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, 2000 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 $10,731,636.
As of March 31, 2000 the aggregate market value of the voting stock held by
non-affiliates of the Issuer was approximately $2,985,000 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, 2000
----- --------------------------------
Common Stock $.01 par value 13,448,110 Common Shares
Transitional Small Business Disclosure Format Yes [___] No [_X_]
<PAGE>
PART I
Item 1. Description of Business
(a) Business Development - Thermodynetics, Inc., a Delaware corporation
incorporated in 1981, is the successor by merger in 1981 to Spiral Tubing
Corporation which had been incorporated in 1972. Thermodynetics, Inc. is
referred to individually and collectively with its Turbotec Products, Inc.
("Turbotec"), TPI Systems, Inc. ("TPI") and National Energy Systems, Inc.
("NES") subsidiaries as the "Company". The Company is engaged in the design,
manufacture and sale of enhanced surface metal tubing and related assemblies
primarily for heat transfer applications using its patented and/or proprietary
technology. The Company's products are primarily used in heat pumps, chillers,
heat reclaimers and biomedical heat exchangers serving the heating, air
conditioning, refrigeration, food processing, beverage, medical equipment,
marine, plumbing, commercial and residential construction, and aerospace
industries and may be used in most applications where heat exchange is required.
(b) Business of Issuer
(1) Products and Marketing - The Company manufactures surface enhanced
metal tubing and related assemblies for heat transfer and plumbing applications.
The Company's patented and/or proprietary machinery transforms smooth metal
tubing using its patented and/or proprietary technology into surface enhanced
tubing. The Company's enhanced tubing is primarily used in applications
involving laminar or turbulent flow of fluids for efficient transfer of heat.
The enhanced tubing products have a significantly greater surface area than a
smooth tube of the same length which improves heat transfer efficiency and
reduces the amount of metal tubing required. The enhanced tubes are easily bent
or coiled without significant distortion into tight radii suited to the
formation of space-saving sizes and shapes.
The Company's products are presently used in heat pumps as condensers and
evaporators in heating, refrigeration, food processing and air-conditioning
systems; in the biomedical field (as blood or intravenous fluid heat
exchangers); in heat recovery units used to heat water with waste heat from air
conditioning, refrigeration systems, in ice production systems; in laser
coolers, beverage dispensers, food processing systems, chillers, heat pump
systems and boilers, and modules for use as components in large condensing or
desuperheater systems; and are generally usable in most applications where heat
transfer is required. The tubing, when used as a flexible connector, also
facilitates the installation of plumbing fixtures and modules.
The Company's heat recovery systems are installed in food processing
plants, restaurants, hotels, supermarkets, military bases and individual
residences, capturing waste heat (from refrigeration and air conditioning
equipment) which is used to produce hot water.
The Company's products are designed for specific customer requirements
taking into account such variables as allowable temperature and pressure
differentials, the nature of the fluids to be used (liquids or gases), the
required flow rates and the operational and environmental conditions. These
factors are considered to determine the type, length, diameter and degree of
enhancement of the metal tubing to be used (usually copper, copper nickel,
aluminum, carbon steel or stainless steel although other metals 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.
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
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 3
fabrication functions. The Company believes its manufacturing capabilities are
adequate for it to manufacture and ship up to approximately $18 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
department which, 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 in commercial, industrial and residential
buildings and structures.
(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 from 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, strikes or other
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, 2000, four (4) customers each accounted for more than 10% of the
Company's net sales, 54% 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 accompanied by an impression or print of
a spirally fluted tube is of material importance to its business.
(8) Governmental Approval - N/A
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 4
(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,
2000, 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, 2000, the Company had 24 salaried employees
and 55 employees compensated on an hourly basis.
(13) Working Capital Items - At March 31, 2000, the Company had a negative
working capital position of $150,556. See Item 6 herein.
At March 31, 2000, the Company's credit facilities consisted of (a) a
$460,000 term note payable in sixty equal monthly installments of $7,667 through
December 1, 2002; (b) a revolving line of credit with a maximum credit limit of
$2,100,000; (c) a $333,330 term note, which was amended, payable in fifty equal
monthly installments of $6,667 through March 1, 2002; (d) a $400,000 term note,
payable in sixty equal monthly installments of $6,667 through December, 2001;
(e) a $297,568 term note, payable in forty-eight equal installments of $6,199
through January, 2004; (f) a revolving equipment line of credit with a maximum
credit availability of $300,000 for the acquisition of capital equipment; and
(g) a $1,750,000 permanent term note payable in sixty equal monthly installments
of $7,292 through December 1, 2004; such loan was converted from a construction
loan into a permanent loan and had been used to finance the construction of an
addition to the Company's Day Hill facility. 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,
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. At March 31, 2000 the Company owed $1,525,319
under the $2,100,000 line of credit. See Item 2 herein.
