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, 1999 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, Windsor, Connecticut 06095 (860) 683-2005
(Address of Principal Executive Offices) (Zip Code) (Issuer's telephone number)
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 $10,445,117.
As of March 31, 1999 the aggregate market value of the voting stock held by
nonaffiliates of the Issuer was approximately $894,000 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, 1999
- ----- --------------------------------
Common Stock $.01 par value 13,048,110 Common Shares
Transitional Small Business Disclosure Format Yes [ ] No [ X ]
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Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 2
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.
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Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 3
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 in part 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, 1999, three (3) customers each accounted for more than 10%
of the Company's net sales, 47% in the aggregate. 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
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Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 4
accompanied by an impression or print of a spirally fluted tube is of
material importance to its business.
(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, 1999, 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, 1999, the Company had 24 salaried
employees and 59 employees compensated on an hourly basis.
(13) Working Capital Items - At March 31, 1999, the Company had a
positive working capital position of $320,140. See Item 6 herein.
At March 31, 1999, 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 November, 1998 to a
maximum credit limit of $2,100,000; (d) a $333,330 term note, which was amended,
payable in fifty equal monthly installments of $6,667 through March 1, 2002; (e)
a $400,000 term note, payable in sixty equal monthly installments of $6,667
through December, 2001; and (f) a revolving equipment line of credit with a
maximum credit availability of $300,000 for the acquisition of new or used
capital equipment. 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 investments in two other
corporations. The revolving line of credit provides for borrowings on a demand
basis against the line based on an inventory and accounts receivable collateral
formula. Other notes payable consists of (g) a vehicle note which requires
monthly installments of principal and interest totaling $1,129 and matures in
December, 2000, and (h) the balance of a securities margin demand loan of
$24,918. At March 31, 1999 the Company owed $1,513,443 under the $2,100,000 line
of credit and $147,763 under the equipment line of credit. See Item 2 herein.
The Company's Baker Hollow facility is subject to (i) 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
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Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 5
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.
The Company has contracted to build an addition to its facility at 651 Day
Hill Road which is anticipated to be started in June, 1999 with completion
projected for November, 1999. The addition is to be constructed of a steel frame
structure with polystyrene and stucco outer walls and will add 15,255 square
feet of space for factory use and general amenities. The addition will
substantially conform to the existing building materials and standards. Parking
will be increased by approximately 40 spaces. The addition will also serve,
along with the original facility, as collateral for the Company's credit
facilities.
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. This
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
approximately 12,000 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. A lease renewal is currently being
negotiated. 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 Friday, December
4, 1998. 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 and represent prices between dealers
and do not include retail mark-up, mark-down or commissions; and do not
represent actual transactions.
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Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 6
Bid Prices Asked Prices
------------------ -------------------
Quarter Ended High Low High Low
- ------------- ------------------ -------------------
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
June 30 1998 0.1525 0.105 0.17 0.12
September 30, 1998 0.15 0.10 0.165 0.11
December 31, 1998 0.15 0.09 0.155 0.105
March 31, 1999 0.13 0.10 0.15 0.11
(b) At March 31, 1999, the number of holders of the Company's Common Stock
was 2,463 (based upon the number of record holders).
(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
1999 Compared to 1998
Net sales for the year ended March 31, 1999 totaled $10,445,117, representing a
new record level for the Company and the first time annual sales exceeded the
$10 million level. The previous record of $8,699,341 was set in fiscal year
1997. Sales for each quarterly period in 1999 were higher than those of the
corresponding period of the prior year. Aggregate sales for fiscal 1999
increased by $1,843,488 or 21% over fiscal 1998.
The 21% increase in sales over the prior year continues the trend begun towards
the end of the 1997 fiscal year. Several factors are responsible for this growth
including a return to more seasonal temperature patterns across the United
States, increased demand from existing customers and the successful introduction
of new product applications for the Company's tubing product line.
The Company's core business of supplying water source coaxial coils to OEM heat
pump manufacturers has continued to grow as a result of both strong levels of
domestic commercial and residential construction and increased market share
garnered by the Company's larger customers. Other established markets have shown
strong growth during the entire year, including swimming pool heat pumps, marine
applications and biomedical products.
Cost of sales remained constant in fiscal 1999, at 74% of net sales. The
Company's cost structure has remained relatively stable during recent years. As
the Company continues to make strides in implementing cellular manufacturing and
supply chain techniques, manufacturing costs per unit are expected to reflect
the increased efficiencies.
Selling, general and administrative expenses increased by $199,038 in fiscal
1999 compared to 1998. As a percentage of net sales, these expenses declined
from 20.4% of 1998 sales to 18.7% of net sales in the current year. Staffing
additions in customer service, engineering and related support functions
accounted
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Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 7
for most of the variance, together with compensation and fringe benefit cost
increases for other employees. Additions to engineering and sales/marketing
departments are planned for the next twelve-month period to further accommodate
the Company's growth pattern.
Interest expense increased by approximately $20,000 in fiscal 1999 compared to
the prior year. Higher average borrowings under the revolving line credit were
required to finance additions to operating assets and added term debt was
incurred during the year resulting from investments made for production
machinery and equipment. During 1999 the Company and its bank negotiated the
establishment of a separate line of credit to finance capital improvements.
Previously, these expenditures were financed from the working capital line of
credit and subsequently converted to term debt. This new structure is expected
to simplify the relationship.
Other non-operating expenses totaled $93,795 in the current year compared to
income of $9,608 in fiscal 1998. This difference of $103,403 primarily resulted
from losses recognized on sales of marketable equity securities ($104,470),
liquidated to finance an investment in a foreign company. In August 1998 the
Company invested $100,000 in a Belgian company engaged in the processing of
pharmaceutical related products. Other comprehensive loss for the current year
represents the unrealized holding loss on the unsold portion of marketable
equity securities from the prior year-end.
Income from operations for the current year was $725,958, or 7% of net sales;
for 1998, operating income totaled $471,674, or 5% of net sales. Income before
income taxes totaled $243,752 in 1999 compared to $112,750 in fiscal 1998, an
increase of $131,002 or 116%.
The outlook for fiscal year 2000 is for continued sales growth in established
markets, complimented by new product applications currently under development.
Expectations are for profitability improvements to mirror the increase in sales,
resulting in new record levels for both net sales and net income.
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
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Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 8
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.
Liquidity and Capital Resources
Working capital at March 31, 1999 was $320,140 compared to $443,505 at March 31,
1998. During the current year, current assets increased by $755,849, largely due
to increases in inventories required to support higher production levels and
accounts receivable from customers. Current liabilities increased by $879,214
consisting primarily of higher trade debt and additional borrowings under the
bank lines of credit. These advances were used to finance the additional
investments in operating assets and capital expenditures during the quarter.
