<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20509
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act
May 26, 2000
DATE OF REPORT
(DATE OF EARLIEST EVENT REPORTED)
VITRISEAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Nevada 2-99110-NY 91-1499978
(STATE OR OTHER JURIS- (COMMISSION FILE NUMBER) (IRS EMPLOYER I.D.
DICTION OF INCORPORATION) NUMBER)
12226 South 1000 East, Suite 9
Draper, Utah 84020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(801) 553-8753
(REGISTRANT'S TELEPHONE NUMBER)
Not Applicable
(FORMER NAME OR FORMER ADDRESS)
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
There have been the following changes to this Item that was contained in
the 8-K Current Report of the Company dated May 26, 2000:
(a) Financial Statements of Business Acquired.
Audited Financial Statements for Thermoflow Corporation for the years
ended December 31, 1999, and December 31, 1998. (See Exhibits.)
Unaudited Financial Statements for Thermoflow Corporation as of and
for the quarters ended March 31, 2000, and March 31, 1999.
(See Exhibits.)
No audited Financial Statements of Liquitek Corporation, which began
operations in late 1999 and had limited operations, have been
prepared and are not required. At the time of its acquisition by
VitriSeal, Inc., Liquitek Corporation held rights to technology
developed by and acquired from Thermoflow Corporation, but had not
begun material operations.
(b) Pro Forma Financial Information.
Unaudited Pro Forma Combined Financial Statements of VitriSeal, Inc.
as of March 31, 2000, for the quarter ended March 31, 2000 and for
the year ended December 31, 1999. (See Exhibits.)
(c) Exhibits.
(1) Audited Financial Statements for Thermoflow Corporation for the
years ended December 31, 1999, and December 31, 1998:
- Independent Auditors' Report
- Balance Sheet
- Statements of Operations
- Statements of Stockholders' Deficit
- Statements of Cash Flows
- Notes to Financial Statements
(2) Unaudited Financial Statements for Thermoflow Corporation as
of and for the quarters ended March 31, 2000, and March 31,
1999:
- Balance Sheets
- Statements of Operations
- Statements of Cash Flows
- Note to Unaudited Financial Statements
(3) Unaudited Pro Forma Combined Financial Statements of VitriSeal,
Inc., as of March 31, 2000, for the quarter ended March 31, 2000,
and for the year ended December 31, 1999.
<PAGE>
- Unaudited Pro Forma Combined Balance Sheet as of
March 31, 2000.
- Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1999
- Unaudited Pro Forma Combined Statement of Operations for the
quarter ended March 31, 2000
- Notes to Unaudited Pro Forma Combined Financial Statements
All other portions of the previously filed 8-K remain unchanged.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
VITRISEAL, INC.
Date: August 9, 2000 By: /s/ Culley W. Davis
----------------------------------
Culley W. Davis,
Chairman of the Board of Directors
<PAGE>
THERMOFLOW CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report............................................. 1
Balance Sheet............................................................ 2
Statements of Operations................................................. 3
Statements of Stockholders' Deficit ..................................... 4
Statements of Cash Flows................................................. 5
Notes to Financial Statements............................................ 7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Thermoflow Corporation
We have audited the accompanying balance sheet of Thermoflow Corporation (the
"Company") as of December 31, 1999, and the related statements of operations,
stockholders' deficit and cash flows for the years ended December 31, 1999 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Thermoflow Corporation as of
December 31, 1999, and the results of its operations and its cash flows for the
years ended December 31, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States.
As described in Note 11, the Company was acquired on May 26, 2000 by VitriSeal,
Inc., a publicly traded company, in a business combination accounted for as a
purchase.
SQUAR, MILNER, REEHL & WILLIAMSON, LLP
June 30, 2000
Newport Beach, California
<PAGE>
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THERMOFLOW CORPORATION
BALANCE SHEET
DECEMBER 31, 1999
-------------------------------------------------------------------------------
<TABLE>
ASSETS
<S> <C>
CURRENT ASSETS
Accounts receivable, net $ 118,133
Prepaid royalties to stockholder 150,000
Inventories and other current assets 18,687
--------------------
286,820
Property, plant and equipment, net 896,260
Investment in closely held company 2,468
Other assets 28,017
--------------------
$ 1,213,565
====================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Unpresented checks $ 135,051
Accounts payable and accrued expenses 192,201
Accrued expenses due to related parties 357,492
Due to stockholders 29,194
Notes payable to related parties 755,750
Other notes payable 185,505
--------------------
1,655,193
Commitments and contingencies
STOCKHOLDERS' DEFICIT
Common stock, $0.01 par value; 10,000,000 shares
authorized; 1,907,522 shares issued and outstanding 19,075
Additional paid-in capital 3,447,570
Accumulated deficit (3,908,273)
--------------------
(441,628)
--------------------
$ 1,213,565
====================
</TABLE>
--------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
PAGE 2
<PAGE>
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THERMOFLOW CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
-------------------- -------------------
<S> <C> <C>
NET SALES $ 736,377 $ 586,790
COST OF SALES 846,634 838,575
-------------------- -------------------
GROSS MARGIN (110,257) (251,785)
OPERATING EXPENSES 399,670 519,316
-------------------- -------------------
LOSS FROM OPERATIONS (509,927) (771,101)
OTHER INCOME (EXPENSE)
Interest expense (130,813) (140,593)
Loss from investment in closely held company (17,532) -
Other income, net 23,194 2,537
-------------------- -------------------
(125,151) (138,056)
-------------------- -------------------
LOSS BEFORE EXTRAORDINARY ITEM (635,078) (909,157)
EXTRAORDINARY GAIN ON SETTLEMENT OF DEBT 67,550 -
-------------------- -------------------
NET LOSS $ (567,528) $ (909,157)
==================== ===================
BASIC AND DILUTED PER SHARE AMOUNTS
Loss before extraordinary item $ (0.36) $ (0.58)
==================== ===================
Extraordinary gain on settlement of debt $ 0.04 $ -
==================== ===================
Net loss $ (0.32) $ (0.58)
==================== ===================
</TABLE>
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
PAGE 3
<PAGE>
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THERMOFLOW CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------------- ------------ --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1997 1,522,383 $ 15,223 $ 2,420,222 $ (2,431,588) $ 3,857
Issuance of common stock 126,254 1,263 292,577 - 293,840
Net loss - - - (909,157) (909,157)
-------------- ----------- --------------- ------------ --------------
BALANCE - DECEMBER 31, 1998 1,648,637 16,486 2,712,799 (3,340,745) (611,460)
Issuance of common stock 258,885 2,589 734,771 - 737,360
Net loss - - - (567,528) (567,528)
------------- ----------- --------------- ------------ --------------
BALANCE - DECEMBER 31, 1999 1,907,522 $ 19,075 $ 3,447,570 $ (3,908,273) $ (441,628)
