the knowledge of the Company,
by each beneficial owner of more than 5% of such Common Stock, by each director
and by all officers and directors of the Company as a group. The shares
underlying the ISOs held by two officers/directors and one officer which are
presently exercisable are deemed beneficially owned.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 14
<TABLE>
<CAPTION>
Name and Address(1) Amount and Nature Percent of
of Beneficial Owner of Beneficial Ownership Class Owned
- ------------------- ----------------------- -----------
Directors and Officers
- ----------------------
<S> <C> <C>
John F. Ferraro 3,642,039 shs (2)(6) 25.3%
Robert A. Lerman 3,910,151 shs (2)(7) 27.1%
Anthony C. Mirabella 210,086 shs(3) 1.7%
Robert I. Lieberman 252,739 shs (4) 2.0%
All officers and 8,181,136 shs (5) 49.3%
directors as a group
(four persons)
Other 5% Shareholders
None
</TABLE>
- ----------
(1) The address of all officers and directors is c/o the Company, 651 Day
Hill Road, Windsor, CT 06095.
(2) Includes options exercisable to acquire 2,000,000 shares; includes
37,120 shares held for Mr. Ferraro and 49,251 shares held for Mr.
Lerman in trust under the Company's 401(k) Plan, respectively;
includes 244,525 shares held by the spouse of Mr. Lerman, and 33,360
shares held by the spouse of Mr. Ferraro, respectively; excludes the
aggregate 634,803 shares held in trust by the trustees of the 401(k)
Plan for all of the participating employees; excludes 166,121 shares
held by a corporation which is owned by Messrs. Lerman and Ferraro.
(3) Includes options exercisable to acquire 50,000 shares. Excludes the
aggregate 539,441 shares held in trust by the trustees of the 401(k)
Plan for all of the participating employees.
(4) Includes options exercisable to acquire 150,000 shares; includes
16,939 shares held in trust under the Company's 401(k) Plan.
(5) Includes options exercisable to acquire 4,200,000 shares; includes an
aggregate 103,310 shares held in trust under the Company's 401(k) Plan
for each respective officer's account; excludes the aggregate 634,803
shares held in trust by the trustees of the 401(k) Plan for all of the
participating employees. Includes 244,525 shares held by the spouse of
Mr. Lerman, and 33,360 shares held by the spouse of Mr. Ferraro.
Includes 166,121 shares held by a corporation which is owned by
Messrs. Lerman and Ferraro.
(6) Mr. Ferraro contributed shares of the Company in Plan years 1991, 1992
and 1994 in accordance with guidelines to the John F. Ferraro Defined
Benefit Pension Plan and Trust which was established in 1984; the
aggregate holdings of outstanding shares of the Company's stock
actually issued which are now owned by that pension plan equals
1,050,000 shares; Mr. Ferraro intends to continue to make such
contributions to his pension plan; Mr. Ferraro, as Trustee of the
Plan, has full voting authority over that pension plan's shares; thus
that pension plan's shares have been included Mr. Ferraro's aggregate
beneficial ownership calculation.
(7) Mr. Lerman has been annually contributing shares of the Company which
he owns to the Robert A. Lerman Money Purchase Plan and Trust,
established in 1988, in accordance with its guidelines; almost all of
Mr. Lerman's aggregate holdings of outstanding shares actually issued
are now owned by that pension plan, except for those shares subject to
the $0.40 per share sharing of proceeds; Mr. Lerman intends to
continue to make such contributions; Mr. Lerman, as Trustee of that
pension plan, has full voting authority over that pension plan's
shares; thus that pension plan's shares have been included in Mr.
Lerman's aggregate beneficial ownership calculation.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 15
Item 12. Certain Relationships and Related Transactions
(a)-(b) Transactions with Management and Others and Certain Business
Relationships - During the fiscal year ended March 31, 1998, the Company has not
been engaged in transaction(s) with any officers, directors, beneficial holders
of more than 5% of its outstanding voting securities and entities with which
they were affiliated. None of the officers and directors of the Company are
currently engaged in businesses competitive to the business of the Company.
(c) Reports on Form 8-K - The Company has not filed any reports on Form 8-K
with respect to or during the year ended March 31, 1998.
(d) Indebtedness of Management - At March 31, 1998, no member of management
was indebted to the Company in excess of $60,000.
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets - March 31, 1998 and March 31, 1997.
Consolidated Statements of Income and Comprehensive Income - For The
Years Ended March 31, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity - For The Years Ended
March 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows - For The Years Ended March 31,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements
(b) Exhibits
(3)(a)(i) Certificate of Incorporation, as amended. (a)
(3)(a)(ii) February 9, 1987 Amendment to Certificate of
Incorporation.(b)
(3)(b) By-Laws. (c)
(4)(i) Form of Common Stock certificate. (d)
(10)(i) $875,000 Secured Term Note dated December 4, 1997.
(10)(ii) Amendment of Note dated September 30, 1997 in amount of
$333,330.
(10)(iii) $460,000 Secured Term Note dated October 3, 1997.
(10)(iv) October 3, 1997 letter amendment to Amended and
Restated Loan and Security Agreement (Accounts
Receivable and Inventory) originally dated October 31,
1994.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 16
(11)(i) Calculations of Earnings (Loss) Per Share. This
information is presented in Footnote 10 to the
Financial Statements.
(21) Subsidiaries - The following table indicates the wholly
owned subsidiaries of Thermodynetics, Inc. and their
respective states of incorporation.
<TABLE>
<CAPTION>
Name State of Incorporation Year of Incorporation
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Turbotec Products, Inc. Connecticut 1978
National Energy Systems, Inc. Connecticut 1984
TPI Systems, Inc. Connecticut 1983
======================================================================================================
</TABLE>
Incorporated by Reference to:
(a) Exhibit 3.1 to Registration Statement on Form S-1 (File No. 2-71500)
(b) Exhibit 3(a)(ii) to Annual Report on Form 10-K for fiscal year ended
1988 (File No. 0-10707)
(c) Exhibit 3.2 to Registration Statement on Form S-1 (File No. 2-71500)
(d) Exhibit 4.1 to Registration Statement on Form S-1 (File No. 2-71500)
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
(Registrant)
THERMODYNETICS, INC.
By: /s/ John F. Ferraro
-----------------------------------------
John F. Ferraro, Chairman of
the Board, Chief Executive Officer,
Secretary and Director
Date: June 25, 1998
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
(Registrant)
THERMODYNETICS, INC.