The Company's Baker Hollow facility is subject to 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 $1,750,000 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 Baker Hollow 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 55,000 square foot one story building constructed in 1981 with
an addition constructed in 2000 on a six acre site located at 651 Day Hill Road,
Windsor, Connecticut. The Day Hill facility is a steel frame structure with
polystyrene and stucco outer walls, has parking for approximately 115 cars and
contains approximately 45,000 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 completed an addition to the Day Hill facility in 2000. The
addition is a steel frame structure with polystyrene and stucco outer walls
providing for 15,255 square feet of space for factory use and general amenities.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 5
Through March 2000 the Company conducted certain of its manufacturing
operations in a light industrial multi-purpose facility on approximately 3.5
acres located at 50 Baker Hollow Road, Windsor, Connecticut, contiguous to the
Day Hill site. The Baker Hollow facility was constructed in 1991 and is
comprised of a steel frame structure with concrete block and stucco outer walls,
has parking for approximately 95 cars and contains approximately 28,600 square
feet of factory space. The Company also owns 3.5 acres of unencumbered
undeveloped land adjacent to the Baker Hollow facility. The Baker Hollow
facility serves as collateral for a ten year mortgage. The Company is currently
leasing the remaining approximately 11,500 square feet of the Baker Hollow
facility to an unaffiliated third party with an annual rental of $51,750, triple
net; that lease will expire in July, 2000. 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 Thursday, January
13, 2000. At said meeting, John F. Ferraro, Robert A. Lerman and Anthony C.
Mirabella were elected to serve as directors of the Company until the next
annual meeting of stockholders and until their successors are elected and
qualified. Said directors were elected by the following votes:
Nominee Number of Votes For Number of Votes Withheld
------- ------------------- ------------------------
John F. Ferraro 9,295,700 142,700
Robert A. Lerman 9,294,900 143,500
Anthony C. Mirabella 9,300,100 138,300
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.
Bid Prices Asked Prices
--------------- ---------------
Quarter Ended High Low High Low
------------- ---- --- ---- ---
June 30, 1999 $0.11 $0.10 $0.12 $0.11
September 30, 1999 0.13 0.11 0.145 0.12
December 31, 1999 0.14 0.10 0.145 0.11
March 31, 2000 0.57 0.105 0.60 0.12
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 6
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, 2000, the number of holders of the Company's Common Stock
was 2,540 (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 or Plan of Operations
Results of Operations
2000 Compared to 1999
Net sales for the year ended March 31, 2000 again set a new record for
product shipments in a twelve-month period. For the second consecutive year
sales exceeded $10 million, finishing at $10,731,636, an increase of $286,519
over the prior year total.
The increase in sales is attributable to the net effect of many factors,
certain of which independently affected different applications for the Company's
products. The residential water source heat pump market was adversely impacted
by the elimination of utility company rebate incentives for geothermal heat
pumps. New home construction in general suffered as mortgage interest rates
climbed during the year in part as a response to rate increases by the Federal
Reserve Board. Consequently, the growth experienced in this market during the
early stages of fiscal year 2000 was significantly tempered during the second
and third fiscal quarters, with a rebound over the balance of the fiscal year.
Commercial applications for water source heat pumps followed a similar pattern
although the variations between quarters were not as notable.
The swimming pool heat pump market, marine applications, food service
equipment applications and biomedical products all exhibited strong performances
during the current year. New customers have been added in many of these areas,
supplementing the existing sales base, fueling penetration in these important
markets.
Cost of sales increased from 74% of net sales in fiscal 1999 and 1998 to
76% of net sales for the current year. The average cost of copper and copper
based alloys increased steadily during the year, together with mill fabrication
charges for conversion of base materials into tubing used in heat exchangers.
Direct and indirect labor costs have continued to rise reflecting the regional
trend of smaller pools from which to draw additional employees. The Company has
also added personnel in manufacturing support positions to identify process
improvements and other cost reduction techniques.
Selling, general and administrative expenses increased slightly but
remained flat at 19% of net sales for both fiscal 1999 and 2000. Headcount in
these areas also increased from staff additions to sales and engineering
departments. Cost reductions in certain employee related expenses served to
offset a portion of the increase in payroll costs.
The decrease in interest expense from fiscal 1999 to fiscal 2000 was due to
the capitalization of certain charges relating to the construction of an
addition to the Company's manufacturing facility. Interest costs charged to
operations are expected to increase in the coming year as the new production
area has been completed and integrated into the manufacturing workflow.
Other non-operating expenses were adversely impacted in fiscal 1999 by the
sales of marketable equity securities liquidated to finance another equity
investment. No sales of non-operating assets occurred in the current
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 7
year. Other comprehensive losses continued to be recorded on unrealized holding
losses of remaining marketable equity securities held by the Company.
Income before income taxes increased from $243,752 in the prior year to
$274,593 in fiscal 2000. The reductions in operating income and other expense
from fiscal 1999 resulted in a net improvement in pre-tax earnings. The
provision for income taxes in the current year represents the recognition of a
deferred liability for federal taxes. Timing differences of expense recognition
for financial reporting and tax calculations require the Company to reflect the
deferred expense in the current year. In fiscal 1999 these differences resulted
in a net deferred tax asset, therefore no provision was required at year-end.
The outlook for fiscal year 2001 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 record levels for both net sales and pre-tax
income.
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 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 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
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 8
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%.