============ =========== =============== ============ ==============
</TABLE>
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
PAGE 4
<PAGE>
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THERMOFLOW CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (567,528) $ (909,157)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 72,182 80,154
Bad debts 2,017 4,222
Loss (gain) on disposal of asset 1,023 (2,537)
Write-off of accounts payable (24,216) -
Extraordinary gain on settlement of debt (67,550) -
Loss from investment in closely held company 17,532 -
Stock issued for services 16,000 76,000
Stock issued for interest 10,610 12,270
Changes in operating assets and liabilities
Accounts receivable (74,487) 7,670
Prepaid royalties to stockholder (125,000) (25,000)
Inventories and other current assets (2,282) 41,523
Other assets - 2,435
Accounts payable and accrued expenses 127,264 23,402
Accrued expenses due to related parties 194,646 141,836
------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (419,789) (547,182)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in closely held company (20,000) -
Proceeds from disposal of vehicle 561 4,463
Acquisitions of property, plant and equipment (26,143) (5,881)
------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (45,582) (1,418)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable to related parties - 384,750
Proceeds from issuance of other notes payable - 40,005
Principal payments on notes payable (85,000) (21,500)
Advances from stockholders 11,429 17,766
Repayment of stockholder advances (104,738) (74,353)
Principal payments on capital lease obligation (950) (4,835)
Net proceeds from issuance of common stock 620,750 205,570
------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 441,491 547,403
------------- --------------
NET DECREASE IN CASH (23,880) (1,197)
CASH - beginning of year 23,880 25,077
------------- --------------
CASH - end of year $ - $ 23,880
============= ===============
(continued)
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
PAGE 5
<PAGE>
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THERMOFLOW CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 55,944 $ 65,660
================== ==================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Conversion of notes payable to stockholder into common stock $ 90,000 $ -
=================== ==================
Common stock issued for commissions on stock sales $ 58,370 $ 13,500
=================== ==================
Settlement of capital lease obligation $ 6,268 $ 7,495
=================== ==================
</TABLE>
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
PAGE 6
<PAGE>
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THERMOFLOW CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
-------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Thermoflow Corporation (the "Company"), a Nevada "S" Corporation, was
incorporated on August 3, 1994. The Company is engaged, primarily in the state
of Nevada, in the recycling of spent antifreeze through the use of a proprietary
technology capable of removing organic and inorganic contaminants from liquids.
Management believes that this technology, which is licensed from a stockholder
(Note 2), is not currently the subject of any active patents.
GOVERNMENT REGULATION
The Company's facility is subject to certain government regulations regarding
hazardous waste management, primarily related to the Company's recycling of
ethylene glycol (spent antifreeze) and storage of other hazardous materials used
in the recycling process. Compliance with these provisions has not had, nor does
the Company expect such compliance to have, any material effect upon the capital
expenditures, operations, financial condition or competitive position of the
Company. Management believes that its current practices and procedures comply
with applicable requirements.
The Company is subject to annual inspections by the Nevada Department of
Conservation and Natural Resources, a Division of Environmental Protection (the
"Department"), which evaluates the Company's compliance with applicable
hazardous waste management regulations. No violations were reported by the
Department during the January 2000 and 1999 inspections. In addition, the
Company has an active Nevada hazardous materials storage permit that expires on
February 28, 2001.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at December 31, 1999, and
the reported amounts of revenues and expenses during the years ended December
31, 1999 and 1998. Actual amounts could materially differ from those estimates
in the near term.
CONCENTRATIONS OF CREDIT RISK
The Company currently maintains substantially all of its operating cash with a
major financial institution. At times, cash balances may be in excess of the
amounts insured by the Federal Deposit Insurance Corporation.
The Company extends credit to its customers based upon its evaluation of each
customer's financial condition and credit history. The Company generally does
not
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PAGE 7
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
CONCENTRATIONS OF CREDIT RISK (continued)
require collateral from its customers. Should a customer be unable to meet
its obligation to the Company, the accounting loss would equal the recorded
accounts receivable.
Management periodically reviews accounts receivable and establishes an allowance
for accounts deemed uncollectible. At December 31, 1999, management considers an
allowance for doubtful accounts of $2,017 to be adequate to provide for losses
that may be sustained in the realization of these accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes that the carrying amounts of the Company's financial
instruments approximate their fair value at December 31, 1999.
INVENTORIES
Inventories, which totaled $17,588 at December 31, 1999, are valued at the lower
of cost (using the first-in, first-out method) or market. Inventories consist
primarily of supplies and finished goods (bottled product).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Major renewals and
improvements are capitalized, while replacements, maintenance and repairs that
do not significantly improve or extend the useful life of the asset are expensed
when incurred.
Factory plant and equipment and the warehouse building are generally depreciated
using the straight-line method over their estimated useful lives of 20 and 30
years, respectively. Furniture, fixtures and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets, which range
from three to seven years. Leasehold improvements are amortized over the shorter
of the estimated useful life of the asset or the remaining lease term.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying values of its long-lived assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. No impairment losses were
recorded in 1999 or 1998. As such, long-lived assets are stated at cost less
accumulated depreciation and amortization.
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PAGE 8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVESTMENT IN CLOSELY HELD COMPANY
The Company accounts for its 50% investment in a closely held company using
the equity method. As such, the Company records its investment at cost and
adjusts the carrying amount of the investment to recognize the Company's
share of the net earnings or losses of the investee after the date of
acquisition.