By: /s/ John F. Ferraro By: /s/ Robert A. Lerman
----------------------------------- -------------------------------
John F. Ferraro, Chairman of Robert A. Lerman, President
the Board, Chief Executive Officer, and Director
Secretary and Director
Date: June 25, 1998 Date: June 25, 1998
By: /s/ Robert I. Lieberman By: /s/ Anthony C. Mirabella
----------------------------------- -------------------------------
Robert I. Lieberman, Chief Anthony C. Mirabella, Director
Financial Officer and
Treasurer
Date: June 25, 1998 Date: June 24, 1998
<PAGE>
================================================================================
THERMODYNETICS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL
STATEMENTS
AS OF MARCH 31, 1998 AND 1997
TOGETHER WITH
INDEPENDENT AUDITORS' REPORT
================================================================================
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Income and Comprehensive Income 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Thermodynetics, Inc.
We have audited the consolidated balance sheets of Thermodynetics, Inc. and
subsidiaries (Company) as of March 31, 1998 and 1997 and the related
consolidated statements of income and comprehensive income, stockholders'
equity, and cash flows for the years ended March 31, 1998, 1997 and 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Thermodynetics, Inc.
and subsidiaries as of March 31, 1998 and 1997 and the results of their
operations and their cash flows for the years ended March 31, 1998, 1997 and
1996 in conformity with generally accepted accounting principles.
/s/ DISANTO, BERTOLINE AND COMPANY, P.C.
--- ------------------------------------
Glastonbury, Connecticut
May 29, 1998
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,023 $ 2,550
Accounts receivable, net of allowance for doubtful
accounts of $20,000 and $39,000 in 1998 and 1997, respectively 1,039,078 1,227,155
Inventories 1,448,420 1,230,566
Prepaid expenses and other current assets 339,213 250,956
Deferred income taxes 100,000 --
----------- -----------
Total current assets 2,928,734 2,711,227
PROPERTY, PLANT AND EQUIPMENT, net 4,512,438 4,483,190
MARKETABLE EQUITY SECURITIES 392,000 392,000
OTHER ASSETS 1,180,732 991,208
----------- -----------
$ 9,013,904 $ 8,577,625
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Demand note payable and current maturities of long-term debt $ 1,353,313 $ 1,556,991
Accounts payable 912,435 758,914
Accrued expenses and taxes 120,831 120,454
----------- -----------
Total current liabilities 2,386,579 2,436,359
LONG-TERM DEBT, less current maturities included above 2,366,345 2,101,458
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized 25,000,000 shares, issued
12,569,646 shares and 12,476,057 shares in 1998
and 1997, respectively 125,696 124,761
Additional paid-in capital 5,411,524 5,404,037
Deficit (759,719) (972,469)
Accumulated other comprehensive income (loss) (196,000) (196,000)
----------- -----------
4,581,501 4,360,329
Less: treasury stock, at cost, 256,898 shares 320,521 320,521
----------- -----------
4,260,980 4,039,808
----------- -----------
$ 9,013,904 $ 8,577,625
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 2 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $ 8,601,629 $ 8,699,341 $ 7,258,129
COST OF SALES 6,371,482 6,509,201 5,386,030
----------- ----------- -----------
Gross profit 2,230,147 2,190,140 1,872,099
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,758,473 1,586,983 1,208,633
----------- ----------- -----------
Income from operations 471,674 603,157 663,466
OTHER INCOME (EXPENSE)
Other, net 9,608 (31,495) 27,934
Interest expense (368,532) (323,166) (366,842)
----------- ----------- -----------
(358,924) (354,661) (338,908)
----------- ----------- -----------
Income before income taxes
and extraordinary item 112,750 248,496 324,558
PROVISION FOR (BENEFIT FROM) INCOME TAXES (100,000) (47,000) --
----------- ----------- -----------
Income before extraordinary item 212,750 295,496 324,558
EXTRAORDINARY ITEM - gain on forgiveness of debt,
net of income tax of $47,000 -- 72,731 --
----------- ----------- -----------
Net income 212,750 368,227 324,558
OTHER COMPREHENSIVE INCOME, net of tax
Unrealized holding gains arising during period -- 49,000 49,000
----------- ----------- -----------
Other comprehensive income, net of tax -- 49,000 49,000
----------- ----------- -----------
Comprehensive income $ 212,750 $ 417,227 $ 373,558
=========== =========== ===========
EARNINGS PER COMMON SHARE
Income before extraordinary item $ 0.02 $ 0.02 $ 0.03
Extraordinary item -- 0.01 --
=========== =========== ===========
Net income $ 0.02 $ 0.03 $ 0.03
=========== =========== ===========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION
Income before extraordinary item $ 0.01 $ 0.02 $ 0.02
Extraordinary item -- -- --
=========== =========== ===========
Net income $ 0.01 $ 0.02 $ 0.02
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------ -------------------------
Additional
Number of Paid-in Number of
Shares Amount Capital Shares Amount Deficit
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1995 12,271,054 $ 122,710 $ 5,398,662 (256,898) $ (320,521) $(1,665,254)
Issuance of stock pursuant to
401(k) plan 96,610 967 2,897 -- -- --
Comprehensive income -- -- -- -- -- 324,558
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1996 12,367,664 123,677 5,401,559 (256,898) (320,521) (1,340,696)
Issuance of stock pursuant to
401(k) plan 98,393 984 2,028 -- -- --
Issuance of stock pursuant to
incentive plan 10,000 100 450 -- -- --
Comprehensive income -- -- -- -- -- 368,227
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1997 12,476,057 124,761 5,404,037 (256,898) (320,521) (972,469)
Issuance of stock pursuant to
401(k) plan 93,589 935 7,487 -- -- --
Comprehensive income -- -- -- -- -- 212,750
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1998 12,569,646 $ 125,696 $ 5,411,524 (256,898) $ (320,521) $ (759,719)
=========== =========== =========== =========== =========== ===========
<CAPTION>
Accumulated
Other
Comprehensive
Income (Loss) Total
------------ -----------
<S> <C> <C>
Balance, March 31, 1995 $ (294,000) $ 3,241,597
Issuance of stock pursuant to
401(k) plan -- 3,864
Comprehensive income 49,000 373,558
----------- -----------
Balance, March 31, 1996 (245,000) 3,619,019
Issuance of stock pursuant to
401(k) plan -- 3,012
Issuance of stock pursuant to
incentive plan -- 550
Comprehensive income 49,000 417,227
----------- -----------
Balance, March 31, 1997 (196,000) 4,039,808
Issuance of stock pursuant to
401(k) plan -- 8,422
Comprehensive income -- 212,750
----------- -----------
Balance, March 31, 1998 $ (196,000) $ 4,260,980
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 212,750 $ 368,227 $ 324,558
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 334,858 350,068 336,867
Deferred tax benefit (100,000) (47,000) --
Compensation expense pursuant to stock
incentive plan -- 550 --
Gain on forgivness of debt -- (126,266)
Unrealized and realized loss on marketable
equity securities -- -- 500
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 188,077 (22,443) (367,965)
Increase (decrease) in accounts payable 153,521 (317,808) 256,683
Increase in accrued expenses and taxes 8,799 334 57,212
(Increase ) decrease in other assets (10,340) (3,096) 4,081
(Increase) decrease in prepaid expenses and
other current assets (79,804) 18,886 (27,322)
Increase in receivable from
insurance companies and insureds - officers'
life insurance, net (203,909) (278,218) (144,511)
(Increase) decrease in inventories (217,854) 86,092 (311,128)
--------- --------- ---------
Net cash provided by operating activities 286,098 29,326 128,975
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable equity securities -- -- 8,336
Purchases of property, plant and equipment (347,834) (319,378) (259,359)
--------- --------- ---------
Net cash used in investing activities (347,834) (319,378) (251,023)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and long-term debt 460,949 588,677 399,055
Principal payments on debt obligations (399,740) (298,604) (277,002)
--------- --------- ---------
Net cash provided by financing activities 61,209 290,073 122,053
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH (527) 21 5
CASH, beginning of year 2,550 2,529 2,524
--------- --------- ---------
CASH, end of year $ 2,023 $ 2,550 $ 2,529
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 5 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of
Thermodynetics, Inc. (the Company), and its wholly-owned subsidiaries,
Turbotec Products, Inc., TPI Systems, Inc. and National Energy Systems,
Inc. All material intercompany balances and transactions have been
eliminated in consolidation.