Liquidity and Capital Resources
Working capital at March 31, 2000 was a negative $150,556 compared to
$320,140 at March 31, 1999. During the current year, current assets decreased by
$294,688 largely due to decreases in inventories and the reversal of a deferred
tax asset into a long-term liability during fiscal 2000. Inventories decreased
by approximately 8% from the prior year as the Company placed an emphasis in
reducing raw material and work in process levels. Current liabilities increased
by $176,008 consisting primarily of higher trade debt and additional borrowings
under the bank line of credit and construction debt. These advances were used to
finance the additional investments in operating assets and capital expenditures
during the year.
Cash used in investing activities increased from $323,589 in fiscal 1999 to
$419,276 for the current year, primarily as a result of higher levels of capital
additions in fiscal year 2000. As additional manufacturing space became
available, production lines were reorganized and machinery and equipment added
to better utilize the floor area.
Cash used by financing activities totaled $312,962 in the current year
compared to cash provided of $216,571 in the prior year. In fiscal 1999 the
Company significantly increased drawdowns on both its revolving and equipment
lines of credit to finance operating expenses and capital additions. Drawdowns
on these lines were minimal in 2000 as construction activities were financed
through term debt converted to a mortgage in March 2000, while principal
payments on pre-existing term debt aggregated $332,588 during the year.
Inflation and other cost increases have begun to play a more significant
role in the Company's day to day operations as competitive pricing pressures
have restricted the Company's ability to fully recover these added expenses.
Improvements in manufacturing processes and procedures, have enabled the Company
to offset a portion of the effects of inflation and continuing internal
refinements are expected to generate further cost reductions during the coming
year. Tightening of the labor markets for skilled and semi-skilled employees is
expected to continue for the foreseeable future, although the impact on
personnel related costs are unknown at this time. Further increases in interest
rates charged by financial institutions will impact both the Company's cost of
borrowing to fund future growth as well as the ability of its customers to sell
products in markets sensitive to interest rate fluctuations.
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", "continue",
"may", "plan", "predict", "should", "will", "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
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 9
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
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.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
(a)-(b) The executive officers and directors of the Company are:
<TABLE>
<CAPTION>
Officer or
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
John F. Ferraro 66 Chairman of the Board 1979
Chief Executive Officer and Secretary
Robert A. Lerman 65 President and Director 1979
Anthony C. Mirabella 58 Director 1985
Robert I. Lieberman 46 Treasurer and Chief Financial Officer 1986
</TABLE>
The term of each director and officer expires when his successor is elected
and qualified. The Company does not have an executive committee, audit
committee, investment committee or stock option committee; the Company relies
upon the full board approving matters related to such topics.
The following is a brief account of the business experience of each
director and executive officer of the Company during the past five years.
Robert A. Lerman holds the degrees of Bachelor of Mechanical Engineering,
College of the City of New York (1957), Master of Science in Mathematics,
Adelphi College (1961), and Master of Science in Electrical Engineering,
University of Connecticut (1964). In 1979, Mr. Lerman was elected Treasurer and
a Director and in 1980 President of the predecessor to the Company. Since the
Company's 1981 merger, Mr. Lerman has been President and a Director of the
Company, and from 1981 through 1992 served as Treasurer. In 1988, Mr. Lerman,
along with Mr. Ferraro, founded Pioneer Capital Corp., of which Mr. Lerman is
Secretary, Treasurer and a Director, a privately held venture capital
corporation. Mr. Lerman co-authored the text book, Nonlinear Systems Dynamics,
which was published in 1992 by Van Nostrand Reinhold, New York, New York. In
1993, Mr. Lerman, along with Mr. Ferraro, founded Pioneer Partners Corp.
("PPC"), of which Mr. Lerman is Treasurer and Managing Director; PPC is the
general partner of Bridge Investors I Limited Partnership ("Bridge"), a
partnership formed by Messrs. Lerman and Ferraro for the purpose of providing
venture capital financing to other companies; Bridge distributed its assets and
dissolved effective December 31, 1999. In 1997, Mr. Lerman became President and
a Director of Pioneer Ventures Corp. ("PVC") and a manager of Ventures
Management Partners LLC ("VMP"), the general partner of Pioneer Ventures
Associates Limited Partnership ("PVALP"), a partnership formed for the purpose
of providing venture capital financing to other companies. In 1998, Mr. Lerman
became a director of
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 10
Initio, Inc., Tristar Corporation, and Energy Brands, Inc. 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 and its general partner
PPC, of which he is Treasurer, Secretary and a Director; Bridge distributed its
assets and dissolved effective December 31, 1999. In 1997, Mr. Ferraro became
Secretary and a Director of PVC and a manager of VMP, the general partner of
PVALP. In 1998 Mr. Ferraro became a director of American Interactive Media,
Inc.; in 1999 he became a director of America's Shopping Mall, Inc.; and in 1998
and reappointed in 2000 became a director of Fidelity First Financial Corp. See
Item 12.
Anthony C. Mirabella holds the degrees of Bachelor of Mechanical
Engineering, Stevens Institute of Technology (1962) and Master in Business
Administration, Western New England College (1969). He was elected a Director of
the Company in 1985. Mr. Mirabella has been employed by 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 per share for Messrs. Ferraro and Lerman) less (ii) the
purchase price paid by the subscriber for each share sold (approximately $0.21
per-share). 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 11
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual ----------------------------------------
Compensation Awards Payouts Other
--------------------------- ------------------ ------- --------
Company
Fiscal Other Stock Options/ LTIP 401(k)
Name/Position Year Salary/Bonus Compensation Awards SARS Payouts Contrib.