Cash used in investing activities decreased from $347,834 in fiscal 1998 to
$323,589 for the current year. In August 1998 the Company completed a long-term
investment in a foreign company which was financed through use of the Company's
investment portfolio. Capital expenditures financed with operating funds
declined from $347,834 in 1998 to $263,119 in fiscal 1999. During the current
year, a separate line of credit was established to finance these additions.
Total levels of capital additions were comparable between the years.
Cash provided by financing activities totaled $216,571 for 1999 compared to
$61,209 in the prior year. In 1998 the Company refinanced a large portion of
term debt resulting in approximately $100,000 of additional principal payments
during that year. During 1999 two officer/directors exercised options to
purchase common stock, generating net proceeds to the Company of $35,200.
During fiscal year 2000, the Company plans to expand the manufacturing
production space at its primary facility. The 15,000 square foot addition is
expected to be financed by the Company's existing bank with completion targeted
for November 1999.
Inflation and other cost increases continue to play a minor role in the
Company's day to day operations. Stability in the precious metals markets
coupled with improvements in manufacturing processes and
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Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 9
procedures, have enabled the Company to offset the effects of inflation.
Continuing internal refinements are expected to generate similar cost reductions
during the coming year.
Certain enhancements and upgrades to the Company's information processing
systems were completed in fiscal 1999. As a result, the Company's internal
systems are now believed to be year 2000 compliant. Communications with major
suppliers and customers indicate that their programs in this area are
progressing and the Company does not anticipate any problems associated with
year 2000 issues at this time.
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.
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Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 10
PART III
Item 9. Directors and Executive Officers of the Issuer
(a)-(b) The executive officers and directors of the Company are:
Officer or
Name Age Position Director Since
- ---- --- -------- --------------
John F. Ferraro 65 Chairman of the Board 1979
Chief Executive Officer and Secretary
Robert A. Lerman 64 President and Director 1979
Anthony C. Mirabella 57 Director 1985
Robert I. Lieberman 45 Treasurer and Chief Financial Officer 1986
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 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 to other companies. 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
other companies. In 1998, Mr. Lerman became a director of Initio, Inc., Tristar
Corporation, and Energy Brands, 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. In
1998 Mr. Ferraro became a director of American Interactive Media, Inc. and in
1999 he became a director of America's Shopping Mall, Inc. 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
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Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 11
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 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 12
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------------------
Annual
Compensation Awards Payouts Other
---------------------------- -------------------------------------------------
Company
Other Stock Options/ LTIP 401(k)
Name/Position Fiscal Year Salary/Bonus Compensation Awards SARS Payouts Contrib.
- ------------- ----------- ------------ ------------ ------ ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
John F. Ferraro (1) 1999 $173,151(2) $4,125 $0 0 shs $0 $499
Chairman of the Board, 1998 $149,029 $3,137 $0 0 shs $0 $398
Secretary & Director 1997 $158,576(2) $2,413 $0 0 shs $0 $0
Robert A. Lerman(1) 1999 $173,151(2) $3,137 $0 0 shs $0 $1,073
President & Director 1998 $144,685 $3,450 $0 0 shs $0 $776
1997 $157,191(2) $3,450 $0 0 shs $0 $970
Robert I. Lieberman(3) 1999 $129,801 $14,228 $0 0 shs $0 $0
Treasurer and CFO & 1998 $112,561 $15,330 $0 0 shs $0 $0
President of Turbotec 1997 $108,775 $750 $0 0 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, 1999, 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,
1999, the amount receivable for premiums paid on the policies was
$1,243,234. 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 $6,500 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) In 1997 and 1999 Messrs. Ferraro and Lerman each received cash bonuses of
$17,500.
(3) 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.
(b) Remuneration - For the fiscal year ending March 31, 2000, the Company
anticipates paying aggregate direct remuneration (based on current salaries and
anticipated bonuses) of approximately $475,000 to all officers as a group (three
persons) of which Mr. Ferraro and Mr. Lerman will each be paid approximately
$175,000, Mr. Lieberman will be paid approximately $125,000.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 13
(c) Stock Option Plans
1992 Incentive Stock Option Plan - On December 16, 1991, the Company's
stockholders approved the adoption of the Company's 1992 Incentive Stock Option
Plan (the "1992 Plan") reserving 500,000 shares of the Company's Common Stock
for issuance pursuant to ISOs which may be granted under the 1992 Plan at
exercise prices at least equal to 100% of the fair market value of the Common
Stock on the date of the effective date of the grant of the option.
At June 2, 1999 no 1992 Plan ISOs were outstanding. No options under the
1992 Plan were granted in fiscal year ended March 31, 1999. The 1992 Plan will
expire on December 31, 2001.
(d) Aggregated Option/SAR Exercises and Fiscal Year End Option/SAR Values -
Options were exercised by certain executive officers of the Company during
fiscal year ended March 31, 1999. See also Item 10(f) and Item 12. The following
table reflects the aggregated option exercise values at year end held by the
executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Shares Options at Options at
Acquired FY-End FY-End ($)
Name of on Value Exercisable ("E") Exercisable ("E")
Officer or Director Exercise Realized Unexercisable ("U") Unexercisable ("U")
- ------------------- -------- -------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
John F. Ferraro 320,000 $21,600 1,680,000 E $113,400 E
Robert A. Lerman 320,000 $21,600 1,680,000 E $113,400 E
Anthony C. Mirabella 0 $0 50,000 E $3,375 E
Robert I. Lieberman 0 $0 150,000 E $10,125 E
</TABLE>
(e) 1990 Non-Qualified Stock Incentive Plan - The Company's 1990
Non-Qualified Stock Incentive Plan ("1990 Plan") expired on January 1, 1999. No
stock incentives were issued under the 1990 Plan in fiscal year ended March 31,
1999.
(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. There are 590,000
options currently reassignable to members of the management team pro rata in
accordance with their terms; the Company anticipates reassigning such options on
or before December 31, 1999. The expiration date of the options is September 30,
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.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 14
Option Grants in Last Fiscal Year. No options were granted in the last
fiscal year. However, 590,000 of the 1995 Options are currently reassignable to
members of the management team pro rata in accordance with their terms. The
590,000 options are anticipated to be reassigned such that 268,182 will be
reassigned to Mr. Lerman, 268,182 will be reassigned to Mr. Ferraro, 20,114 will
be reassigned to Mr. Lieberman, 6,704 will be reassigned to Mr. Mirabella, and
26,818 will be reassigned to two other individuals. The anticipated reassigned
options are not included in the Aggregated Exercises table above.