NATURE OF OPERATIONS
Thermodynetics, Inc. is a manufacturer of high performance, high quality
heat exchangers and flexible connector products for heat transfer and
plumbing applications. The Company markets its products in the United
States, Canada and abroad to customers in the space conditioning,
refrigeration, automotive, biomedical, plumbing, water heating and
aerospace industries.
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
the disclosure of contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
MARKETABLE EQUITY SECURITIES
The Company determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of
each balance sheet date.
The Company classifies certain highly liquid securities as trading
securities. Trading securities are stated at fair value and unrealized
holding gains and losses are included in the determination of net income.
Securities that are not classified as trading are classified as
available-for-sale. Available-for-sale securities are carried at fair
value, with the unrealized holding gains and losses, net of tax, reported
as other comprehensive income.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
on a first-in, first-out basis.
- 6 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the related assets, or, in the case of leasehold
improvements and leased property under capital lease, over the remaining
term of the related lease or estimated useful life of the related asset,
whichever is shorter. Expenditures which substantially increase the useful
lives of the related assets are capitalized. Maintenance, repairs and minor
renewals on property and equipment are charged to operations as incurred
INTANGIBLE ASSETS
Patent costs are capitalized and amortized on a straight-line basis over 17
years. Other intangibles are amortized on a straight-line basis over their
estimated useful lives.
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with original
maturities of three months or less to be cash equivalents. The Company had
no cash equivalents as of March 31, 1998 and 1997.
INCOME TAXES
The Company files consolidated federal and combined state corporate income
tax returns. Tax credits are recorded as a reduction of income taxes in the
year realized.
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
STOCK OPTIONS
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which
establishes a fair value based method of accounting for an employee stock
option or similar equity instrument. SFAS No. 123 gives entities a choice
of recognizing related compensation expense by adopting the new fair value
method or to continue to measure compensation using the intrinsic value
approach under Accounting Principles Board (APB) Opinion No. 25, the former
standard. If the former standard for measurement is elected, SFAS No. 123
requires supplemental disclosure to show the effects of using the new
measurement criteria. The Company intends to continue using the measurement
prescribed by APB Opinion No. 25, and accordingly, this pronouncement will
not affect the Company's consolidated financial position or results of
operations.
- 7 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share". The objective of SFAS No. 128 is to simplify
the standards for computing earnings per share (EPS) and make them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. All prior period EPS data
presented has been restated to conform with the provisions of this
Statement.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components (i.e.
revenues, expenses, gains, and losses) in a full set of financial
statements. All prior periods have been restated to conform with the
provisions of this Statement.
NOTE 2 - FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash, trade accounts receivables,
marketable equity securities and other assets:
o Cash - The Company places its cash deposits with high quality credit
institutions. Such deposits, at times, may exceed federal depository
insurance limits.
o Trade accounts receivable - The Company's customers, who are primarily
original equipment manufacturers, serve a wide variety of markets
worldwide; principal applications involve the control of heat
transfer. Total sales to individual customers which exceeded ten
percent of net sales during each of the years ended March 31, 1998,
1997 and 1996 aggregated 56% (3 customers), 49% (3 customers) and 53%
(3 customers), respectively. The Company performs on-going credit
evaluations of its customers and generally does not require
collateral. Allowances for potential credit losses are maintained and
such losses have been within management's expectations.
o Marketable equity securities - The investment is concentrated in the
common stock of a publicly held entity and is subject to risks of the
market as a whole and the industries in which the entity operates.
- 8 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 2 - FINANCIAL INSTRUMENTS (Continued)
CONCENTRATIONS OF CREDIT RISK (Continued)
o Other assets include a receivable relating to officers' life insurance
(see Note 6) which represents the net aggregate proceeds due the
Company from the insurers and insured for the reimbursement of policy
premiums. Certain rights to cash value and proceeds from these
policies have been assigned to the Company in order to secure amounts
due.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Fair Value of
Financial Instruments, requires disclosure of the fair value of financial
instruments for which the determination of fair value is practicable. SFAS
No. 107 defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between
willing parties.
The carrying amounts of the Company's financial instruments approximates
their fair value as outlined below:
o Cash, trade receivables, trade payables - The carrying amounts
approximate their fair value because of the short maturity of those
instruments.
o Marketable equity securities - Marketable equity securities are
carried at fair value which is determined using quoted market prices.
o Management has determined that it is not practicable to estimate the
fair value of the receivable relating to officers' life insurance
since these related party advances have no scheduled repayment terms
and the availability of similar financing from unrelated lenders is
uncertain.
o Demand note payable - The carrying amount approximates fair value as
the demand note payable has a variable interest rate which fluctuates
with the market.
o Long-term debt - The carrying amount approximates fair value as the
interest rates on the various notes approximate the Company's
estimated incremental borrowing rate.
The Company's financial instruments are held for other than trading
purposes.