------------- ---- ------------ ------------ ------ ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
John F. Ferraro (1) 2000 $170,760(2) $3,210 $0 0 shs $0 $518
Chairman of the Board, 1999 $173,151(2) $4,125 $0 0 shs $0 $499
Secretary & Director 1998 $149,029 $3,137 $0 0 shs $0 $398
Robert A. Lerman(1) 2000 $176,852(2) $4,125 $0 0 shs $0 $1,096
President & Director 1999 $173,151(2) $3,137 $0 0 shs $0 $1,073
1998 $144,685 $3,450 $0 0 shs $0 $776
Robert I. Lieberman(3) 2000 $130,509 $11,878 $0 0 shs $0 $0
Treasurer and CFO & 1999 $129,801 $14,228 $0 0 shs $0 $0
President of Turbotec 1998 $112,561 $15,330 $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, 2000, 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,
2000, the amount receivable for premiums paid on the policies was
$1,477,257. 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 2000 and 1999 Messrs. Ferraro and Lerman each received cash bonuses of
$12,500 and $17,500, respectively.
(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, 2001, the Company
anticipates paying aggregate direct remuneration (based on current salaries and
anticipated bonuses) of approximately $490,000 to all officers as a group (three
persons) of which Mr. Ferraro and Mr. Lerman will each be paid approximately
$180,000, Mr. Lieberman will be paid approximately $130,000.
(c) Stock Option Plans
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 12
1992 Incentive Stock Option Plan - On December 16, 1991, the Company's
stockholders approved the adoption of the Company's 1992 Incentive Stock Option
Plan (the "1992 Plan") reserving 500,000 shares of the Company's Common Stock
for issuance pursuant to ISOs which may be granted under the 1992 Plan at
exercise prices at least equal to 100% of the fair market value of the Common
Stock on the date of the effective date of the grant of the option.
At June 2, 2000 no 1992 Plan ISOs were outstanding. No options under the
1992 Plan were granted in fiscal year ended March 31, 2000. The 1992 Plan will
expire on December 31, 2001.
(d) Aggregated Option/SAR Exercises and Fiscal Year End Option/SAR Values -
Options were exercised by certain executive officers of the Company during
fiscal year ended March 31, 2000. See also Item 10(e) and Item 12. The following
table reflects the aggregated option exercise values at year-end held by the
executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Shares Options at Options at
Acquired FY-End FY-End ($)
Name of on Value Exercisable ("E") Exercisable ("E")
Officer or Director Exercise Realized Unexercisable ("U") Unexercisable ("U")
------------------- -------- -------- ------------------- -------------------
<S> <C> <C> <C> <C>
John F. Ferraro 0 $0 1,948,182 E $287,356 E
Robert A. Lerman 0 $0 1,948,182 E $287,356 E
Anthony C. Mirabella 50,000 $7,375 6,704 E $989 E
Robert I. Lieberman 0 $0 170,114 E $25,092 E
</TABLE>
(e) 1995 Stock Options - On May 15, 1995, the Company's Board of Directors
approved the adoption of the 1995 Stock Options ("1995 Options") and
subsequently granted such stock options to purchase 4,920,000 shares of the
Company's Common Stock. The purchase price for the exercise of the options
equaled the fair market value ("FMV") on the effective date of the option, May
19, 1995. A total of 590,000 options were reassigned in August, 1999 and granted
to members of the management team pro rata in accordance with their terms. 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.
(f) Option Grants in Last Fiscal Year. No options were granted in the last
fiscal year. However, 590,000 of the 1995 Options were reassigned in August,
1999 as follows: 268,182 to Mr. Lerman, 268,182 Mr. Ferraro, 20,114 to Mr.
Lieberman, 6,704 to Mr. Mirabella, and 26,818 to two other individuals.
(g) Directors' Fees - During the fiscal year ended March 31, 2000,
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, 2001.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 13
(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 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 determined
its matching contributions to the 401(k) Plan for the plan year ending December
31, 2000 will equal a maximum of 200,000 shares of the Company's common stock,
provided that the value of such grant does not exceed $35,000. 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 401(k) Contribution" 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, 1999, Column (1), and for all years from inception of the
Plan through Plan year ended December 31, 1999, Column (2).
Shares Contributed by the Company
and Held in Trust Under 401(k) Plan
Name -----------------------------------
Officers and Directors Column (1) Column (2)
---------------------- ---------- ----------
(Aggregate)
John F. Ferraro(a) 9,425 51,300
Robert A. Lerman(a) 19,929 79,397
Robert I. Lieberman -0- 16,939
Anthony C. Mirabella(a) -0- -0-
All officers and directors as a group(a) 29,354 147,636
(4 persons)
Total Matching Contribution 200,000 934,803
to all employees
(35 persons)
----------
(a) Trustees of the 401(k) Plan. Excludes the aggregate shares held in trust by
the trustees of the 401(k) Plan for all participating employees.
(i) Compensation Committee Interlocks and Insider Participation - The Board
of Directors has not established a compensation committee. The compensation of
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
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 14
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) a total of 640,000 shares of common stock were sold on January 12,
1999 to two officers/directors of the Company, and 50,000 shares of common stock
were sold on July 5, 1999 to one director 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 $37,950.