(g) Directors' Fees - During the fiscal year ended March 31, 1999,
directors' fees of $4,000 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 $6,000 in directors' fees in the fiscal year ending
March 31, 2000.
(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, 1999. 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, 1998, Column (1), and for all years from inception of the
Plan through Plan year ended December 31, 1998, Column (2).
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 15
<TABLE>
<CAPTION>
Shares Contributed by the Company
Name and Held in Trust Under 401(k) Plan
---- -----------------------------------
Officers and Directors Column (1) Column (2)
---------------------- ---------- ----------
(Aggregate)
<S> <C> <C>
John F. Ferraro(a) 4,755 41,875
Robert A. Lerman(a) 10,217 59,468
Robert I. Lieberman -0- 16,939
Anthony C. Mirabella(a) -0- -0-
All officers and directors
as a group(a) (4 persons) 14,972 118,282
Total Matching Contribution 100,000 734,803
to all employees (32 persons)
</TABLE>
- ----------
(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
the Chairman, the President, and the Treasurer is determined by their employment
contracts. See Footnotes (1) and (3) 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 (3) herein as to
the Company's employment contracts with Messrs. Ferraro, Lerman and Lieberman
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 within the past three years, except
that a total of 640,000 shares of common stock were sold on January 12, 1999 to
two officers/directors of the Company through the exercise of a portion of their
respective stock options. The options have an exercise price of $0.055 per
share, and thus the aggregate purchase price was $35,200. The exemption from the
registration requirements of Section 5 of the Securities Act of 1933 which was
claimed was the issuance of securities not involving a public offering under
ss.4(2) of the Act.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of June 14, 1999, 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 16
Name and Address(1) Amount and Nature Percent of
of Beneficial Owner of Beneficial Ownership Class Owned
- ------------------- ----------------------- -----------
Directors and Officers
John F. Ferraro 3,729,854 shs (2)(6) 25.1%
Robert A. Lerman 4,003,428 shs (2)(7) 27.0%
Anthony C. Mirabella 210,086 shs(3) 1.6%
Robert I. Lieberman 252,739 shs (4) 1.9%
All officers and 8,196,107 shs (5) 49.1%
directors as a group
(four persons)
Other 5% Shareholders
None
- ----------
(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 1,680,000 shares; includes 41,875
shares held for Mr. Ferraro and 59,468 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 734,803 shares held in trust
by the trustees of the 401(k) Plan for all of the participating employees;
includes one-half of 166,121 shares held by a corporation which is owned
50% by Mr. Lerman and 50% by Mr. Ferraro.
(3) Includes options exercisable to acquire 50,000 shares. Excludes the
aggregate 734,803 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 3,560,000 shares; includes an
aggregate 118,282 shares held in trust under the Company's 401(k) Plan for
each respective officer's account; excludes the aggregate 734,803 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 certain of his shares of Company stock in
accordance with the guidelines to the John F. Ferraro Defined Benefit
Pension Plan and Trust which was established in 1984; the aggregate
holdings of Company stock owned by that pension plan equals 1,370,000
shares; 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 contributed certain of his shares of Company stock in accordance
with the guidelines to the Robert A. Lerman Money Purchase Plan and Trust,
established in 1988; the aggregate holdings of Company stock now owned by
that pension plan equals 1,291,880 shares; 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.
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, 1999, 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. The
Company's transactions with these individuals and entities in the fiscal year
most recently ended are described below.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 17
With Directors and Officers, and Related Persons. A total of 590,000 of the
1995 stock options are currently reassignable to the management team pro rata in
accordance with their terms; the Company anticipates reassigning such options on
or before December 31, 1999. See "1995 Stock Options" and "Option Grants in Last
Fiscal Year."
In August 1998, the Company invested $100,000 in a Belgian pharmaceutical
company. In October 1998 the Company declined to increase its investment. In
December, 1998 the Company's three directors, Messrs. Lerman, Ferraro, and
Mirabella, along with Kenneth B. Lerman, an attorney who provides legal services
to the Company and is the son of one of the directors, each participated in a
further investment on an individual basis; such persons invested on terms less
favorable than that 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 endedMarch 31, 1999.
(d) Indebtedness of Management - At March 31, 1999, 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, 1999 and March 31, 1998.
Consolidated Statements of Income and Comprehensive Income - For The
Years Ended March 31, 1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity - For The Years Ended
March 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows - For The Years Ended March 31,
1999, 1998 and 1997.
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) November 13, 1998 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 18
(10)(ii) Line of Credit Agreement for the Acquisition of
Equipment dated November 13, 1998.
(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.
(27) Financial Data Schedule.
Name State of Incorporation Year of Incorporation
- --------------------------------------------------------------------------------
Turbotec Products, Inc. Connecticut 1978
National Energy Systems, Inc. Connecticut 1984
TPI Systems, Inc. Connecticut 1983
================================================================================
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
Signature Page
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 28, 1999
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 28, 1999 Date: June 28, 1999
By: /s/ Robert I. Lieberman By: /s/ Anthony C. Mirabella
----------------------------------- -------------------------------
Robert I. Lieberman, Chief Anthony C. Mirabella, Director
Financial Officer and
Treasurer
Date: June 28, 1999 Date: June 28, 1999
<PAGE>
================================================================================
THERMODYNETICS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999 AND 1998
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>
DiSanto Bertoline
&
Company, P.C.
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
628 Hebron Avenue, Building #3
Glastonbury, CT 06033-2496
Phone: (860) 659-1338
Fax: (860) 633-0712
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, 1999 and 1998, and the related
consolidated statements of income and comprehensive income, stockholders'
equity, and cash flows for the years ended March 31, 1999, 1998 and 1997. 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, 1999 and 1998, and the results of their
operations and their cash flows for the years ended March 31, 1999, 1998 and
1997 in conformity with generally accepted accounting principles.
/s/ DiSanto Bertoline & Company, P.C.