- 9 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 3 - INVENTORIES
The major classes of inventories consist of the following as of March 31:
1998 1997
----------- ---------
Raw materials $ 910,993 $ 666,419
Work-in-process 299,895 208,626
Finished goods 237,532 355,521
-------- -----------
$1,448,420 $1,230,566
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of March 31:
1998 1997
---------- ----------
Land $ 204,484 $ 204,484
Buildings 3,676,096 3,676,096
Machinery and equipment 3,565,173 3,369,729
Furniture and fixtures 849,149 765,290
Improvements 668,350 599,819
---------- ----------
8,963,252 8,615,418
Less: accumulated depreciation 4,450,814 4,132,228
---------- ----------
$4,512,438 $4,483,190
Depreciation expense totaled $318,586, $316,072 and $317,571 for the years
ended March 31, 1998, 1997 and 1996, respectively.
- 10 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 5 - MARKETABLE EQUITY SECURITIES
The cost and market values of marketable equity securities (common stocks)
as well as the gross unrealized gains and losses are as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Market Unrealized Unrealized Market
Cost Gain Loss Value Cost Gain Loss Value
--------- ---------- --------- --------- ---- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noncurrent
Common
stock $ 588,000 $ -- $(196,000) $ 392,000 $ 588,000 $ -- $(196,000) $ 392,000
========= ======= ========= ========= ========= ===== ========= =========
</TABLE>
The Company owns 49,000 shares of common stock of a developer of
cogeneration projects which has been classified as noncurrent marketable
equity securities. As of March 31, 1998 and 1997, accumulated other
comprehensive loss totaling $196,000 has been included in stockholders'
equity to reflect the excess of the cost basis over market value.
Realized and unrealized gain (loss) on current marketable equity securities
of $-0-, $-0- and $(500) are included in other income for the years ended
March 31, 1998, 1997 and 1996, respectively.
NOTE 6 - OTHER ASSETS
Other assets consist of the following as of March 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land contiguous to principal facility $ 116,593 $ 115,111
Deferred assets 5,125 8,468
Intangible assets, net of accumulated amortization of
$376,748 and $360,476 in 1998 and 1997, respectively 127,623 142,136
Officers' life insurance premiums receivable, net 923,790 719,881
Deposits 7,601 5,612
---------- ----------
$1,180,732 $ 991,208
========== ==========
</TABLE>
Amortization expense totaled $16,272, $19,296 and $19,296 for the years
ended March 31, 1998, 1997 and 1996, respectively.
- 11 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 7 - DEMAND NOTE PAYABLE
The Company has a demand note agreement which provides for borrowings,
based on a collateral formula, up to a maximum of $1,800,000. Interest is
payable monthly on amounts outstanding at the bank's base lending rate plus
1.0% (9.5% at March 31, 1998). Borrowings outstanding at March 31, 1998 and
1997 totaled $1,061,747 and $1,303,813, respectively.
The demand note and term notes payable (see Note 8) are collateralized by
substantially all assets of the Company, excluding the Company's
multi-purpose building. In addition, the Company must comply with certain
financial and non-financial covenants, noncompliance with which would be
considered an event of default and provide the bank with the right to
demand repayment prior to each loan's respective maturity date. The demand
note may be terminated by either party with thirty days written notice.
NOTE 8 - LONG-TERM DEBT
Long-term debt consists of the following as of March 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Mortgage note payable - principal facility $ 845,832 $ 694,420
Mortgage note payable - multi-purpose building 1,066,530 1,086,400
Term notes payable 708,326 523,931
Other notes payable 37,223 49,885
---------- ----------
2,657,911 2,354,636
Less: current maturities 291,566 253,178
---------- ----------
$2,366,345 $2,101,458
========== ==========
</TABLE>
On October 3, 1997, the Company obtained a secured term note from a bank
which replaced two previous term notes dated May 24, 1993 and February 22,
1994. The $460,000 note requires monthly principal installments of $7,667
plus interest at the bank's lending rate plus 1% (9.5% at March 31, 1998),
maturing on December 1, 2002. The note is secured by substantially all
assets of the Company.
On December 4, 1997, the Company obtained a secured term note from a bank
from which the proceeds replaced a mortgage note payable on the Company's
principal facility and the remainder was used as payment against the
Company's demand note payable. The $875,000 note requires monthly principal
installments of $7,292 (except the last installment which shall be the
unpaid balance) plus interest at the bank's lending rate plus 1% (9.5% at
March 31, 1998), maturing on December 1, 2002. The note is secured by
substantially all of the assets of the Company.
- 12 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 8 - LONG-TERM DEBT (Continued)
On June 25, 1996, the Company refinanced the mortgage on its multi-purpose
building by obtaining a 10 year, $1,100,000 mortgage note payable. The
mortgage note is secured by a first mortgage on the multi-purpose building
(see Note 10) and a second mortgage on the Company's principal facility.
The note is payable in monthly installments of principal and interest of
$10,510. The note has a fixed interest rate of 9.72% through August, 2001
at which time the interest rate will be adjusted as defined in the note.
The Company recorded an extraordinary gain of $119,731 resulting from debt
forgiven upon refinancing.
Maturities of long-term debt for each of the years succeeding March 31,
1998 are as follows:
Year ending March 31,
1999 $ 291,566
2000 297,684
2001 297,961
2002 260,905
2003 and thereafter 1,509,795
----------
$2,657,911
==========
NOTE 9 - STOCKHOLDERS' EQUITY
STOCK OPTIONS
In February 1990, the stockholders approved the Company's Non-Qualified
Stock Incentive Plan (the 1990 Plan) reserving 750,000 shares of the
Company's common stock for issuance pursuant to options, stock appreciation
rights (SAR) or stock awards which may be granted under the 1990 Plan.
Participation in the 1990 Plan and the type and amount of the award or
grant to be made to each participant are determined by the Board of
Directors. Through March 31, 1998, no options or SARs had been granted
under the 1990 Plan, however a total of 304,500 shares have been granted of
which no shares were issued to employees and directors during fiscal years
1998, 1997 and 1996. At March 31, 1998, 445,500 shares remain available for
grant under the 1990 Plan.
In December 1991, the stockholders approved the Company's Incentive Stock
Option Plan (the 1992 ISO Plan) reserving 500,000 shares of the Company's
common stock for issuance pursuant to options which may be granted under
the 1992 ISO Plan at exercise prices equal to the market value on the date
of grant. The terms of the 1992 ISO Plan are essentially the same as the
1982 ISO Plan. Through March 31, 1998, 140,000 options had been granted
under the 1992 ISO plan at an exercise price of $.34 per share all of which
expired without exercise as of March 31, 1998.