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; (b) a total of 590,000 options were
reassigned in August, 1999 to members of the management team pro rata in
accordance with their terms. The expiration date of the options is September 30,
2002, (c) a total of 125,000 shares of common stock were issued from shares of
treasury stock on October 1, 1999 as stock bonus awards. The shares were valued
at $0.04 per share. 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. See also Item 10(d)
and Item 12.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of May 24, 2000, 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.
Name and Address(1) Amount and Nature Percent of
of Beneficial Owner of Beneficial Ownership Class Owned
------------------- ----------------------- -----------
Directors and Officers
----------------------
John F. Ferraro 4,057,462 shs (2)(6) 25.8%
Robert A. Lerman 4,341,539 shs (2)(7) 27.6%
Anthony C. Mirabella 241,791 shs (3) 1.8%
Robert I. Lieberman 272,853 shs (4) 2.0%
All officers and 8,913,645 shs (5) 49.9%
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 1,948,182 shares; includes 51,300
shares held for Mr. Ferraro and 79,397 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 934,803 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 6,704 shares. Excludes the
aggregate 934,803 shares held in trust by the trustees of the 401(k) Plan
for all of the participating employees.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 15
(4) Includes options exercisable to acquire 170,114 shares; includes 16,939
shares held in trust under the Company's 401(k) Plan.
(5) Includes options exercisable to acquire 4,073,182 shares; includes an
aggregate 147,636 shares held in trust under the Company's 401(k) Plan for
each respective officer's account; excludes the aggregate 934,803 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) The aggregate holdings of Company stock now owned by the John F. Ferraro
Defined Benefit Pension Plan and Trust established in 1984 equals 1,370,000
shares; Mr. Ferraro, as Trustee of that pension plan, has full voting
authority over that such shares which have been included Mr. Ferraro's
aggregate beneficial ownership calculation.
(7) The aggregate holdings of Company stock now owned by the Robert A. Lerman
Money Purchase Plan and Trust established in 1988 equals 1,291,880 shares;
Mr. Lerman, as Trustee of that pension plan, has full voting authority over
such shares which 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 last two (2) fiscal years, 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, except as presented below. 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.
With Directors and Officers, and Related Persons. A total of 590,000 of the
1995 stock options were reassigned to the management team pro rata in accordance
with their terms. 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 two of the Company's directors, Messrs. Lerman and Mirabella,
along with Brenda Ferraro, the wife of one of the directors, and 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 ended March 31, 2000.
(d) Indebtedness of Management - At March 31, 2000, no member of management
was indebted to the Company in excess of $60,000.
Item 13. Exhibits and Reports on Form 8-K
(a) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets - March 31, 2000 and March 31, 1999.
Consolidated Statements of Income and Comprehensive Income (Loss) -
For The Years Ended March 31, 2000, 1999 and 1998.
Consolidated Statements of Stockholders' Equity - For The Years Ended
March 31, 2000, 1999 and 1998.
<PAGE>
Thermodynetics, Inc.
Annual Report on Form 10-KSB
Page 16
Consolidated Statements of Cash Flows - For The Years Ended March 31,
2000, 1999 and 1998.
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) July 23, 1999 Secured Construction to Permanent Note in
the original principal amount of $1,750,000.
(10)(ii) July 23, 1999 Construction Loan Agreement.
(11)(i) Calculations of Earnings Per Common Share. This
information is presented in Footnote 10 to the
Consolidated 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.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000 AND 1999
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 (Loss) 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.
628 Hebron Avenue, Building #3
Glastonbury, Connecticut 06033
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, 2000 and 1999, and the related
consolidated statements of income and comprehensive income (loss), stockholders'
equity, and cash flows for the years ended March 31, 2000, 1999 and 1998. 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, 2000 and 1999, and the results of their
operations and their cash flows for the years ended March 31, 2000, 1999 and
1998 in conformity with generally accepted accounting principles.
/s/ DiSanto Bertoline & Company, P.C.