CONVERTIBLE DEBT
The Company uses the book value approach in accounting for debt instruments
converted to shares of common stock. Under this approach, the new stock is
valued at the carrying amount of the converted debt, and no gain or loss is
recognized upon conversion.
REVENUE RECOGNITION
Revenue is recognized when products are shipped to customers.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Accordingly, the Company has not provided for federal
income taxes because the income tax liability is that of the individual
stockholders. The Company is subject to Nevada state income tax at the rate of
7.25% of taxable income. Deferred income taxes are not material to the
accompanying financial statements.
LOSS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," basic loss per share is computed by dividing the loss
attributable to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted loss per share reflects the amount
that would have resulted if certain dilutive potential common stock had been
issued. Because the Company has experienced losses from inception, the
convertible debt described in Note 6 is antidilutive. Therefore, if such debt
had been incurred prior to January 1, 1998, it would not have impacted the
disclosures described below.
The weighted average number of common shares outstanding for the years ended
December 31, 1999 and 1998 are 1,778,663 and 1,562,749, respectively.
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PAGE 9
<PAGE>
2. PREPAID ROYALTIES TO STOCKHOLDER
On February 27, 1998, Alois Schmidt ("Alois"), a founding stockholder, and the
Company agreed to enter into a licensing agreement pursuant to which all of the
technology relating to solid and liquid waste recycling and disposal (the
"Technology") owned by Alois would be licensed to the Company. Pursuant to this
agreement, Alois received $25,000 as an advance payment of royalties in excess
of the "minimum royalty," as defined. In addition, Alois was to be paid the
greater of $15,000 (the minimum royalty) or 0.5% of net sales, as defined, per
quarter for five years. After that, no minimum royalty payments would be due;
however, royalties were to accrue at 0.5% of net sales per quarter through
December 31, 2020.
On April 23, 1999, Alois and the Company entered into an Exclusive World-Wide
Technology and Know-How Licensing Agreement (the "Licensing Agreement"), which
superceded the February 27, 1998 agreement. The terms of the Licensing Agreement
are substantially the same as the February 27, 1998 agreement, except minimum
royalty payments shall now continue through December 31, 2020. Unless the
Licensing Agreement is terminated prior to such date, all rights, title and
interest in the Technology shall be assigned (or otherwise be deemed to fully
vest) to the Company. Pursuant to the terms of the Licensing Agreement, an
additional $125,000 was paid to Alois in December 1999 as an advance payment of
royalties in excess of minimum royalties.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of December 31, 1999:
<TABLE>
<S> <C>
Factory plant and equipment $ 784,446
Warehouse building 176,522
Land 90,936
Furniture, fixtures and equipment 50,886
Leasehold improvements 41,485
-------------------
1,144,275
Accumulated depreciation and amortization (248,015)
-------------------
$ 896,260
===================
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998 totaled
$63,885 and $71,857, respectively. Amortization expense totaled $8,297 in both
1999 and 1998.
4. INVESTMENT IN CLOSELY HELD COMPANY
In May 1999, the Company and EET Corporation ("EET") (Note 11) each contributed
$20,000 to form Liquitek, Inc. ("Liquitek"), a Nevada corporation, which
provides
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PAGE 10
<PAGE>
4. INVESTMENT IN CLOSELY HELD COMPANY (continued)
technology and services for liquid and solid waste treatment and recycling. The
Company acquired 50% of Liquitek's common stock as a result of this transaction.
The investment is being accounted for under the equity method (Note 1).
As of December 31, 1999, unaudited total assets for Liquitek were approximately
$8,000 and unaudited total revenue and net loss for the period May 5, 1999
(inception) through December 31, 1999 were approximately $18,000 and $35,000,
respectively. Such amounts have been represented by management as being
in conformity with accounting principles generally accepted in the United
States.
5. DUE TO STOCKHOLDERS
Certain stockholders have periodically advanced funds to and received repayments
from the Company. Advances from stockholders generally accrue interest at a rate
of 12% per annum, are due upon demand and are to be repaid as cash becomes
available. At December 31, 1999, the Company owed stockholders $29,194.
6. NOTES PAYABLE
Notes payable consist of the following at December 31, 1999:
<TABLE>
<S> <C>
Note payable to Mark Lantzman, Essex Square Corporation, Burton
and Beth Nord. Interest accrues at a rate of 10% per annum,
payable in 24 monthly installments. Unpaid principal and
accrued interest were due on December 27, 1998. The due date
was extended to December 27, 1999, with the interest rate
increasing to 13% per annum on December 27, 1998. The note
is now due upon demand. The note is secured by a first lien
deed of trust on the Company's land and warehouse and
guaranteed by Alois and Ernst Schmidt, stockholders. $ 169,505
Note payable to Friedhelm Cordes, a stockholder and director.