- 13 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
STOCK OPTIONS (Continued)
In May, 1995, the Board of Directors granted options to employees and
directors which provide the opportunity to purchase a total of 4,920,000
shares of common stock at an exercise price of $.055 per share (market
price at the date of issuance). All employees and directors were fully
vested at the time of issuance and the options expire on September 30,
2002. Through March 31, 1998, 10,000 shares have been issued as a result of
the exercise of options, resulting in a charge to operations of $-0- and
$550 for the years ended March 31, 1998, 1997, and 1996, respectively.
A summary of the status of the Company's four stock option plans as of
March 31, 1998, 1997 and 1996 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- ------------------------------ ---------------------------------
Outstanding Price Outstanding Price Outstanding Price
---------------- ------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 5,322,500 $.055 to .39 5,435,000 $ .055 to .5625 540,000 $ .172 to .5625
Granted - $ - - $ - 4,920,000 $ .055
Excercised - $ - (10,000) $ .055 - $ -
Canceled (412,500) $.39 to .5313 (102,500) $ .39 to .5313 (25,000) $ .39 to .5313
---------- ---------- ----------
Outstanding at end of year 4,910,000 $ .055 5,322,500 $ .055 to .39 5,435,000 $ .055 to .5625
========== ========== ==========
</TABLE>
Effective April 1, 1996, the Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". In accordance with the provisions of SFAS No. 123, the
Company applies APB Opinion No. 25 in accounting for its stock option plans
and, accordingly, does not recognize compensation cost at the grant date.
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS No. 123,
net income and income per share would have been adjusted to the pro forma
amounts indicated below:
The fair value of each option grant is estimated on the date of grant with
the following assumptions:
Expected dividend yield 0%
Expected volatility 42%
Risk-free interest rate 6.5%
Expected life of options 76 months
- 14 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ------------------------ ---------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- ----------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Income:
Income before extraordinary
item $212,750 $212,750 $295,496 $187,806 $324,558 $280,278
Extraordinary gain -- -- 72,731 72,731 -- --
----------- ----------- -------- -------- ----------- -----------
Net income $212,750 $212,750 $368,227 $260,537 $324,558 $280,278
=========== =========== ======== ======== =========== ===========
Income per common share:
Income before extraordinary
item $.02 $.02 $.02 $.02 $.02 $.02
Extraordinary gain -- -- -- -- -- --
----------- ----------- -------- -------- ----------- -----------
Net income $.02 $.02 $.02 $.02 $.02 $.02
=========== =========== ======== ======== =========== ===========
</TABLE>
NOTE 10 - EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators of the basic and
diluted Earnings Per Common Share (EPS) computations for "income before
extraordinary items" for the years ended March 31, 1998, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ ----------------------------- -------------------------
Income Shares Income Shares Income Shares
(Numerator) (Denominator) (Numerator) (Denominator) (Numerator) (Denominator)
----------- ------------ ----------- ------------- ---------- - -----------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item $ 212,750 $ 295,496 $ 324,558
--------- ---------- ---------
Basic EPS
Income available to common
stockholders 212,750 12,550,159 295,496 12,444,721 324,558 12,331,767
Effect of Dilutive Securities
Stock options -- 3,131,014 -- 3,722,297 -- 2,070,665
------- -------- -------
Diluted EPS
Income available to common
stockholders including
assumed conversions $ 212,750 15,681,173 $ 295,496 16,167,018 $ 324,558 14,402,432
========= =========== ========== ========== ========= ==========
</TABLE>
- 15 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 11 - RENTAL OF MULTI-PURPOSE BUILDING
The Company leases a portion of its multi-purpose building (see Note 8) to
an unrelated tenant under an agreement which expires July 31, 1999. Rental
income aggregated $45,042, $43,374 and $44,051 for the years ended March
31, 1998, 1997 and 1996, respectively, and is included in other income in
the accompanying consolidated statements of income and comprehensive
income.
NOTE 12 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs charged to selling, general and
administrative expenses amounted to $120,115, $97,628 and $93,326 for the
years ended March 31, 1998, 1997 and 1996, respectively.
NOTE 13 - ADVERTISING
The Company expenses the production costs of advertising when the costs are
incurred. Advertising expense totaled $35,189, $28,829 and $21,615 for the
years ended March 31, 1998, 1997, and 1996, respectively.
NOTE 14 - INCOME TAXES
The provision for (benefit from) income taxes consists of the following:
1998 1997 1996
--------- -------- --------
Current
Federal $ -- $ -- $ --
State -- -- --
--------- -------- --------
--------- -------- --------
Deferred (100,000) (47,000) --
--------- -------- --------
$(100,000) $(47,000) $ --
========= ======== ========
The alternative minimum tax (AMT) had no effect on the tax provision for
financial reporting purposes, as the Company's AMT income was completely
offset by application of AMT net operating loss carryforwards and the AMT
exemption. For 1998, 1997 and 1996, the Company had no liability for state
taxes based upon income. State taxes accrued were based on net worth and,
accordingly, included in selling, general and administrative expenses.
- 16 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 14 - INCOME TAXES (Continued)
The provision for income taxes differs from the amount computed by applying
the statutory rate of 34% for fiscal years 1998, 1997 and 1996 to income
before income taxes. The principal reasons for this difference are listed
in the following table:
1998 1997 1996
---- ---- ----
Statutory federal income tax 34% 34% 34%
Insurance (28) (22) --
Amortization and other 14 10 --
Utilization of net operating loss
carryforwards (80) 48 (34)
Change in valuation allowance (29) (89) --
---- ---- ----
(89)% (19)% - %
==== ==== ====
The significant components of the deferred tax provision are as follows:
1998 1997 1996
--------- --------- ---------
Net operating loss - federal $(122,000) $120,000 $(293,000)
Net operating loss - state 33,000 75,000 (13,000)
Other 1,000 -- (3,000)
Uniform capitalization 3,000 (3,000) 5,000
Property and equipment, net 17,000 497,000 38,000
Valuation allowance (32,000) (736,000) 266,000
--------- --------- ---------
$(100,000) $(47,000) $ --
========= ========= =========
The components of the net deferred tax accounts as of March 31, 1998 and
1997 are as follows:
1998 1997
----------- -----------
Deferred tax assets:
Valuation allowance $(145,000) $(177,000)
Inventory reserve 14,000 8,000
Allowance for doubtful accounts 8,000 15,000
Uniform capitalization 34,000 37,000
Net operating loss - state 18,000 51,000
Investment tax credits 144,000 144,000
Net operating loss - federal 965,000 843,000
----------- -----------
Total deferred tax asset 1,038,000 921,000
Deferred tax liabilities:
Property and equipment, net (938,000) (921,000)
----------- -----------
Total deferred tax liability (938,000) (921,000)
----------- -----------
Net deferred tax asset (liability) $100,000 $ --
=========== ===========
- 17 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 14 - INCOME TAXES (Continued)
The Company has $2,400,000 of net operating losses for federal income tax
reporting purposes available for carryforward which expire in years ending
March 31, 2000 through 2010. Differences between financial reporting and
tax reporting relate primarily to inventory reserves and allowances for
doubtful accounts recorded for financial reporting purposes, inventory
capitalization adjustments recorded for tax reporting purposes and
differences between depreciation for financial reporting and tax reporting
purposes. Unused tax credit carryovers totaled approximately $144,000 as of
March 31, 1998 and expire in years ending March 31, 1999 through 2001.