Glastonbury, Connecticut
May 19, 2000
- 1 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 2,814 $ 1,658
Accounts receivable, net of allowance for doubtful
accounts of $20,000 and $11,000 in 2000 and 1999, respectively 1,226,817 1,259,524
Inventories 1,802,535 1,957,097
Prepaid expenses and other current assets 259,079 267,654
Deferred income taxes -- 100,000
------------ ------------
Total current assets 3,291,245 3,585,933
PROPERTY, PLANT AND EQUIPMENT, net 5,833,988 4,586,199
MARKETABLE EQUITY SECURITIES 62,456 185,000
OTHER ASSETS 1,814,528 1,585,319
------------ ------------
$ 11,002,217 $ 9,942,451
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Demand note payable and current maturities of long-term debt $ 1,877,733 $ 1,854,552
Accounts payable 1,466,680 1,249,110
Accrued expenses and taxes 97,388 162,131
------------ ------------
Total current liabilities 3,441,801 3,265,793
LONG-TERM LIABILITIES
Long-term debt, less current maturities included above 3,013,700 2,194,241
Deferred income taxes 95,000 --
------------ ------------
3,108,700 2,194,241
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized 25,000,000
shares 135,800 133,050
Additional paid-in capital 5,298,398 5,444,855
Deficit (436,374) (515,967)
Accumulated other comprehensive income (loss) (381,544) (259,000)
------------ ------------
4,616,280 4,802,938
Less: treasury stock, at cost 164,564 320,521
------------ ------------
4,451,716 4,482,417
------------ ------------
$ 11,002,217 $ 9,942,451
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
- 2 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 10,731,636 $ 10,445,117 $ 8,601,629
COST OF SALES 8,160,301 7,761,648 6,371,482
------------ ------------ ------------
Gross profit 2,571,335 2,683,469 2,230,147
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,986,224 1,957,511 1,758,473
------------ ------------ ------------
Income from operations 585,111 725,958 471,674
OTHER INCOME (EXPENSE)
Other, net 44,087 (93,795) 9,608
Interest expense (354,605) (388,411) (368,532)
------------ ------------ ------------
(310,518) (482,206) (358,924)
------------ ------------ ------------
Income before provision for (benefit from)
income taxes 274,593 243,752 112,750
PROVISION FOR (BENEFIT FROM) INCOME TAXES 195,000 -- (100,000)
------------ ------------ ------------
Net income 79,593 243,752 212,750
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
Unrealized holding gains (losses) arising during period (122,544) (167,470) --
Add: reclassification adjustment for losses included in
net income -- 104,470 --
------------ ------------ ------------
Other comprehensive income (loss), net of tax (122,544) (63,000) --
------------ ------------ ------------
Comprehensive income (loss) $ (42,951) $ 180,752 $ 212,750
============ ============ ============
EARNINGS PER COMMON SHARE $ 0.01 $ 0.02 $ 0.02
============ ============ ============
EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ 0.01 $ 0.02 $ 0.01
============ ============ ============
</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, 2000, 1999 AND 1998
<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, 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)
Issuance of stock pursuant to
401(k) plan 100,000 1,000 3,500 -- --
Issuance of stock pursuant to
incentive plan 50,000 500 2,250 -- --
Cancellation of treasury shares -- -- (155,957) (125,000) 155,957
Issuance of stock 125,000 1,250 3,750 -- --
Comprehensive income -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2000 13,580,008 $ 135,800 $ 5,298,398 131,898 $ (164,564)
=========== =========== =========== =========== ===========
</TABLE>
Accumulated
Other
Comprehensive
Deficit Income (Loss) Total
----------- ----------- -----------
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
Issuance of stock pursuant to
401(k) plan -- -- 4,500
Issuance of stock pursuant to
incentive plan -- -- 2,750
Cancellation of treasury shares -- -- --
Issuance of stock -- -- 5,000
Comprehensive income 79,593 (122,544) (42,951)
----------- ----------- -----------
Balance, March 31, 2000 $ (436,374) $ (381,544) $ 4,451,716
=========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
- 4 -
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 79,593 $ 243,752 $ 212,750
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 334,839 337,122 334,858
Deferred tax provision (benefit) 195,000 -- (100,000)
Realized losses on marketable
equity securities -- 104,470 --
Changes in operating assets and liabilities:
Increase in accounts payable 217,570 336,675 153,521
Decrease (increase) in inventories 154,562 (508,677) (217,854)
Decrease (increase) in accounts receivable 32,707 (220,446) 188,077
Decrease (increase) in prepaid expenses and
other current assets 8,575 (27,091) (79,804)
(Decrease) increase in accrued expenses and taxes (60,243) 46,785 8,799
Increase in other assets (229,209) (205,937) (214,249)
--------- --------- ---------
Net cash provided by operating activities 733,394 106,653 286,098
--------- --------- ---------
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 (419,276) (263,119) (347,834)
--------- --------- ---------
Net cash used in investing activities (419,276) (323,589) (347,834)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and long-term debt 11,876 472,614 460,949
Proceeds from issuance of stock 7,750 35,200 --
Principal payments on debt obligations (332,588) (291,243) (399,740)
--------- --------- ---------
Net cash (used in) provided by financing activities (312,962) 216,571 61,209
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH 1,156 (365) (527)
CASH, beginning of year 1,658 2,023 2,550
--------- --------- ---------
CASH, end of year $ 2,814 $ 1,658 $ 2,023
========= ========= =========
</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, 2000, 1999 AND 1998
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.
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
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2000 and 1999.
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 1998, 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 fair value
method or measuring compensation using the intrinsic value approach under
Accounting Principles Board (APB) Opinion No. 25. If the intrinsic value
approach for measurement is elected, SFAS No. 123 requires supplemental
disclosure to show the effects of using the fair value 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.
EARNINGS PER COMMON SHARE
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 128 simplifies the
standards for computing earnings per share (EPS) and makes them comparable
to international EPS standards. It replaced 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.
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," which
established 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 consolidated 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, 2000 and
1999, all cash balances were fully insured.
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, 2000,
1999 and 1998 aggregated 54% (4 customers), 47% (3 customers) and 56%
(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
realized 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.
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000, 1999 AND 1998
NOTE 2 - FINANCIAL INSTRUMENTS (Continued)
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 approximate
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 stock 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.