Glastonbury, Connecticut
May 21, 1999
-1-
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,658 $ 2,023
Accounts receivable, net of allowance for doubtful
accounts of $11,000 and $20,000 in 1999 and 1998, respectively 1,259,524 1,039,078
Inventories 1,957,097 1,448,420
Prepaid expenses and other current assets 267,654 240,563
Deferred income taxes 100,000 100,000
----------- -----------
Total current assets 3,585,933 2,830,084
PROPERTY, PLANT AND EQUIPMENT, net 4,586,199 4,512,438
MARKETABLE EQUITY SECURITIES 185,000 392,000
OTHER ASSETS 1,585,319 1,279,382
----------- -----------
$9,942,451 $9,013,904
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Demand note payable and current maturities of long-term debt $1,854,552 $1,353,313
Accounts payable 1,249,110 912,435
Accrued expenses and taxes 162,131 120,831
----------- -----------
Total current liabilities 3,265,793 2,386,579
LONG-TERM DEBT, less current maturities included above 2,194,241 2,366,345
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized 25,000,000
shares, issued 13,305,008 shares and 12,569,646 shares in 1999
and 1998, respectively 133,050 125,696
Additional paid-in capital 5,444,855 5,411,524
Deficit (515,967) (759,719)
Accumulated other comprehensive income (loss) (259,000) (196,000)
----------- -----------
4,802,938 4,581,501
Less: treasury stock, at cost, 256,898 shares 320,521 320,521
----------- -----------
4,482,417 4,260,980
----------- -----------
$9,942,451 $9,013,904
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
THERMODYNETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 10,445,117 $ 8,601,629 $ 8,699,341
COST OF SALES 7,761,648 6,371,482 6,509,201
------------ ------------ ------------
Gross profit 2,683,469 2,230,147 2,190,140
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,957,511 1,758,473 1,586,983
------------ ------------ ------------
Income from operations 725,958 471,674 603,157
OTHER INCOME (EXPENSE)
Other, net (93,795) 9,608 (31,495)
Interest expense (388,411) (368,532) (323,166)
------------ ------------ ------------
(482,206) (358,924) (354,661)
------------ ------------ ------------
Income before income taxes
and extraordinary item 243,752 112,750 248,496
PROVISION FOR (BENEFIT FROM) INCOME TAXES -- (100,000) (47,000)
------------ ------------ ------------
Income before extraordinary item 243,752 212,750 295,496
EXTRAORDINARY ITEM - gain on forgiveness of debt,
net of income tax of $47,000 -- -- 72,731
------------ ------------ ------------
Net income 243,752 212,750 368,227
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
Unrealized holding gains (losses) arising during period (167,470) -- 49,000
Add: reclassification adjustment for losses included in
net income 104,470 -- --
------------ ------------ ------------
Other comprehensive income (loss), net of tax (63,000) -- 49,000
------------ ------------ ------------
Comprehensive income $ 180,752 $ 212,750 $ 417,227
============ ============ ============
EARNINGS PER COMMON SHARE
Income before extraordinary item $ 0.02 $ 0.02 $ 0.02
Extraordinary item -- -- 0.01
------------ ------------ ------------
Net income $ 0.02 $ 0.02 $ 0.03
============ ============ ============
EARNINGS PER COMMON SHARE - ASSUMING DILUTION
Income before extraordinary item $ 0.02 $ 0.01 $ 0.02
Extraordinary item -- -- --
------------ ------------ ------------
Net income $ 0.02 $ 0.01 $ 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, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Treasury Stock
---------------------------- ----------------------------
Additional
Number of Paid-in Number of
Shares Amount Capital Shares Amount
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1996 12,367,664 $ 123,677 $ 5,401,559 256,898 $ (320,521)
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 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, March 31, 1997 12,476,057 124,761 5,404,037 256,898 (320,521)
Issuance of stock pursuant to
401(k) plan 93,589 935 7,487 -- --
Comprehensive income -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, March 31, 1998 12,569,646 125,696 5,411,524 256,898 (320,521)
Issuance of stock pursuant to
401(k) plan 95,362 954 4,531 -- --
Issuance of stock pursuant to
incentive plan 640,000 6,400 28,800 -- --
Comprehensive income -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, March 31, 1999 13,305,008 $ 133,050 $ 5,444,855 256,898 $ (320,521)
=========== =========== =========== =========== ===========
<CAPTION>
Accumulated
Other
Comprehensive
Deficit Income (Loss) Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, March 31, 1996 $(1,340,696) $ (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 368,227 49,000 417,227
----------- ----------- -----------
Balance, March 31, 1997 (972,469) (196,000) 4,039,808
Issuance of stock pursuant to
401(k) plan -- -- 8,422
Comprehensive income 212,750 -- 212,750
----------- ----------- -----------
Balance, March 31, 1998 (759,719) (196,000) 4,260,980
Issuance of stock pursuant to
401(k) plan -- -- 5,485
Issuance of stock pursuant to
incentive plan -- -- 35,200
Comprehensive income 243,752 (63,000) 180,752
----------- ----------- -----------
Balance, March 31, 1999 $ (515,967) $ (259,000) $ 4,482,417
=========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
</TABLE>
-4-
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 243,752 $ 212,750 $ 368,227
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 337,122 334,858 350,068
Deferred tax benefit -- (100,000) (47,000)
Compensation expense pursuant to stock
incentive plan -- -- 550
Gain on forgivness of debt -- -- (126,266)
Realized losses on marketable
equity securities 104,470 -- --
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable 336,675 153,521 (317,808)
Increase in accrued expenses and taxes 46,785 8,799 334
(Increase) decrease in prepaid expenses and
other current assets (27,091) (79,804) 18,886
Increase in other assets (205,937) (214,249) (281,314)
(Increase) decrease in accounts receivable (220,446) 188,077 (22,443)
(Increase) decrease in inventories (508,677) (217,854) 86,092
--------- --------- ---------
Net cash provided by operating activities 106,653 286,098 29,326
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable equity securities 39,530 -- --
Purchase of investment (100,000) -- --
Purchases of property, plant and equipment (263,119) (347,834) (319,378)
--------- --------- ---------
Net cash used in investing activities (323,589) (347,834) (319,378)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and long-term debt 472,614 460,949 588,677
Proceeds from issuance of stock 35,200 -- --
Principal payments on debt obligations (291,243) (399,740) (298,604)
--------- --------- ---------
Net cash provided by financing activities 216,571 61,209 290,073
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH (365) (527) 21
CASH, beginning of year 2,023 2,550 2,529
--------- --------- ---------
CASH, end of year $ 1,658 $ 2,023 $ 2,550
========= ========= =========
</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, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of
Thermodynetics, Inc., and its wholly-owned subsidiaries, Turbotec
Products, Inc., TPI Systems, Inc. and National Energy Systems, Inc.
(the Company). 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 has classified its marketable equity securities 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, 1999, 1998 AND 1997
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,
plant 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, 1999 and 1998.