Interest accrues at a rate of 11% per annum. The outstanding
principal balance and accrued interest were due in full on
August 17, 1999 and are now due upon demand. Unpaid principal
after the due date accrues interest at a rate of 16% per annum
until paid. 150,000
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PAGE 11
<PAGE>
6. NOTES PAYABLE (continued)
Notes payable to Arthur L. Winders ("Winders"), a stockholder and
director. Interest accrues at the Norwest Bank prime rate
(8.5% and 7.75% at December 31, 1999 and 1998, respectively)
plus 5% per annum and is payable monthly. The outstanding
principal balance and accrued interest were due on August
31, 1997 and are now due upon demand. The notes are secured
by substantially all of the Company's assets. Until the
notes are retired, Winders has the option to convert them
into shares of the Company's common stock at a conversion
price of $5.00 per share. 149,500
Note payable to Winders. Interest accrues at a rate of 11% per
annum. The outstanding principal balance and accrued
interest were due in full on August 17, 1999 and are now due
upon demand. Unpaid principal after the due date accrues
interest at a rate of 16% per annum until paid. 100,000
Note payable to I-Vest Partners, a related party. Interest accrues
at a rate of 10% per annum, payable monthly. The outstanding
principal balance and accrued interest are due in full on
April 1, 2000. Unpaid principal after the due date shall
accrue interest at a rate of 18% per annum until paid. The
note is secured by a third lien deed of trust on the Company's
land and warehouse and guaranteed by Alois and Ernst Schmidt,
stockholders. Prior to the due date, I-Vest Partners has the
option to convert the note, in part or in whole, into shares
of the Company's common stock at a conversion price of $12.50
per share. 96,250
Note payable to I-Vest Partners. Interest accrues at a rate of
10.5% per annum, payable in 36 monthly installments. Unpaid
principal and accrued interest were due on December 27, 1999
and the note is now due upon demand. The note is secured by
a second lien deed of trust on the Company's land and warehouse
and guaranteed by Alois and Ernst Schmidt. The Board of Directors
agreed to provide I-Vest Partners with the option to convert
this note into 18,000 shares of common stock at $5.00 per share. 90,000
Note payable to the Mary Monasmith Trust, a stockholder. Interest
accrues at a rate of 12% per annum. The outstanding principal
balance and accrued interest were due in full on July 20, 1998
and are now due upon demand. 60,000
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PAGE 12
<PAGE>
6. NOTES PAYABLE (continued)
Note payable to M-SMITH, Inc., a related party. Interest accrues
at a rate of 12% per annum and is payable monthly. The
outstanding principal balance and accrued interest were due
in full on June 10, 1999 and are now due upon demand.
Thereafter, the obligation accrues interest at a rate of 18%
per annum. The note is secured by the Company's forklift and
other miscellaneous equipment. This note has been assigned
to Roberto Brutoco ("Brutoco") and interest payments have
been assigned to the Lantzman Family Trust. 60,000
Note payable to John F. Berzanskis, Jr., a stockholder. Interest
accrues at a rate of 9% per annum and is payable annually.
Principal and accrued interest are due in full on demand. 50,000
Note payable to Brutoco, secured by substantially all of the
Company's assets. Interest accrues at a rate of 10% per annum.
The outstanding principal balance and accrued interest were
due in full on July 1, 1998 and are now due upon demand. 16,000
---------
$ 941,255
=========
</TABLE>
Substantially all notes payable are in default at December 31, 1999 and are due
on demand. None of the note holders had entered into collection procedures as of
December 31, 1999. As such, all notes payable are classified as current
liabilities in the accompanying balance sheet. Subsequent to December 31, 1999,
all notes payable were repaid in full, except for the $90,000 note payable to
I-Vest Partners, which was converted into 18,000 shares of the Company's
common stock.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases certain factory and office space under a noncancelable
operating lease that expires on December 31, 2004 and has an option to purchase
the premises on or before December 31, 2000 for $534,100. Rent is subject to
annual increases based on the Consumer Price Index.
Future minimum payments under this noncancelable operating lease are as follows
for the years ending December 31:
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PAGE 13
<PAGE>
7. COMMITMENTS AND CONTINGENCIES (continued)
LEASE COMMITMENTS (continued)
<TABLE>
<S> <C>
2000 $ 64,044
2001 65,965
2002 67,944
2003 69,983
2004 72,082
-----------------
$ 340,018
=================
</TABLE>
Rent expense for the years ended December 31, 1999 and 1998 totaled $64,343 and
$63,420, respectively.
ROYALTY COMMITMENTS
The Company has entered into an Exclusive World-Wide Technology and Know-How
Licensing Agreement with a stockholder (Note 2). Future minimum payments under
this agreement are as follows for the years ending December 31:
<TABLE>
<S> <C>
2000 $ 60,000
2001 60,000
2002 60,000
2003 60,000
2004 60,000
Thereafter 1,260,000
-----------
$ 1,560,000
===========
</TABLE>
Royalty expense for the years ended December 31, 1999 and 1998 totaled $30,000
and $60,000, respectively, and are included in operating expenses in the
accompanying statements of operations.
OTHER CONTINGENCIES
The Company's commitments and contingencies also include the usual
obligations incurred in the normal course of business. In the opinion of
management, these matters will not have a material adverse effect on the
Company's financial position or results of operations.
8. CONCENTRATIONS
For the years ended December 31, 1999 and 1998, three customers accounted for
approximately 53% and 62%, respectively, of net sales. As of December 31, 1999,
three
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PAGE 14
<PAGE>
8. CONCENTRATIONS (continued)
customers accounted for approximately 78% of accounts receivable. No other
individual customer accounted for more than 10% of net sales for the years ended
December 31, 1999 and 1998 or more than 10% of accounts receivable as of
December 31, 1999.
9. EXTRAORDINARY GAIN ON SETTLEMENT OF DEBT
The Company negotiated the settlement of a $122,000 note payable to Jerry
Allison, a former stockholder, and accrued interest totaling $30,551, for a
lump-sum payment of $85,000, which was made in September 1999. Accordingly, the
Company recognized a gain in the amount of $67,550, which is reported as an
extraordinary item in the accompanying statements of operations. The Company had
previously issued to the creditor 100,000 shares of common stock as collateral
for the note payable. Such shares were recorded at par value and are still
outstanding at December 31, 1999, and will be canceled pending release by the
creditor.
10. RELATED PARTY TRANSACTIONS
The Company has issued stock purchase warrants to certain stockholders as
incentives to invest in the Company and as commissions for arranging Company
financing. These warrants expire in April and June 2002 and provide the
holders with the right to purchase a total of 72,000 shares of common stock
at a purchase price of $5.00 per share and 7,700 shares of common stock at a
purchase price of $12.50 per share. The effect of issuing these stock
purchase warrants was not material to the accompanying financial statements.
As of December 31, 1999, none of the warrants had been exercised. On May 26,
2000 as a result of the acquisition of the Company (Note 11), such stock
purchase warrants were cancelled and the holders received stock purchase
warrants to purchase a total of 360,000 shares of VitriSeal, Inc.
("VitriSeal") restricted common stock at $1.00 per share and 38,500 shares of
VitriSeal restricted common stock at $2.50 per share.
During the year ended December 31, 1999, the Company issued 5,000 shares of
common stock to an existing stockholder for a 6-month loan extension fee. This
fee was valued at $10,000 and is included in operating expenses in the
accompanying financial statements.