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:
2000 1999
---------- ----------
Raw materials $1,041,791 $1,085,891
Work-in-process 281,653 318,750
Finished goods 479,091 552,456
---------- ----------
$1,802,535 $1,957,097
========== ==========
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000, 1999 AND 1998
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of March 31:
2000 1999
----------- -----------
Land $ 204,484 $ 204,484
Buildings 4,867,833 3,676,096
Machinery and equipment 4,258,741 4,020,040
Furniture and fixtures 749,899 740,713
Improvements 792,991 713,524
----------- -----------
10,873,948 9,354,857
Less: accumulated depreciation 5,039,960 4,768,658
----------- -----------
$ 5,833,988 $ 4,586,199
=========== ===========
Depreciation expense totaled $322,899, $325,182 and $318,586 for the years
ended March 31, 2000, 1999 and 1998, respectively.
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,
----------------------------------------------------------------------------
2000 1999
----------------------------------- ------------------------------------
Gross Gross
Unrealized Market Unrealized Market
Cost Gain (Loss) Value Cost Gain (Loss) Value
-------- ---------- ------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Noncurrent
Common
stock $444,000 $(381,544) $62,456 $444,000 $(259,000) $185,000
======== ========= ======= ======== ========= ========
</TABLE>
The Company owns 37,000 shares of common stock of a developer of renewable
energy projects which has been classified as noncurrent marketable equity
securities. As of March 31, 2000 and 1999, accumulated other comprehensive
loss totaling $381,544 and $259,000, 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 $-0-, $104,470 and $-0-
are included in other income (expense), net for the years ended March 31,
2000, 1999 and 1998, respectively, in the accompanying consolidated
statements of income and comprehensive income (loss).
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000, 1999 AND 1998
NOTE 6 - OTHER ASSETS
Other assets consist of the following as of March 31:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Land contiguous to principal facility $ 119,666 $ 118,109
Intangible assets, net of accumulated amortization of
$391,628 and $379,688 in 2000 and 1999, respectively 103,743 115,683
Officers' life insurance premiums receivable, net 1,477,257 1,243,234
Investment 100,000 100,000
Other 13,862 8,293
---------- ----------
$1,814,528 $1,585,319
========== ==========
</TABLE>
Amortization expense totaled $11,940, $11,940 and $16,272 for the years
ended March 31, 2000, 1999 and 1998, respectively.
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% (10% at March 31, 2000). Borrowings outstanding at March 31, 2000 and
1999 totaled $1,525,319 and $1,513,443, 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.
NOTE 8 - LONG-TERM DEBT
Long-term debt consists of the following as of March 31:
2000 1999
---------- ----------
Mortgage note payable - principal facility $1,720,833 $ 758,328
Mortgage note payable - multi-purpose building 1,020,471 1,044,353
Term notes payable 624,810 684,082
Other notes payable -- 48,587
---------- ----------
3,366,114 2,535,350
Less: current maturities 352,414 341,109
---------- ----------
$3,013,700 $2,194,241
========== ==========
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000, 1999 AND 1998
NOTE 8 - LONG-TERM DEBT (Continued)
On July 23, 1999, the Company obtained a secured term note from a bank, the
proceeds from which 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 $1,750,000 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%
(10% at March 31, 2000), maturing on December 1, 2004. 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% (10% at March 31, 2000), maturing through fiscal 2007.
The notes are secured by substantially all assets of the Company.
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. 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 the loan's
maturity date.
Maturities of long-term debt for each of the years succeeding March 31,
2000 are as follows:
Year ending March 31,
2001 $ 352,414
2002 329,180
2003 250,293
2004 166,108
2005 129,674
2006 and thereafter 2,138,445
----------
$3,366,114
==========
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. The 1990 Plan expired on January 1, 1999.
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000, 1999 AND 1998
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
STOCK OPTIONS (Continued)
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.
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, 2000, 700,000 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, 2000, 1999, and 1998, respectively.
A summary of the status of the Company's three stock option plans as of
March 31, 2000, 1999 and 1998 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- --------------------------
Outstanding Price Outstanding Price Outstanding Price
----------- ----- ----------- ----- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 4,270,000 $.055 4,910,000 $.055 5,322,500 $.055 to .39
Granted 80,000 $.055 -- $ -- -- $ --
Excercised (50,000) $.055 (640,000) $.055 -- $ --
Canceled -- $ -- -- $ -- (412,500) $.39 to .53
--------- --------- ---------
Outstanding at end of year 4,300,000 $.055 4,270,000 $.055 4,910,000 $.055
========= ========= =========
</TABLE>
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation". In accordance with the
provisions of SFAS No. 123, the Company applies APB Opinion No. 25 in
accounting for its stock option plans and, accordingly, does not recognize
compensation cost at the grant date. If the Company had elected to
recognize compensation cost based on the fair value of the options granted
at grant date as prescribed by SFAS No. 123, net income and income per
share would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income:
Net income $79,593 $78,473 $243,752 $243,752 $212,750 $212,750
======= ======= ======== ======== ======== ========
Income per common share $.01 $.01 $.02 $.02 $.02 $.02
======= ======= ======== ======== ======== ========
</TABLE>
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000, 1999 AND 1998
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 the years ended
March 31, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
Income Shares Income Shares Income Shares
(Numerator) (Denominator) (Numerator) (Denominator) (Numerator) (Denominator)
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 79,593 $ 243,752 $ 212,750
----------- ----------- -----------
Basic EPS
Income available to common
stockholders 79,593 13,526,734 243,752 12,789,127 212,750 12,550,159
Effect of Dilutive Securities
Stock options -- 2,711,324 -- 2,714,192 -- 3,131,014
----------- ----------- ----------- ----------- ----------- -----------
Diluted EPS
Income available to common
stockholders including
assumed conversions $ 79,593 16,238,058 $ 243,752 15,503,319 $ 212,750 15,681,173
=========== =========== =========== =========== =========== ===========
</TABLE>
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, 2000. Rental
income aggregated $51,750 $49,833 and $45,042 for the years ended March 31,
2000, 1999 and 1998, respectively, and is included in other income
(expense), net in the accompanying consolidated statements of income and
comprehensive income (loss).