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, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER COMMON SHARE
In fiscal 1998, the Company 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)
In fiscal 1998, the Company 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 year financial
statements have been reclassified to conform to the requirements 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 maintains cash balances which, at times, may
exceed federal depository insurance limits. However, at March 31,
1999 and 1998, all cash balances were fully insured.
-8-
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999, 1998 AND 1997
NOTE 2 - FINANCIAL INSTRUMENTS (Continued)
CONCENTRATIONS OF CREDIT RISK (Continued)
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, 1999, 1998 and 1997 aggregated 47% (3 customers) 56% (3
customers) and 49% (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.
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 advances have been made to related parties
and have no scheduled repayment terms.
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.
-9-
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999, 1998 AND 1997
NOTE 2 - FINANCIAL INSTRUMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued
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.
NOTE 3 - INVENTORIES
The major classes of inventories consist of the following as of March
31:
1999 1998
---------- ----------
Raw materials $1,085,891 $ 910,993
Work-in-process 318,750 299,895
Finished goods 552,456 237,532
---------- ----------
$1,957,097 $1,448,420
========== ==========
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of March
31:
1999 1998
---------- ----------
Land $ 204,484 $ 204,484
Buildings 3,676,096 3,676,096
Machinery and equipment 4,020,040 3,742,270
Furniture and fixtures 740,713 672,052
Improvements 713,524 668,350
---------- ----------
9,354,857 8,963,252
Less: accumulated depreciation 4,768,658 4,450,814
---------- ----------
$4,586,199 $4,512,438
========== ==========
Depreciation expense totaled $325,182, $318,586 and $316,072 for the
years ended March 31, 1999, 1998 and 1997, respectively.
-10-
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999, 1998 AND 1997
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,
------------------------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------- -------------------------------------------------
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 $ 444,000 $ -- $(259,000) $ 185,000 $ 588,000 $ -- $(196,000) $ 392,000
========= ======= ========= ========= ========= ===== ========= =========
</TABLE>
The Company owns 37,000 shares of common stock of a developer of
cogeneration projects which has been classified as noncurrent
marketable equity securities. As of March 31, 1999 and 1998,
accumulated other comprehensive loss totaling $259,000 and $196,000,
respectively, has been included in stockholders' equity to reflect the
excess of the cost basis over market value.
Realized losses on marketable equity securities of $104,470, $-0- and
$-0- are included in other income (expense), net for the years ended
March 31, 1999, 1998 and 1997, respectively, in the accompanying
consolidated statements of income and comprehensive income.
NOTE 6 - OTHER ASSETS
Other assets consist of the following as of March 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land contiguous to principal facility $ 118,109 $ 116,593
Deferred assets -- 5,125
Intangible assets, net of accumulated amortization of
$379,688 and $367,748 in 1999 and 1998, respectively 115,683 127,623
Officers' life insurance premiums receivable, net 1,243,234 1,022,440
Investment 100,000 --
Deposits 8,293 7,601
---------- ----------
$1,585,319 $1,279,382
========== ==========
</TABLE>
Amortization expense totaled $11,940, $16,272 and $19,296 for the
years ended March 31, 1999, 1998 and 1997, respectively.
-11-
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999, 1998 AND 1997
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 $2,100,000. Interest
is payable monthly on amounts outstanding at the bank's base lending
rate plus 1.0% (8.5% at March 31, 1999). Borrowings outstanding at
March 31, 1999 and 1998 totaled $1,513,443 and $1,061,747,
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>
1999 1998
---------- ----------
<S> <C> <C>
Mortgage note payable - principal facility $ 758,328 $ 845,832
Mortgage note payable - multi-purpose building 1,044,353 1,066,530
Term notes payable 684,082 708,326
Other notes payable 48,587 37,223
---------- ----------
2,535,350 2,657,911
Less: current maturities 341,109 291,566
---------- ----------
$2,194,241 $2,366,345
========== ==========
</TABLE>
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% (8.5% at March 31, 1999), maturing on December 1, 2002.
The note is secured by substantially all of the assets of the Company.
The Company has various secured term notes from a bank which require
total monthly principal installments of $24,704 plus interest at the
bank's lending rate plus 1% (8.5% at March 31, 1999), maturing through
fiscal 2007. The notes are secured by substantially all assets of the
Company.
Other notes payable consists of a vehicle note which requires monthly
installments of principal and interest totaling $1,129 and matures in
December, 2000, and a demand loan of $24,918 secured by the Company's
investment in marketable equity securities.
-12-
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999, 1998 AND 1997
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 11) 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 for the year ended March
31, 1997 resulting from debt forgiven upon refinancing.
Maturities of long-term debt for each of the years succeeding March
31, 1999 are as follows:
Year ending March 31,
2000 $ 341,109
2001 335,203
2002 297,841
2003 219,369
2004 142,006
2005 and thereafter 1,199,822
-----------
$2,535,350
==========
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, 1999, no
options or SARs had been granted under the 1990 Plan, however a total
of 304,500 shares have been awarded of which no shares were issued to
employees and directors during fiscal years 1999, 1998 and 1997. 1990
Plan expired on January 1, 1999.
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 1990 Plan. Through March 31, 1999, 140,000
options had been granted under the 1992 ISO plan at an exercise price
of $.34 per share all of which have expired without exercise as of
March 31, 1999.
-13-
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999, 1998 AND 1997
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, 1999, 650,000 shares
have been issued as a result of the exercise of options, resulting in
a charge to operations of $-0- for the years ended March 31, 1999,
1998, and 1997, respectively.