The Company establishes a valuation allowances in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". The Company
continually reviews the adequacy of the valuation allowance and recognizes
a benefit from income taxes only when reassessment indicates that it is
more likely than not that the benefits will be realized. In fiscal 1998,
the Company reduced the valuation allowance applied against the net
operating loss carryforwards by approximately $32,000 based upon reasonable
and prudent tax planning strategies and future income projections.
NOTE 15 - 401(k) PLAN
The Company has a 401(k) plan which covers all participating employees who
are over the age of 21 years and have at least one year of service. The
Company may elect to make a matching contribution equal to a percentage of
employee contributions, subject to IRS regulations. Matching contributions
are made, in the form of Company common stock, subsequent to the close of
the plan year. Contributions for the years ended March 31, 1998, 1997 and
1996 totaled $5,483, $4,790 and $3,012, respectively.
NOTE 16 - EMPLOYMENT CONTRACTS
On April 1, 1996, the Company entered into employment agreements with two
of its employees which expire on March 31, 2001. After that date, the
employment relationships will continue from year to year unless either
party provides the other with written notice of intent not to renew. These
agreements provide for combined annual base salaries of $205,000 for the
fiscal year ended March 31, 1997, and $215,000 for the fiscal years ending
March 31, 1999, 2000, and 2001. The employees may also earn a discretionary
bonus based on performance targets established by the Board of Directors.
The Company has also entered into employment agreements with two employees
and directors which also expire on March 31, 2001. At the option of the
employees, the agreements may be renewed for one additional five year term
under the same terms and conditions. These agreements provide for an annual
base salary of $150,000 each, updated annually for increases in the
Consumer Price Index, as well as certain medical, life and disability
insurance coverage. In addition, upon death, the employees' estate will
receive the amount by which the cash surrender value on life insurance
policies exceeds the net premiums paid by the Company (see Note 6).
- 18 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998, 1997 AND 1996
NOTE 16 - EMPLOYMENT CONTRACTS (Continued)
In the event of termination, all four agreements provide for the
continuation of compensation and benefits. However, the employees may not
compete with the Company within the United States for a period of two years
after termination.
NOTE 17 - CASH FLOW INFORMATION AND NONCASH INVESTING AND FINANCING ACTIVITIES
A summary of cash paid for interest and income taxes and a summary of the
Company's noncash investing and financing activities for the years ended
March 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH PAID
Interest $ 368,532 $322,783 $ 366,459
Income taxes -- -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES
Long-term debt incurred to acquire
property, plant and equipment $ -- $ 45,858 $ --
Issuance of stock pursuant to 401(k) plan 8,422 3,012 3,864
Unrealized holding gain on long-term
investment -- 49,000 49,000
Consolidation of long-term debt 1,335,000 -- --
</TABLE>
NOTE 18 - OTHER COMPREHENSIVE INCOME
Other comprehensive income is reflected net of a provision for income taxes
totaling $-0- for each of the years ended March 31, 1998, 1997 and 1996.
- 19 -
EXHIBIT 10(i)
SECURED TERM NOTE
$875,000.00 December 4, 1997
Boston, Massachusetts
For value received, the undersigned promises to pay to USTrust ("Bank"), or
order, at Bank, the principal sum of Eight Hundred Seventy-Five Thousand
($875,000.00) Dollars in sixty (60) installments, as follows: $7,292.00 on
January 1, 1998, and the same amount on the same day of each month thereafter
until fifty-nine (59) installments have been made, and a final installment in
the amount of $444,772.00 on December 1, 2002, with interest from the date
hereof on the said principal sum from time to time outstanding at the Base
Lending Rate for commercial loans from time to time in effect at the Bank plus
one (1%) percent per annum. Such interest shall be payable monthly in arrears on
the first day of each month, commencing on the first of such dates next
succeeding the date hereof. The term "Base Lending Rate" as used herein shall
mean the rate of interest announced by Bank from time to time at its head office
as its Base Lending Rate, it being understood that such rate is a reference rate
and not necessarily the lowest rate of interest charged by the Bank. Interest
shall be calculated on the basis of actual days elapsed and a 360 day year.
In all events the entire principal balance, together with all accrued
interest is to be fully paid on December 1, 2002.
At the option of the holder, this note shall become immediately due and
payable without notice or demand upon the occurrence at any time of any of the
following events of default: (1) the failure by the undersigned to pay when due
any principal, interest, fees, costs and expenses due to the holder hereunder or
otherwise; (2) if any statement, representation or warranty made in or in
connection with the loan evidenced by this note, or in any supporting financial
statement of the undersigned or of any guarantor hereof shall be found to have
been false in any material respect;(3) the institution by or against the
undersigned or any guarantor hereof of any proceedings pursuant to Title 11 of
the United States Code entitled "Bankruptcy" (commonly referred to as the
Bankruptcy Code) or any other law in which the undersigned or any guarantor
hereof is alleged to be insolvent or unable to pay their respective debts as
they mature or the making by the undersigned or any guarantor hereof of an
assignment for the benefit of creditors; (4) the service upon the holder hereof
of a writ in which the holder is named as trustee of the undersigned or of any
guarantor hereof; or (5) termination for any reason of the Amended and Restated
Loan and Security Agreement (Accounts Receivable and Inventory) dated October
31, 1994, as amended, between the Bank and Turbotec Products, Inc. (the
"Agreement").
<PAGE>
This note may be prepaid in whole or in part at any time and from time to
time without penalty or premium, provided that any such prepayment shall be
applied to the installments due hereunder in the inverse order of their
maturity.