NOTE 12 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs charged to selling, general and
administrative expenses amounted to $104,438, $116,783 and $120,115 for the
years ended March 31, 2000, 1999 and 1998, respectively.
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000, 1999 AND 1998
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 $28,101, $29,603 and $35,189 for the years
ended March 31, 2000, 1999, and 1998, respectively.
NOTE 14 - INCOME TAXES
The provision for (benefit from) income taxes consists of the following:
2000 1999 1998
---------- ---------- ---------
Current
Federal $ -- $ -- $ --
State -- -- --
---------- ---------- ---------
Deferred 195,000 -- (100,000)
---------- ---------- ---------
$ 195,000 $ -- $(100,000)
========== ========== =========
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 2000, 1999 and 1998, 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.
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
2000, 1999 and 1998. The principal reasons for this difference are listed
in the following table:
2000 1999 1998
---- ---- ----
Statutory federal income tax 34% 34% 34%
Insurance (28) (10) (28)
Amortization and other 3 1 14
Utilization of net operating loss
carryforwards 98 (16) (80)
Change in valuation allowance (36) (9) (29)
--- --- ---
71% - % (89)%
=== === ===
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000, 1999 AND 1998
NOTE 14 - INCOME TAXES (Continued)
The significant components of the deferred tax provision are as follows:
2000 1999 1998
--------- --------- ---------
Net operating loss - federal $ 223,000 $ 48,000 $(122,000)
Property and equipment, net 10,000 24,000 17,000
Other -- 4,000 1,000
Uniform capitalization 15,000 (2,000) 3,000
Net operating loss - state 47,000 (29,000) 33,000
Valuation allowance (100,000) (45,000) (32,000)
--------- --------- ---------
$ 195,000 $ -- $(100,000)
========= ========= =========
The components of the net deferred tax accounts as of March 31, 2000 and
1999 are as follows:
2000 1999
----------- -----------
Deferred tax assets:
Net operating loss - federal $ 694,000 $ 917,000
Investment tax credits 144,000 144,000
Net operating loss - state -- 47,000
Uniform capitalization 21,000 36,000
Other 18,000 18,000
Valuation allowance -- (100,000)
----------- -----------
Total deferred tax asset 877,000 1,062,000
Deferred tax liabilities:
Property and equipment, net (972,000) (962,000)
----------- -----------
Total deferred tax liability (972,000) (962,000)
----------- -----------
Net deferred tax asset (liability) $ (95,000) $ 100,000
=========== ===========
The Company has $1,750,000 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, 2000 and expire in years ending March 31, 2001 and 2002.
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000, 1999 AND 1998
NOTE 14 - INCOME TAXES (Continued)
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 2000,
the Company reduced the valuation allowance applied against the net
operating loss carryforwards by approximately $100,000 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, 2000, 1999 and 1998 totaled $11,000, $4,500
and $5,485, 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 $205,000 for the fiscal year ended March
31, 1998, $215,000 for the fiscal years ended March 31, 1999 and 2000 and
the fiscal year ending March 31, 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).
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.
<PAGE>
THERMODYNETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2000, 1999 AND 1998
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, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH PAID
Interest $ 354,605 $ 388,411 $ 368,532
Income taxes -- -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES
Long-term debt incurred to acquire
property, plant and equipment $ 1,163,352 $ 147,764 $ --
Investment purchased on margin -- 100,000 --
Issuance of stock pursuant to 401(k) plan 4,500 5,485 8,422
Unrealized holding gain (loss) on long-term
investment (122,544) (63,000) --
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, 2000, 1999 and 1998.
<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 22, 2000
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,
the Board, Chief Executive Officer, President and Director
Secretary and Director
Date: June 22, 2000 Date: June 22, 2000
By: /s/ Robert I. Lieberman By: /s/ Anthony C. Mirabella
----------------------------------- -------------------------
Robert I. Lieberman, Chief Anthony C. Mirabella,
Financial Officer and Director
Treasurer
Date: June 27, 2000 Date: June 22, 2000
<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, 2000
================================================================================
<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) July 23, 1999 Secured Construction to Permanent Note in the original
principal amount of $1,750,000.
(10)(ii) July 23, 1999 Construction Loan Agreement.
(11)(i) Calculations of Earnings Per Common Share. This information is
presented in Footnote 10 to the Consolidated Financial Statements.
(22) Subsidiaries - at Part III, Item 13 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-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)