A summary of the status of the Company's three stock option plans as
of March 31, 1999, 1998 and 1997 and changes during the years ending
on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ------------------------------- ---------------------------------
Outstanding Price Outstanding Price Outstanding Price
----------- -------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 4,910,000 $.055 5,322,500 $ .055 to .39 5,435,000 $ .055 to .5625
Granted -- $ -- -- $ -- -- $ --
Excercised (640,000) $.055 -- $ -- (10,000) $ .055
Canceled -- $ -- (412,500) $ .39 to .5313 (102,500) $ .39 to .5313
--------- --------- ----------
Outstanding at end of year 4,270,000 $.055 4,910,000 $ .055 5,322,500 $ .055 to .39
========= ========= ==========
</TABLE>
Effective April 1, 1996, the Company 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:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- -------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Income:
Income before extraordinary
item $ 243,752 $ 243,752 $ 212,750 $ 212,750 $ 295,496 $187,806
Extraordinary gain -- -- -- -- 72,731 72,731
----------- ----------- ----------- ----------- ----------- --------
Net income $ 243,752 $ 243,752 $ 212,750 $ 212,750 $ 368,227 $260,537
=========== =========== =========== =========== =========== ========
Income per common share:
Income before extraordinary
item $ .02 $ .02 $ .02 $ .02 $ .02 $ .02
Extraordinary gain -- -- -- -- .01 --
----------- ----------- ----------- ----------- ----------- --------
Net income $ .02 $ .02 $ .02 $ .02 $ .03 $ .02
=========== =========== =========== =========== =========== ========
</TABLE>
-14-
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999, 1998 AND 1997
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
STOCK OPTIONS (Continued)
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
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 item" for the years ended March 31, 1999, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
Income Shares Income Shares Income Shares
(Numerator) (Denominator) (Numerator) (Denominator) (Numerator) (Denominator)
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item $ 243,752 $ 212,750 $ 295,496
----------- ----------- -----------
Basic EPS
Income available to common
stockholders 243,752 12,789,127 212,750 12,550,159 295,496 12,444,721
Effect of Dilutive Securities
Stock options -- 2,714,192 -- 3,131,014 -- 3,722,297
----------- ----------- ----------- ----------- ----------- -----------
Diluted EPS
Income available to common
stockholders including
assumed conversions $ 243,752 15,503,319 $ 212,750 15,681,173 $ 295,496 16,167,018
=========== =========== =========== =========== =========== ===========
</TABLE>
-15-
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999, 1998 AND 1997
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 $49,833 $45,042 and $43,374 for the
years ended March 31, 1999, 1998 and 1997, respectively, and is
included in other income (expense), net 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 $116,783, $120,115 and $97,628 for
the years ended March 31, 1999, 1998 and 1997, respectively.
NOTE 13 - ADVERTISING
The Company expenses the production costs of advertising when the
costs are incurred. Advertising expense charged to selling, general
and administrative expenses totaled $29,603, $35,189 and $28,829 for
the years ended March 31, 1999, 1998, and 1997, respectively.
NOTE 14 - INCOME TAXES
The provision for (benefit from) income taxes consists of the
following:
1999 1998 1997
--------- --------- ---------
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 1999, 1998 and 1997, 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, 1999, 1998 AND 1997
NOTE 14 - INCOME TAXES (Continued)
The provision for income taxes differs from the amount computed by
applying the statutory rate of 34% to income before income taxes for
fiscal years 1999, 1998 and 1997. The principal reasons for this
difference are listed in the following table:
1999 1998 1997
------ ------ ------
Statutory federal income tax 34% 34% 34%
Insurance (10) (28) (22)
Amortization and other 1 14 10
Utilization of net operating loss
carryforwards (16) (80) 48
Change in valuation allowance (9) (29) (89)
--- --- ---
--% (89)% (19)%
=== === ===
The significant components of the deferred tax provision are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Net operating loss - federal $ 48,000 $(122,000) $ 120,000
Property and equipment, net 24,000 17,000 497,000
Other 4,000 1,000 --
Uniform capitalization (2,000) 3,000 (3,000)
Net operating loss - state (29,000) 33,000 75,000
Valuation allowance (45,000) (32,000) (736,000)
--------- --------- ---------
$ -- $(100,000) $ (47,000)
========= ========= =========
</TABLE>
The components of the net deferred tax accounts as of March 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss - federal $ 917,000 $ 965,000
Investment tax credits 144,000 144,000
Net operating loss - state 47,000 18,000
Uniform capitalization 36,000 34,000
Other 18,000 22,000
Valuation allowance (100,000) (145,000)
----------- -----------
Total deferred tax asset 1,062,000 1,038,000
Deferred tax liabilities:
Property and equipment, net (962,000) (938,000)
----------- -----------
Total deferred tax liability (962,000) (938,000)
----------- -----------
Net deferred tax asset (liability) $ 100,000 $ 100,000
=========== ===========
</TABLE>
-17-
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999, 1998 AND 1997
NOTE 14 - INCOME TAXES (Continued)
The Company has $2,300,000 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, 1999 and
expire in years ending March 31, 2000 and 2001.
The Company establishes a valuation allowance 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 1999, the Company reduced the valuation allowance
applied against the net operating loss carryforwards by approximately
$45,000 based upon reasonable and prudent tax planning strategies and
future income projections.
NOTE 15 - 401(k) PLAN
The Company has a defined contribution 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 Company's fiscal
year. Contributions for the years ended March 31, 1999, 1998 and 1997
totaled $4,500, $5,485 and $8,422, respectively.
NOTE 16 - EMPLOYMENT CONTRACTS
The Company has 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 $195,000 for
the fiscal year ended March 31, 1997, $205,000 for the fiscal year
ended March 31, 1998, 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 with 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, 1999, 1998 AND 1997
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, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH PAID
Interest $ 388,411 $ 368,532 $ 322,783
Income taxes -- -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES
Long-term debt incurred to acquire
property, plant and equipment $ 147,764 $ -- $ 45,858
Investment purchased on margin 100,000 -- --
Issuance of stock pursuant to 401(k) plan 5,485 8,422 3,012
Unrealized holding gain (loss) on long-term
investment (63,000) -- 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, 1999, 1998
and 1997.
-19-
<PAGE>
================================================================================
U.S. Securities and Exchange Commission
EXHIBITS
to
Form 10-KSB
Annual Report
under the
Securities Act of 1934
Thermodynetics, Inc.
(Exact name of registrant as specified in charter)
Commission File Number 0-10707
For Fiscal Year Ended March 31, 1999
================================================================================
<PAGE>
Thermodynetics, Inc.
Index to Exhibits
Exhibit
Number
(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) November 13, 1998 letter amendment to Amended and Restated
Loan and Security Agreement (Accounts Receivable and
Inventory) originally dated October 31, 1994.
(10)(ii) Line of Credit Agreement for the Acquisition of Equipment
dated November 13, 1998.
(11)(i) Calculations of Earnings (Loss) Per Share. This information
is presented in Footnote 10 to the Financial Statements.
(22) Subsidiaries - at Part IV, Item 14 of 10-KSB.
(27) Financial Data Schedule.
================================================================================
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-KSB 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)
Exhibit (10)(i)
USTrust Bank USTrust
30 Court Street
Boston, Massachusetts 02108
(617) 726-7000
November 13, 1998
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:
1. 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) $850,000.00, 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) $200,000.00, 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 account of
the Borrower;
<PAGE>
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 $2,100,000.00 (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."
2. The following new Section 21 is hereby added to the Agreement:
"21. YEAR 2000 COMPLIANT.