During the years ended December 31, 1999 and 1998, the Company issued to a
stockholder 2,122 shares and 2,454 shares, respectively, of the Company's stock
as payment of interest expense due on the notes payable. Such shares were valued
at $5.00 per share.
During the years ended December 31, 1999 and 1998, the Company issued to
existing stockholders 17,284 shares and 7,200 shares, respectively, of common
stock for commissions on stock sales transactions. Such shares were valued at
prices ranging from
-------------------------------------------------------------------------------
PAGE 15
<PAGE>
10. RELATED PARTY TRANSACTIONS (continued)
$1.25 to $5.00 per share, and the commissions are charged to additional paid-in
capital in the accompanying financial statements.
During the years ended December 31, 1999 and 1998, the Company issued to
existing stockholders 3,000 shares and 30,500 shares, respectively, of common
stock for various services. Such shares were valued at prices ranging from $2.00
to $5.00 per share and are included in operating expenses in the accompanying
financial statements.
Several of the Company's stockholders periodically provide consulting
services to the Company. For the years ended December 31, 1999 and 1998, the
Company incurred fees related to such services totaling $38,300 and $28,000,
respectively. Such amounts are included in operating expenses in the
accompanying financial statements. At December 31, 1999, accrued consulting
fees owed to related parties totaled $29,000 and are included in accrued
expenses due to related parties in the accompanying financial statements.
During the year ended December 31, 1998, the Company incurred legal fees from a
stockholder totaling $64,311. Such amount is included in operating expenses in
the accompanying financial statements. At December 31, 1999, $37,420 was owed to
such stockholder for legal fees and is included in accrued expenses due to
related parties in the accompanying financial statements. No legal fees from
related parties were incurred during the year ended December 31, 1999.
The President of the Company in 1999 ("Sferrazza") is a relative of a founding
stockholder of the Company and vice president and a member of the Board of
Directors of EET. Services performed for the Company by Sferrazza were billed
by, and paid to, EET and recorded as management fees. For the year ended
December 31, 1999, $90,000 in related party management fees is included in
operating expenses in the accompanying financial statements. At December 31,
1999, $88,344 of these fees was unpaid and, accordingly, are included in accrued
expenses due to related parties in the accompanying financial statements.
At December 31, 1999, accrued interest on related party notes payable (Note 6)
totaled $112,728 and is included in accrued expenses due to related parties in
the accompanying financial statements. For the years ended December 31, 1999 and
1998, the Company incurred interest expense to related parties totaling
approximately $128,000 and $118,000, respectively, which is included in interest
expense in the accompanying financial statements.
Other related party transactions are discussed elsewhere in these notes to the
financial statements.
-------------------------------------------------------------------------------
PAGE 16
<PAGE>
11. SUBSEQUENT EVENTS (UNAUDITED)
On May 26, 2000, the Company was acquired by VitriSeal, a publicly traded
company, in a stock-for-stock purchase. In connection therewith, the
Company's stockholders received 9,661,500 shares of VitriSeal restricted
common stock and warrants to purchase 398,500 shares of VitriSeal common
stock in exchange for 100% of their common stock and outstanding warrants in
the Company. The acquisition was accounted for as a purchase under Accounting
Principles Board Opinion Number 16. On May 26, 2000, VitriSeal also purchased
EET's 50% ownership interest in Liquitek in a stock-for-stock purchase
whereby VitriSeal issued 5,000,000 shares of restricted common stock to EET
in exchange for EET's 50% ownership of Liquitek's common stock outstanding
(Note 4). As a result of the acquisition, the Company's income tax status
changed from "S" corporation to "C" corporation.
Subsequent to December 31, 1999 and prior to May 26, 2000, VitriSeal advanced to
the Company and Liquitek approximately $460,000 and $200,000, respectively.
In January 2000, the Company issued 98,200 shares of common stock to related
parties and employees for services rendered. Such shares were valued at
approximately $245,000.
-------------------------------------------------------------------------------
PAGE 17
<PAGE>
THERMOFLOW CORPORATION
UNAUDITED INTERIM
FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
<PAGE>
--------------------------------------------------------------------------------
THERMOFLOW CORPORATION
BALANCE SHEETS
(UNAUDITED)
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------------ -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 48,090 $ 19,731
Accounts receivable, net 101,241 45,595
Prepaid royalties to stockholder 150,000 25,000
Inventories and other current assets 17,209 49,083
------------------ -------------------
316,540 139,409
Property, plant and equipment, net 885,845 934,004
Investment in closely held company - -
Other assets 28,017 28,555
------------------ -------------------
$ 1,230,402 $ 1,101,968
================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 165,965 $ 305,518
Accrued expenses due to related parties 370,502 145,479
Capital lease obligation - 6,305
Due to stockholders 29,194 139,132
Notes payable to related parties 665,750 967,750
Other notes payable 172,005 185,505
Due to VitriSeal, Inc. 367,000 -
------------------ -------------------
1,770,416 1,749,689
Commitments and contingencies
STOCKHOLDERS' DEFICIT
Common stock, $0.01 par value; 10,000,000
shares authorized; 2,023,722 and 1,703,715
shares issued and outstanding at March 31,
2000 and 1999, respectively 20,237 17,037
Additional paid-in capital 3,781,907 2,818,624
Accumulated deficit (4,342,158) (3,483,382)
------------------ -------------------
(540,014) (647,721)
------------------ -------------------
$ 1,230,402 $ 1,101,968
================== ===================
</TABLE>
--------------------------------------------------------------------------------
THE ACCOMPANYING NOTE IS AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
PAGE 2
<PAGE>
--------------------------------------------------------------------------------
THERMOFLOW CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------------- -------------------
<S> <C> <C>
NET SALES $ 211,686 $ 145,714
COST OF SALES 292,017 183,935
-------------------- -------------------
GROSS MARGIN (80,331) (38,221)
OPERATING EXPENSES 319,674 75,365
-------------------- -------------------
LOSS FROM OPERATIONS (400,005) (113,586)
OTHER INCOME (EXPENSE)
Interest expense (32,543) (29,050)
Loss from investment in closely held company (2,468) -
Other income, net 1,130 -
-------------------- -------------------
(33,881) (29,050)
-------------------- -------------------
NET LOSS $ (433,886) $ (142,636)
==================== ===================
Basic and diluted loss per share $ (0.21) $ (0.09)
==================== ===================