Any deposits or other sums at any time credited by or due from the Bank to
the undersigned or any guarantor hereof, and any securities or other property of
the undersigned or any such guarantor, in the possession of the Bank, may at any
and all times be held and treated as security for the payment of the liabilities
hereunder; and the Bank may apply or set off such deposits or other sums, at any
time, and without notice to the undersigned or to any such guarantor, against
any of such liabilities, whether or not the same have matured, and whether or
not other collateral is available to the Bank.
The undersigned agrees to pay all costs of collection including reasonable
fees of attorneys.
No delay or omission on the part of the holder in exercising any right
hereunder shall operate as a waiver of such right or of any other right of such
holder, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. Every
one of the undersigned and every indorser or guarantor of this note regardless
of the time, order or place of signing waives presentment, demand, protest and
notices of every kind and assents to any one or more extensions or postponements
of the time of payment or any other indulgences, to any substitutions, exchanges
or releases of collateral if at any time there be available to the holder
collateral for this note, and to the additions or releases of any other parties
or persons primarily or secondarily liable.
This note is secured pursuant to the terms of an Open-End Mortgage Deed of
even date herewith on property located at 651 Day Hill Road, Windsor,
Connecticut, and a Security Agreement - Inventory, Accounts, Equipment and Other
Property dated September 4, 1992.
All rights and obligations hereunder shall be governed by the law of the
Commonwealth of Massachusetts and this note shall be deemed to be under seal.
Witness: THERMODYNETICS, INC.
/s/ By: /s/
- --------------------------- ------------------------------
- 2 -
EXHIBIT 10(ii)
AMENDMENT OF NOTE
AGREEMENT made as of the 30th day of September, 1997, by and among USTrust,
a Massachusetts trust company with a principal place of business at 30 Court
Street, Boston, Massachusetts 02108 (hereinafter called "Bank"), Thermodynetics,
Inc., a Delaware corporation, and Turbotec Products, Inc., a Connecticut
corporation, both with a principal place of business at 651 Day Hill Road,
Windsor, Connecticut 06095 (hereinafter, jointly and severally, called
"Borrower").
WHEREAS, Bank is the holder of a Secured Term Note in the original
principal amount of Four Hundred Thousand ($400,000.00) Dollars, of which
Borrower is the maker, dated October 17, 1996 (the "Note"); and
WHEREAS, Bank and Borrower wish to extend and amend the terms of the Note.
NOW THEREFORE, Bank and Borrower agree each for themselves, their heirs,
representatives, successors and assigns as follows:
1. The present principal balance of the Note is now Three Hundred
Thirty-Three Thousand Three Hundred Thirty ($333,330.00) Dollars and the time
for payment of the Note shall be in or within fifty (50) months with interest at
the Base Lending Rate from time to time in effect plus one (1%) percent per
annum.
2. The principal sum of Three Hundred Thirty-Three Thousand Three Hundred
Thirty ($333,330.00) Dollars shall be payable in fifty (50) installments as
follows: $6,667.00 on October 1, 1997, and the same amount (except the last
installment which shall be the unpaid balance) on the first day of each month
thereafter until the Note is fully paid, together with interest from the date
hereof on the said principal sum from time to time outstanding at the Base
Lending Rate from time to time in effect at Bank plus one (1%) percent per
annum. Such interest shall be payable monthly in arrears on the first day of
each month, commencing on the first of such dates next succeeding the date
hereof. The term "Base Lending Rate" as used herein shall mean the rate of
interest announced by Bank from time to time at its head office as its Base
Lending Rate, it being understood that such rate is a reference rate and not
necessarily the lowest rate of interest charged by Bank. Interest shall be
calculated on the actual days elapsed in a 360 day year.
3. All of Bank's rights under the Note and Mortgage, except as herein
expressly changed, shall continue during the term of the Note and Mortgage and
during the term as extended by this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as a sealed instrument as of the day and year first above written.
THERMODYNETICS, INC.
/s/ By: /s/
- ------------------------------ --------------------------------
Witness Robert A. Lerman, President
TURBOTEC PRODUCTS, INC.
/s/ By: /s/
- ------------------------------ --------------------------------
Witness Robert I. Lieberman, President
and Treasurer
USTRUST
/s/ By: /s/
- ------------------------------ --------------------------------
Witness D. Michael Murray, Vice
President
EXHIBIT 10(iii)
SECURED TERM NOTE
$460,000.00 October 3, 1997
Boston, Massachusetts
For value received, the undersigned, jointly and severally, promise to pay
to USTrust ("Bank"), or order, at its office at 30 Court Street, Boston,
Massachusetts 02108, or at such other place as may be designated in writing by
the holder hereof, the principal sum of Four Hundred Sixty Thousand
($460,000.00) Dollars in sixty (60) installments, as follows: $7,667.00 on
December 1, 1997, and the same amount (except the last installment which shall
be the unpaid balance) on the first day of each month thereafter until this note
is fully paid, with interest from the date hereof on the said principal sum from
time to time outstanding at the Base Lending Rate plus one (1%) percent per
annum. Such interest shall be payable monthly in arrears on the first day of
each month, commencing on the first of such dates next succeeding the date
hereof. Interest shall be calculated on the basis of actual days elapsed and a
360 day year. If this note is not paid in full on the date of maturity or upon
the exercise by the holder of its rights in the event of the undersigned's
default, interest on unpaid balances shall thereafter be payable at a
fluctuating interest rate per annum equal to three (3%) percent greater than the
rate of interest specified herein.
The term "Base Lending Rate" as used herein shall mean the rate of interest
announced by Bank from time to time, at its head office, as its Base Lending
Rate, it being understood that such rate is a reference rate, and not
necessarily the lowest rate of interest charged by Bank.
The undersigned hereby authorizes Bank to charge the amount of all monthly
interest and principal payments, when due and payable hereunder, against the
loan account of Turbotec Products, Inc. created pursuant to an Amended and
Restated Loan and Security Agreement (Accounts Receivable and Inventory) dated
October 31, 1994, as amended (the "Agreement").
At the option of the holder, this note shall become immediately due and
payable without notice or demand upon the occurrence at any time of (i) the
failure to pay in full and when due any installment of principal or interest
hereunder; (ii) one or more Events of Default as defined in the Agreement; or
(iii) the termination of the Agreement.
Any deposits or other sums at any time credited by or due from Bank to the
undersigned or any guarantor hereof, and any securities or other property of the
undersigned or any such guarantor, in the possession of Bank, may at any and all
times be held and treated as security for the payment of the liabilities
hereunder; and Bank may apply or set off such deposits or other sums, at any
time after the occurrence of one or more Events of Default, and without notice
to the undersigned or to any such guarantor, against any of such liabilities,
whether or not the same have matured, and whether or not other collateral is
available to Bank.