(a) Borrower agrees, represents and warrants that it will become Year
2000 Compliant by ensuring, on a timely basis, that all of the products,
systems and services material to its business will be able to properly and
accurately perform date-sensitive functions for all dates before and after
January 1, 2000. Borrower will adopt a realistic, adequately staffed and
funded comprehensive Year 2000 plan and will disclose to Bank the details
of that plan, and provide to Bank updates on that plan's progress,
including any assessment provided by third parties. Borrower will also use
due diligence to ensure that each of its key suppliers, vendors and
customers will, on a timely basis, be Year 2000 Compliant.
(b) Borrower also agrees, represents and warrants that it will inform
Bank promptly of any failure by it to successfully implement its plan to
become Year 2000 Compliant, or of its inability to dedicate the resources
required to be Year 2000 Compliant on a timely basis. In particular,
Borrower will promptly inform Bank of any occurrence, event, circumstance
or condition impacting the implementation of its Year 2000 plan that has or
could reasonably be expected to have a material adverse impact on
Borrower's business, operations, prospects or condition, financial or
otherwise.
(c) Borrower also acknowledges and understands that failure by it to
perform any of the warranties, representations or covenants set forth in
this section, or the occurrence or existence of any event, circumstance or
condition described in the foregoing paragraph, may constitute the
occurrence of an Event of Default under this Agreement. Upon such Event of
Default, Bank would be entitled, among other things, to suspend future
borrowings or other extensions of credit and require repayment of all of
Borrower's obligations to Bank thereunder.
-2-
<PAGE>
(c) To the extent of any inconsistency between this section and any
other provisions of this Agreement, the terms of this section shall
control."
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:____________________________________
James H. Herzog, Jr., Vice President
UNDERSTOOD AND AGREED TO:
TURBOTEC PRODUCTS, INC.
By:_______________________________
Robert I. Lieberman, President
-3-
Exhibit (10)(ii)
USTrust Bank USTrust
30 Court Street
Boston, Massachusetts 02108
(617) 726-7000
LINE OF CREDIT AGREEMENT
FOR THE ACQUISITION OF EQUIPMENT
November 13, 1998
Thermodynetics, Inc.
651 Day Hill Road
Windsor, Connecticut 05095
Attn: Robert I. Lieberman, Treasurer
Gentlemen:
We (hereinafter "Bank") are pleased to advise you (hereinafter referred to
as the "Borrower") that Bank has established a line of credit of up to Three
Hundred Thousand ($300,000.00) Dollars (hereinafter the "Credit Limit") for
Borrower to be used exclusively for the purchase of new or used equipment;
subject to Bank's periodic review. This line of credit will be subject to the
following terms and conditions:
1. Any advances, extensions of credit, or loan of funds pursuant to this
line of credit (hereinafter collectively and separately referred to as the
"Loan") will be made only if in the opinion of Bank there has been no material
adverse change of circumstances and if there exists no Event(s) of Default (as
hereinafter defined). No advances, extensions of credit or loan of funds will be
made on or after July 31, 1999. Any sums repaid hereunder shall not be
readvanced.
2. Borrower may draw upon this line of credit from time to time by
presenting to Bank for each Loan: (i) an invoice from the vendor of such
equipment in a form reasonably acceptable to Bank, which includes, without
limitation, the purchase price of such equipment, including all accessions
thereto, net of all discounts, rebates, and other dealer or manufacturer
incentives; (ii) a certificate of origin, bill of sale, or other documentation
satisfactory to Bank indicating whether the equipment being purchased is new or
used equipment (hereinafter referred to as the "Equipment Documentation"); and
(iii) an Equipment Documentation Certification in the form of Exhibit A annexed
hereto. Draws under this Line of Credit Agreement must be equal to or exceed the
sum of Fifty Thousand ($50,000.00) Dollars.
<PAGE>
3. Interest will be charged to Borrower at a rate which is the daily
equivalent to the Base Lending Rate in effect from time to time, plus one (1%)
percent per annum, or such other rate as Bank and Borrower may from time to time
agree to, upon any balance owing to Bank at the close of each day. 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. Such interest shall be payable monthly in arrears on the first
(1st) day of each month, commencing on the first of such dates next succeeding
the date hereof. Upon the occurrence of an Event of Default hereunder, 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.
4. The aggregate principal amount of any Loan made hereunder shall be
payable in forty-eight (48) successive equal monthly installments over a term
that begins on the first day of the first month which is more than six (6)
months from the date of such Loan with the proviso that all Loans shall become
due and payable upon the termination of an Amended and Restated Loan and
Security Agreement (Accounts Receivable and Inventory) dated October 31, 1994,
as amended, between Bank and Turbotec Products, Inc. (the "Loan Agreement").
5. The Loan may, but need not, be evidenced by notes in a form reasonably
satisfactory to Bank, but in the absence of notes, shall be conclusively
evidenced by Bank's records of disbursements. The Loan, together with interest
thereon, is secured by all collateral at any time granted to Bank by Borrower,
or any guarantor of Borrower to secure any obligations of Borrower to Bank, and
includes, without limitation, that certain Security Agreement, Inventory,
Accounts, Equipment and Other Property dated September 4, 1992, executed by
Borrower in favor of Bank (the "Security Agreement").
6. The aggregate principal amount of any Loan made against any Equipment
Documentation shall not exceed the lesser of (i) the Credit Limit, less any
previous Loan, or (ii) eighty (80%) percent of the net purchase price (exclusive
of any soft costs, transportation or installation charges) of the equipment
referred to therein.
7. Borrower will pay or reimburse Bank for all reasonable expenses,
including reasonable attorneys' fees, which Bank may in any way incur in
connection with this agreement or any other agreement between Borrower and Bank
or with any Loan or which result from any claim or action by any third person
against Bank which would not have been asserted were it not for Bank's
relationship with Borrower hereunder or otherwise.
8. Upon the occurrence of any one or more of the following events
(hereinafter "Events of Default"), any and all obligations of Borrower to Bank
shall become immediately due and payable, at the option of Bank and without
notice or demand:
-2-
<PAGE>
(a) The failure by Borrower to pay when due any principal, interest or
other amounts due under this Line of Credit Agreement.
(b) The termination of the Loan Agreement or the occurrence of an
Event of Default as described in the Loan Agreement or in the Security
Agreement.
(c) The occurrence of any such Event of Default shall also constitute,
without notice or demand, a default under all other agreements between Bank
and Borrower and instruments and papers given Bank by Borrower, whether
such agreements, instruments, or papers now exist or hereafter arise.