Weighted average number of common shares outstanding 2,023,722 1,657,292
==================== ===================
</TABLE>
--------------------------------------------------------------------------------
THE ACCOMPANYING NOTE IS AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
PAGE 3
<PAGE>
--------------------------------------------------------------------------------
THERMOFLOW CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (433,886) $ (142,636)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 20,214 34,428
Loss from investment in closely held company 2,468 -
Stock issued for services 245,500 6,000
Changes in operating assets and liabilities
Accounts receivable 16,892 68
Prepaid royalties to shareholder - -
Inventories and other current assets 1,478 (32,678)
Unpresented checks (135,051) -
Accounts payable and accrued expenses (26,236) 50,764
Accrued expenses due to related parties 13,010 (17,367)
------------------- -------------------
NET CASH USED IN OPERATING ACTIVITIES (295,611) (101,421)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property, plant and equipment (9,799) (18,819)
------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (9,799) (18,819)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 2,500 -
Principal payments on notes payable (16,000) -
Advances from VitriSeal 367,000 -
Advances from stockholders - 16,629
Principal payments on capital lease obligation - (913)
Net proceeds from issuance of common stock - 100,375
------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 353,500 116,091
------------------- -------------------
NET INCREASE (DECREASE) IN CASH 48,090 (4,149)
CASH - beginning of period - 23,880
------------------- -------------------
CASH - end of period $ 48,090 $ 19,731
=================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 13,278 $ 9,206
=================== ===================
(continued)
--------------------------------------------------------------------------------
THE ACCOMPANYING NOTE IS AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
PAGE 4
<PAGE>
--------------------------------------------------------------------------------
THERMOFLOW CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Conversion of note payable to stockholder into common stock
$ 90,000 $ -
=================== ===================
Common stock issued for commissions on stock sales $ - $ 8,700
=================== ===================
</TABLE>
--------------------------------------------------------------------------------
THE ACCOMPANYING NOTE IS AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
PAGE 5
<PAGE>
--------------------------------------------------------------------------------
THERMOFLOW CORPORATION
NOTE TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The Company has prepared its financial statements for the quarters ended March
31, 2000 and 1999 without audit by the Company's independent auditors. In the
opinion of management, all adjustments necessary to present fairly the financial
position, results of operations, and cash flows of the Company as of March 31,
2000 and for the quarters ended March 31, 2000 and 1999 have been made. Such
adjustments consist only of normal recurring adjustments.
Certain note disclosures normally included in the Company's annual financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted. The accompanying interim
financial statements should be read in conjunction with the December 31, 1999
and 1998 audited financial statements and notes within this Form 8-K/A filed
with the Securities and Exchange Commission.
The results of operations for the quarter ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year.
--------------------------------------------------------------------------------
PAGE 6
<PAGE>
VITRISEAL, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 2000 AND DECEMBER 31, 1999
INTRODUCTION
On May 26, 2000, VitriSeal, Inc. (the "Company") acquired all of the
outstanding voting stock of Thermoflow Corporation ("Thermoflow") and
Liquitek, Inc ("Liquitek") in a purchase business combination by issuing
14,661,500 shares of its restricted common stock and warrants for 398,500
shares of its restricted common stock. Both Thermoflow and Liquitek have
calendar year-ends.
The following unaudited pro forma combined financial statements (hereinafter
collectively referred to as "the pro forma financial statements") are presented
for illustrative purposes only, and are not necessarily indicative of the
combined financial position at an earlier date or results of operations of
future periods or the results that would have been realized had the Company,
Thermoflow and Liquitek been a combined entity during the specified periods. The
pro forma financial statements (including the notes thereto) are qualified in
their entirety by reference to, and should be read in conjunction with, the
historical financial statements of the Company and Thermoflow, including the
notes thereto, incorporated herein by reference or included herein. The
Company's historical financial statements incorporated herein by reference are
(a) the audited December 31, 1999 financial statements included in the related
Form 10-KSB, and (b) the unaudited March 31, 2000 financial statements included
in the related Form 10-QSB. The financial statements referred to in the
preceding sentence have been previously filed with the Securities and Exchange
Commission. The separate historical financial statements of Liquitek (not
included herein) are not material to the pro forma financial statements.
The following pro forma financial statements give effect to the reorganization
of the Company, Thermoflow and Liquitek using the purchase method of accounting.
The pro forma financial statements are based on the respective historical
financial statements and the notes thereto of the Company and Thermoflow (which
are included or incorporated herein by reference) and the historical
financial statements of Liquitek. The March 31, 2000 pro forma
combined balance sheet, which assumes that the reorganization took place on
March 31, 2000, combines the unaudited balance sheets of the Company,
Thermoflow, and Liquitek as of such date. The pro forma combined statements of
operations, which assume that the reorganization took place on January 1, 1999,
<PAGE>
combine for the three entities such financial statements for calendar 1999 and
their unaudited statements of operations for the quarter ended March 31, 2000.
The 1999 unaudited pro forma combined statement of operations excludes the
extraordinary credit reported by Thermoflow in its historical statement of
operations for the year ended December 31, 1999.
The pro forma adjustments described in the accompanying notes are
preliminary, and are based on management's estimates and a preliminary
third-party valuation of the estimated fair value of the net assets acquired.
Such adjustments are also based on a third-party valuation of the estimated
fair value of the Company's restricted common stock issued to the former
stockholders of Thermoflow and Liquitek; such value has been estimated at
approximately $1.23 per share. Factors considered in estimating the fair
value of the Company's common stock issued in the reorganization include
those discussed in the following paragraph.