<PAGE>
The undersigned agrees to pay all costs of collection including reasonable
fees of attorney.
No delay or omission on the part of the holder in exercising any right
hereunder shall operate as a waiver of such right or of any other right of such
holder, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. Every
one of the undersigned and every indorser or guarantor of this note regardless
of the time, order or place of signing waives presentment, demand, protest and
notices of every kind and assents to any one or more extensions or postponements
of the time of payment or any other indulgences, to any substitutions, exchanges
or releases of collateral if at any time there be available to the holder
collateral for this note, and to the additions or releases of any other parties
or persons primarily or secondarily liable.
This note is secured pursuant to the terms of the Agreement, and a
Supplementary Security Agreement - Goods and Chattels dated September 4, 1992,
executed by Turbotec Products, Inc., and is also secured pursuant to the terms
of a Security Agreement Inventory, Accounts, Equipment and Other Property dated
September 4, 1992, and an Open-End Mortgage Deed on property located at 651 Day
Hill Road, Windsor, Connecticut, executed by Thermodynetics, Inc.
The undersigned shall be jointly and severally obligated hereunder.
All rights and obligations hereunder shall be governed by the law of the
Commonwealth of Massachusetts and this note shall be deemed to be under seal.
Witness:
/s/ By: /s/
- ------------------------- -------------------------------
THERMODYNETICS, INC.
/s/ By: /s/
- ------------------------- -------------------------------
EXHIBIT 10(iv)
USTrust
USTrust Bank
30 Court Street
Boston, MA 02108
October 3, 1997
Turbotec Products, Inc.
651 Day Hill Road
Windsor, Connecticut 05095
Attn: Robert I. Lieberman, President
Gentlemen:
Reference is made to our Amended and Restated Loan and Security Agreement
(Accounts Receivable and Inventory) dated October 31, 1994, together with all
amendments and additions thereto (hereinafter called the "Agreement").
Notwithstanding the provisions of the Agreement, it is agreed, effective
immediately, that the Agreement shall be amended as follows:
Section 5.A of the Agreement is hereby stricken in its entirety and the
following new Section 5.A substituted therefor:
"A. Subject to the terms and provisions of this Agreement, the Bank
hereby establishes a discretionary revolving line of credit in Borrower's
favor in the amount set forth below, as determined by Bank from time to
time hereafter. Bank may make such loans to Borrower, based upon such facts
and circumstances existing at the time of the request, as from time to time
Bank elects to make which are secured by Borrower's Inventory, Accounts and
all other Collateral and the proceeds thereof. Without limiting the
discretionary nature of Bank's obligation to make loans hereunder, or the
demand feature of any loans that Bank does make hereunder, Borrower agrees
that the aggregate unpaid principal of all loans outstanding at any one
time shall not exceed the Borrowing Base. The term "Borrowing Base" as used
herein shall mean the sum of the following:
(a) up to eighty (80%) percent of the unpaid face amount of
Qualified Accounts (as defined below) or such other percentage thereof
as may from time to time be fixed by the Bank upon notice to Borrower,
PLUS
(b) the lesser of (i) $650,000.00, or (ii) up to (A) fifty (50%)
percent of the cost or market value, whichever is lower, of all
Eligible Inventory (as defined below) consisting of raw materials and
twisted tubes, plus (B) the lesser of (1) $100,000.00, or (2) fifty
(50%) percent of the cost or market value, whichever is lower, of all
Eligible Inventory consisting of finished goods, MINUS
(c) one hundred (100%) percent of the aggregate amount then
undrawn on all letters of credit and acceptances issued by the Bank
for the
<PAGE>
account of the Borrower; but in no event shall the sum of all direct
loans plus the sum of the aggregate amount undrawn on all letters of
credit and acceptances be in excess of $1,800,000.00 (the "Credit
Limit") or such other sum as may from time to time be fixed by the
Bank upon notice to Borrower. All such loans shall bear interest and
at the option of Bank shall be evidenced by demand notes in form
satisfactory to Bank, but in the absence of notes shall be
conclusively evidenced by the Bank's record of disbursements and
repayments and shall be payable ON DEMAND. Interest will be charged to
Borrower at a fluctuating rate which is the daily equivalent to the
Base Lending Rate in effect from time to time, plus one (1%) percent
per annum or at such other rate agreed on from time to time by the
parties, upon any balance owing to Bank at the close of each day and
shall be payable monthly in arrears, on the first day of each month,
until the Bank makes demand; PROVIDED THAT Bank at all times reserves
the right exercisable in Bank's sole discretion, based upon
circumstances then existing, to adjust the margin over the Base
Lending Rate payable by Borrower hereunder upon thirty (30) days
notice to Borrower. The rate of interest payable by Borrower shall be
changed effective as of that date in which a change in the Base
Lending Rate becomes effective. Interest shall be computed on the
basis of the actual number of days elapsed over a year of three
hundred sixty (360) days. The term "Base Lending Rate" as used herein
and in any supplement and amendment hereto shall mean the rate of
interest announced from time to time by Bank, at its head office, as
its Base Lending Rate, it being understood that such rate is a
reference rate and not necessarily the lowest rate of interest charged
by the Bank."
Kindly note that the alterations contained herein do not in any way alter,
release or change any other sections contained in the Agreement.
Please acknowledge your agreement to the foregoing by signing the enclosed
copy of this letter and returning the same to the undersigned.
Very truly yours,
USTRUST
By:/s/
---------------------------------
D. Michael Murray, Vice President
UNDERSTOOD AND AGREED TO:
TURBOTEC PRODUCTS, INC.
By: /s/
---------------------------------------
Robert I. Lieberman, President
- 2 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-KSB for the period ended as stated below and is qualified in
its entirety by reference to such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,023
<SECURITIES> 0
<RECEIVABLES> 1,039,078
<ALLOWANCES> 0
<INVENTORY> 1,448,420
<CURRENT-ASSETS> 2,928,734
<PP&E> 8,963,252
<DEPRECIATION> 4,450,814
<TOTAL-ASSETS> 9,013,904
<CURRENT-LIABILITIES> 1,353,313
<BONDS> 0
0
0
<COMMON> 125,696
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,013,904
<SALES> 8,601,629
<TOTAL-REVENUES> 8,601,629
<CGS> 6,371,482
<TOTAL-COSTS> 1,758,473
<OTHER-EXPENSES> (9,608)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 368,532
<INCOME-PRETAX> 212,750
<INCOME-TAX> 0
<INCOME-CONTINUING> 212,750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 212,750
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.01
</TABLE>