9. Borrower agrees that notwithstanding anything contained herein, the Loan
Agreement or otherwise, if Turbotec Products, Inc. shall pay off all amounts due
under the Loan Agreement and shall release Bank from its obligation, if any, to
make advances under the Loan Agreement or any successor agreement, Bank shall
have the right to terminate this line of credit and demand the immediate payment
of the balance due under this Line of Credit Agreement and any secured term note
issued pursuant to this Line of Credit Agreement.
10. The execution, delivery and performance of this Line of Credit
Agreement, any note or any other instrument or document at any time required in
respect hereof or of the Loan are within the corporate powers of Borrower, and
not, to the best of Borrower's knowledge, in contravention of law, the Articles
of Organization or By-Laws of Borrower or any amendment thereof, or of any
indenture, agreement or undertaking to which Borrower is a party or may
otherwise be bound, and each such instrument and document represents a valid and
binding obligation of Borrower and is fully enforceable according to its terms.
Borrower will, concurrently with the execution of this Line of Credit Agreement,
furnish Bank with the opinion of counsel for Borrower with respect to any or all
of the foregoing or other matters, such opinion to be in substance and form
reasonably satisfactory to Bank.
11. This Line of Credit Agreement is supplementary to each and every other
agreement between Borrower and Bank and shall not be so construed as to limit or
otherwise derogate from any of the rights or remedies of Bank or any of the
liabilities, obligations or undertakings of Borrower under any such agreement,
nor shall any contemporaneous or subsequent agreement between Borrower and Bank
be construed to limit or otherwise derogate from any of the rights or remedies
of Bank or any of the liabilities, obligations or undertakings of Borrower
hereunder unless such other agreement specifically refers to this Line of Credit
Agreement and expressly so provides.
12. This Line of Credit Agreement and the covenants and agreements herein
contained shall continue in full force and effect and shall be applicable not
only in respect of the Loan, but also to all other obligations, liabilities and
undertakings of Borrower to Bank whether direct or indirect, absolute or
contingent, due or to become due, now existing or hereafter arising or acquired,
until all such obligations, liabilities and undertakings have been paid or
otherwise satisfied in full. No delay or omission on the part of Bank in
exercising any right hereunder shall operate as a waiver of such right or any
other right and waiver on any one or more occasions shall not be construed as a
bar to or waiver of any right or remedy of Bank on any future occasion. This
Line of Credit Agreement is intended to take effect as a sealed instrument,
shall
-3-
<PAGE>
be governed by and construed according to the laws of the Commonwealth of
Massachusetts, shall be binding upon Borrower's successors and assigns and shall
inure to the benefit of Bank's successors and assigns.
13. THE BORROWER AND BANK EACH HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVES ANY RIGHT THEY MAY HAVE OR HEREAFTER HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS LINE OF CREDIT AGREEMENT. The Borrower hereby certifies that neither Bank
nor any of its representatives, agents or counsel has represented, expressly or
otherwise, that Bank would not, in the event of any such suit, action or
proceeding, seek to enforce this waiver of right to trial by jury. The Borrower
acknowledges that it has read the provisions of this Line of Credit Agreement
and in particular, this Section; has consulted legal counsel; understands the
right it is granting in this Line of Credit Agreement and is waiving in this
Section in particular; and makes the above waiver knowingly, voluntarily and
intentionally.
14. The Borrower and Bank agree that any action or proceeding to enforce or
arising out of this Line of Credit Agreement may be commenced in any court of
the Commonwealth of Massachusetts sitting in the counties of Suffolk or
Middlesex, or in the District Court of the United States for the District of
Massachusetts, and the Borrower waives personal service of process and agrees
that a summons and complaint commencing an action or proceeding in any such
court shall be properly served and confer personal jurisdiction if served by
registered or certified mail to the Borrower, or as otherwise provided by the
laws of the Commonwealth of Massachusetts or the United States of America.
Very truly yours,
USTRUST
By:____________________________________
James H. Herzog, Jr., Vice President
UNDERSTOOD AND AGREED TO:
THERMODYNETICS, INC.
By:_______________________________
Robert I. Lieberman, Treasurer
-4-
<PAGE>
EXHIBIT A
EQUIPMENT DOCUMENTATION CERTIFICATION
The undersigned, the __________________ of Thermodynetics, Inc. (the
"Borrower"), hereby certifies to USTrust that:
1. The attached copy of the Equipment Documentation (as defined in
Paragraph 2 of the Borrower's Line of Credit Agreement for the
Acquisition of Equipment dated November _____, 1998), is a true,
correct and complete copy of the Equipment Documentation;
2. The net purchase price (exclusive of soft cost, transportation and
installation charges) of the equipment referred to in the attached
Equipment Documentation is in the amount of $________________;
3. The soft cost, transportation and installation charges of the
equipment referred to in the attached Equipment Documentation is in
the amount of $______________;
4. The total purchase price of the equipment referred to in the attached
Equipment Documentation (the net purchase price, plus the soft cost,
transportation and installation charges) is in the amount of
$___________; and
5. The aggregate principal amount of the Loan requested in connection
with the attached Equipment Documentation does not exceed the lesser
of (i) the Credit Limit, less any previous Loan, or (ii) eighty (80%)
percent of the net purchase price of the equipment set forth in Item 2
above.
Capitalized terms not otherwise defined herein shall have the meanings
assigned to them in Borrower's Line of Credit Agreement for the Acquisition of
Equipment dated November ___, 1998.
_________________________________________
Name:
Title:
Date: ______________, 199__
<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>
<CIK> 0000351902
<NAME> Thermodynetics, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,658
<SECURITIES> 185,000
<RECEIVABLES> 1,259,524
<ALLOWANCES> 0
<INVENTORY> 1,957,097
<CURRENT-ASSETS> 3,585,933
<PP&E> 9,354,857
<DEPRECIATION> 4,768,658
<TOTAL-ASSETS> 9,942,451
<CURRENT-LIABILITIES> 3,265,793
<BONDS> 0
0
0
<COMMON> 133,050
<OTHER-SE> 4,349,367
<TOTAL-LIABILITY-AND-EQUITY> 9,942,451
<SALES> 10,445,117
<TOTAL-REVENUES> 10,445,117
<CGS> 7,761,648
<TOTAL-COSTS> 1,957,511
<OTHER-EXPENSES> 93,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 388,411
<INCOME-PRETAX> 243,752
<INCOME-TAX> 0
<INCOME-CONTINUING> 243,752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 243,752
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