The owners of the aforementioned stock (and the warrants described in Note D)
have the right to participate in a registration statement to be filed by the
Company under the Securities Act of 1933 (the "Act"). Owners who exercise this
right become subject to an agreement whereby they will be allowed to sell a
maximum of 25% of their shares in any six-month period until May of 2002, when
such restriction is lifted. The stock owned by shareholders who do not exercise
this right will remain restricted under Rule 144 of the Act. Based on the
matters described above, the substantial number of shares issued in the
reorganization (as compared to the average daily trading volume of the Company's
common stock), and a third-party valuation, management has applied a discount of
40% to the average market price of the Company's common stock during the week
ended May 5, 2000 to estimate its fair value. Such date is based on the
Company's letter of intent with Thermoflow and Liquitek.
Management is in the process of assessing and formulating its integration plans;
although restructuring costs (if any) are not yet known, management does not
believe that they will be material. In the opinion of management, all known
presently quantifiable adjustments have been made that are necessary to present
fairly the pro forma financial statements.
A material nonrecurring charge that (1) will be included in the Company's
operations during the quarter ending June 30, 2000 and (2) resulted directly
from the reorganization is described in Note H. Because the unaudited pro
forma combined statements of operations are intended to present the ongoing
normal operations of the Company as they might appear after the purchase
transaction, such charge has not been considered in preparing such financial
statements. However, the effect of this item is reflected in the accompanying
unaudited pro forma combined balance sheet.
<PAGE>
VITRISEAL, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical
------------------------------------
Thermoflow/ Pro Forma Pro Forma
Vitriseal Liquitek Adjustments Combined
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash $ 5,086 $ 127 $ - $ 5,213
Trade accounts receivable 101 101
Advances to/for companies being acquired 749 (567) A 182
Prepaid royalties 150 150
Inventories and other current assets 17 17
Completed technology 11,670 C 11,670
Excess of purchase price over net
assets acquired (goodwill) 5,525 C 5,525
Patents 157 157
Other intangible assets 470 C,H 470
Property, plant and equipment, net 142 1,076 394 C,E 1,612
Other assets 6 33 39
--------------- --------------- --------------- ----------------
Total assets $ 6,140 $ 1,504 $ 17,492 $ 25,136
=============== =============== =============== ================
Unpresented checks $ - $ - $ - $ -
Accrued expenses due to related parties 234 234
Accounts payable and other accrued expenses 236 310 546
Due to VitriSeal 567 (567) A -
Notes payable to related parties 827 827
Other liabilities 170 170
Common stock 23 20 (5) C,F 38
Additional paid-in capital 12,525 3,782 14,291 C,F 30,598
Accumulated deficit (6,869) (4,406) 3,436 C,F,H (7,839)
Other equity, net 225 337 C,D,F 562
--------------- --------------- --------------- ---------------
Total liabilities and stockholders' equity $ 6,140 $ 1,504 $ 17,492 $ 25,136
=============== =============== =============== ===============
</TABLE>
See accompanying notes.
<PAGE>
VITRISEAL, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical
-----------------------------------
Thermoflow/ Pro Forma Pro Forma
VitriSeal Liquitek Adjustments Combined
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ - $ 736 $ - $ 736
Cost of sales - 846 846
--------------- --------------- --------------- ---------------
Gross margin - (110) - (110)
Operating expenses:
Research and development 645 645
Amortization of intangibles 56 2 992 G 1,050
Other depreciation and amortization 10 7 26 G 43
Other 902 391 1,293
--------------- --------------- --------------- ---------------
Loss from operations (1,613) (510) (1,018) (3,141)
Interest expense/(income) and other, net (19) 125 106
--------------- --------------- --------------- ---------------
Loss before income taxes and extraordinary credit (1,594) (635) (1,018) (3,247)
Income tax benefit, net - - - -
--------------- --------------- --------------- ---------------
Loss before extraordinary credit $ (1,594) $ (635) $ (1,018) $ (3,247)
=============== =============== =============== ===============
Basic and diluted loss per common share before
extraordinary credit $ (0.08) $ (0.09)
=============== ===============
Weighted average number of common shares
outstanding 20,627 14,662 35,289
=============== =============== ===============
</TABLE>
See accompanying notes.
<PAGE>
VITRISEAL, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
QUARTER ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical
-----------------------------------
Thermoflow/ Pro Forma Pro Forma
VitriSeal Liquitek Adjustments Combined
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ - $ 241 $ - $ 241
Cost of sales - 271 271
--------------- --------------- --------------- ---------------
Gross margin - (30) - (30)
Operating expenses:
Research and development 132 132
Amortization of intangibles 7 248 G 255
Other depreciation and amortization 5 20 7 G 32
Other 1,260 417 1,677
--------------- --------------- --------------- ---------------
Loss from operations (1,404) (467) (255) (2,126)
Interest expense/(income) and other, net (27) 31 4
--------------- --------------- --------------- ---------------
Loss before income taxes (1,377) (498) (255) (2,130)
Income tax benefit, net - - -
--------------- --------------- --------------- ---------------
Net Loss $ (1,377) $ (498) $ (255) $ (2,130)
=============== =============== =============== ===============
Basic and diluted loss per common share $ (0.06) $ (0.06)
=============== ===============
Weighted average number of common shares
outstanding 22,196 14,662 36,858
=============== =============== ===============
</TABLE>
See accompanying notes.
<PAGE>
VITRISEAL, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
March 31, 2000 and December 31, 1999
Note (A) Basis of Presentation
The pro forma combined balance sheet assumes that the reorganization took place
on March 31, 2000. Such financial statement combines the historical balance
sheets of the Company, Thermoflow and Liquitek at that date. The pro forma
combined statements of operations assume that the reorganization took place on
January 1, 1999, and combine the historical statements of continuing operations
for calendar 1999 and for the quarter ended March 31, 2000 of the three entities
which participated in the transaction. The aforementioned historical financial
statements have been adjusted as discussed in the notes below.
Other than $567,000 of advances by the Company to Thermoflow and Liquitek in
anticipation of the reorganization, there were no other significant
transactions on a combined basis between the acquired entities and the
Company during the periods presented.
Note (B) Introduction to the Unaudited Preliminary Pro Forma Adjustments
The accompanying pro forma information, including the allocation of the purchase
price, is based on management's preliminary estimates and a third-party
valuation of (1) the net assets acquired and (2) the fair value of the equity
securities issued by the Company to consummate the reorganization. Based on the
timing of the closing of the acquisition, the finalization of the valuation, and
other factors, the final pro forma adjustments may differ materially from those
presented in the accompanying pro forma combined financial statements. A change
in the value assigned to long-term assets and liabilities could result in a
reallocation of the purchase price and a revision of certain pro forma
adjustments. The impact of any such changes on the pro forma statements of
operations will depend on the nature and amount of the assets and/or liabilities
adjusted. See Note K for additional information.
Management is in the process of assessing and formulating its integration plans.
Though management has not yet determined the actual amount of any restructuring
costs associated with the integration plans, it is not expected that such costs
will be material; no amounts are included in the accompanying pro forma
financial statements. In addition, the pro forma financial statements have not
been adjusted to reflect any cost savings or operating synergies that may result
from the reorganization.
<PAGE>
Note (C)
To reflect the excess of the total acquisition cost over the
estimated fair value of the net assets acquired (goodwill). The
purchase price, purchase price allocation and financing of the
transaction are summarized as follows:
Purchase price paid as:
<TABLE>
<S> <C>
Common stock issued $ 18,088,186
Stock warrants issued 336,731
------------
Total purchase consideration 18,424,917
------------
Allocated to:
Historical book value of Thermoflow's and
Liquitek's assets and liabilities (604,065) *
Adjustments to reflect assets and liabilities at
estimated fair value:
Completed technology 11,670,000
Property, plant and equipment 393,778
Assembled workforce 210,000
Non-competition agreement 150,000
Unitek license agreement 110,000
In-process research and development
written off (Note H) 970,000
-------------
Total allocation 12,899,713
-------------
Excess of purchase price over allocation to
identifiable assets and liabilities (goodwill) $ 5,525,204 *
============
</TABLE>
* The historical book value of Thermoflow's and Liquitek's assets and
liabilities is different at different dates, resulting in different
amounts of goodwill. The March 31, 2000 data required for this filing
are as shown above. The amounts to be recorded at the closing of the
acquisitions (May 26, 2000) are:
<TABLE>
<S> <C>
Historical book value of Thermoflow's and Liquitek's
assets and liabilities $ (794,756)
Excess of purchase price over allocation to identifiable
assets and liabilities (goodwill) 5,715,895
</TABLE>
<PAGE>
Note (D)
On May 26, 2000, the Company issued warrants to acquire 398,500 shares of its
restricted common stock to former Thermoflow shareholders who owned warrants
to purchase Thermoflow common stock. Such warrants, which expire in May of
2002, allow the holders to acquire such stock at a price of $1.00 per share
(as to 360,000 warrants) and $2.50 per share (as to 38,500 warrants).
The fair value of the above warrants, which was estimated using the
Black-Scholes stock option-pricing model, has been included in the purchase
price. The use of such model was based on the 40% valuation discount
discussed in the "Introduction" and the following assumptions:
<TABLE>
<S> <C> <C>
Risk-free interest rate 6.5%
Expected life 2 years
Estimated annualized volatility 130%
Expected dividend yield Zero
</TABLE>
Note (E)
To reflect the step-up in the property, plant and equipment carrying amount to
estimated fair value based on a third-party valuation.
Note (F)
To reflect (1) the elimination of the stockholders' equity accounts of
Thermoflow and Liquitek, and (2) the issuance of common stock and warrants
by the Company as consideration for the purchase (see Note D).
<PAGE>
Note (G)
To reflect the increase in depreciation and amortization expense due to (i)
the amortization of goodwill and completed technology over 20 years, (ii) the
amortization of assembled workforce (10 years) and the rights associated with
certain agreements (2-3 years), and (iii) the adjustment resulting from the
step-up of property, plant and equipment to estimated fair value depreciated
over an average life of approximately 15 years on a straight-line basis.
Note (H)
In-process research and development ("IPR&D") relates to Liquitek's car-wash
wastewater technology. Because such technology is estimated to be only 50%
complete as of May 26, 2000, management has concluded that the technological
feasibility thereof had not been established at that date. In addition, such
technology is not presently expected to have any alternative future uses.
Thus, the purchase price allocated to IPR&D will be expensed on the
consummation date. Such amount has been charged to the accumulated deficit in
the pro forma combined balance sheet; it has not been included in the pro
forma combined statements of operations because of its non-recurring nature.
Note (I)
Since the unaudited pro forma combined statements of operations report a loss
from continuing operations, there is no income tax effect of the above pro forma
adjustments except as described in the following paragraph.
Prior to the reorganization, Thermoflow and Liquitek were not subject to any
entity-level federal income tax because of their Subchapter S election. On
May 26, 2000, such election terminated for both companies. Assuming such tax
election terminated on January 1, 1999, any deferred income tax benefit of
the combined entity for 1999 or the quarter ended March 31, 2000 would have
been subject to reduction based on whether such benefit was likely to be
realized. Since there is no reasonable assurance that such assets will be
realized in future years, the combined entity has reflected a 100% valuation
allowance against these deferred tax assets. For that reason, the net effect
thereof on the unaudited pro forma combined statements of operations is nil.
<PAGE>
Note (I) - continued
If the combined entity earns taxable income in excess of available net
operating loss carryforwards in the future, its effective income tax rate
will exceed the applicable statutory rate because amortization
of the purchase price allocated to intangible assets and property, plant and
equipment is not deductible for income tax purposes.
Note (J)
Basic and diluted pro forma loss per common share (before extraordinary credit,
as to 1999) is calculated based on the issuance (assumed to have been on January
1, 1999) of 14,661,500 shares of Vitriseal restricted common stock in the
reorganization. Warrants and stock options, including those assumed to be
outstanding as of January 1, 1999, were not considered in the computation of
diluted pro forma loss per common share because their inclusion would have been
antidilutive.
Note (K)
As of May 26, 2000, the Company had advanced to Thermoflow/Liquitek a total
of approximately $ 665,000 pursuant to the terms of the reorganization
agreements.
