<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(FEE REQUIRED)
For the Fiscal Year Ended Commission File
March 31, 2000 Number 0-15654
-------------- --------
TRANSPIRATOR TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2789408
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
850-870 U.S. Highway #1
North Brunswick, New Jersey 18902
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, with area code 732-246-5900
------------
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:
Common Stock, $0.01 par value
--------------------------------------------------------------------------------
(Title of class)
Indicate by a check mark whether the registrant (1) has 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 as the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
<PAGE> 2
On June 30, 2000 the aggregate market value of the voting stock of Transpirator
Technologies, Inc. held by nonaffiliates of the registrant was approximately
$443,803 based upon the average bid and asked prices of such common stock on
said date as reported by NASDAQ. On such date, there were 3,245,950 shares of
common stock of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
2
<PAGE> 3
TRANSPIRATOR TECHNOLOGIES, INC.
INDEX
TABLE OF CONTENTS
PART I
Item 1. Descriptions of Business
Item 2. Descriptions of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security ownership of Certain Beneficial owners and Management
Item 12. Certain Relationships and Related Transactions
PART IV
Item 13. Exhibits and Reports on Form 8-K
3
<PAGE> 4
ITEM I. DESCRIPTION OF BUSINESS
FORWARD-LOOKING
Transpirator Technologies, Inc. (the "Company") cautions readers that certain
important factors may affect the Company's actual results and could cause such
results to differ materially from any forward-looking statements which may be
deemed to have been made in this report or which are otherwise made by or on
behalf of the Company. For this purpose, any statements contained in this report
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"May," "Will," "Expect," "Believe," "Anticipate," "Intend," "Could," "Would,"
"Estimate," or "Continue" or the negative other variations thereof or comparable
terminology are intended to identify forward-looking statements. Factors which
may affect the Company's results include, but are not limited to, the risks and
uncertainties associated with a medical apparatus company which has only
recently licensed its sole product including a history of net losses, some
unproven technologies, limited manufacturing experience, current and potential
competitors with significant technical and marketing resources, need for future
capital and dependence on collaborative partners and on key personnel.
Additionally, the Company is subject to the risks and uncertainties associated
with all medical apparatus companies, including compliance with government
regulations. The Company is also subject to other risks detailed herein or
detailed from time to time in the Company's filings with the Securities and
Exchange Commission (the "Commission").
GENERAL
The Company was organized on December 22, 1986 as a Delaware corporation and
filed an S-1 Registration Statement on April 8, 1987. The Company was organized
to design, develop and market respiratory therapy products for veterinary and
human use. The main products developed by the Company were the ET-1000 Equine
Unit and the MT-1000 Human Unit.
In the initial years of operation, the Company had sales of the Equine Unit as
well as rental revenue of the Equine Units. However, sales of the Equine product
were not substantial enough to be profitable and on January 25, 1990, the
Company granted all rights to the future sales of the Equine Unit to another
party in exchange for a note in the amount of $263,000, plus $20,000 in cash and
royalties of $200 for each unit sold. The note was payable monthly and was paid
off by 1993. Since inception the Company has received no royalties under this
agreement.
Subsequent to March 31, 1989, and the sale of the rights to the Equine Unit, the
Company wound down its activities by paying off its creditors. The Company could
not continue the development and marketing plans for the MT-1000 Unit without
additional funding.
The Company has been dormant since March 31, 1990 except for keeping its patents
current. For the year ended March 31, 1991, the Company had no revenues and had
expenditures of approximately $116,009, comprised primarily of salaries, legal
fees, consulting and the remaining product development.
4
<PAGE> 5
For the year ended March 31, 1992, the Company had minimal activity, resolving
the remainder of the Company's debts by negotiating with creditors for final
settlements. As a result of these negotiations there was debt forgiveness of
approximately $143,000 in that year. Otherwise, the expenditures for accounting
and office supplies, etc., were less than $30,000. For the years March 31, 1993
through 1997, the Company had kept its charter effective to protect its patents
and product rights for the Human MT-1000 Unit.
In May of 1997, the Company entered into a licensing agreement ("Licensing
Agreement") with Vapotherm, Inc. formally known as Healthcare Quality Solutions,
Inc., a Maryland corporation (the "Licensee"). The Licensee has developed and is
awaiting FDA approval of a new version of its product. The Licensee has the
option to purchase the Company's technology for 2 million dollars. The Licensee
has paid $92,500 in cash and $82,500 by delivery of a promissory note
representing $175,000 in minimum royalties due under the licensing agreement.
Additional royalties are to be paid to the Company for sales of products equal
to 5-10% of gross sales, depending upon the product and the total gross sales
amounts of the year. The agreement can be terminated at the discretion of the
licensee and by giving 30 days notice.
Vapotherm, Inc. is currently awaiting FDA approval for its initial device, which
it expects by the end of July 2000. The device uses membrane technology in
circulating warm water to saturate a stream of air/oxygen at or near 100%
humidity. The stream is delivered directly into the nasal passages through a
high flow nasal cannula at flow rates of 40 liters per minute at temperatures
between 34(0)C and 43(0)C. The device has broad applications across numerous
respiratory indications including but not limited to Chronic Obstructive
Pulmonary Disease, asthma, allergic and atrophic rhinitis, chronic sinusitis and
cystic fibrosis. Vapotherm, Inc. expects market introduction of its
institutional device in the December 31, 2000 quarter.
The Company received a copy of a Schedule 13D, on January 4, 1989, as amended
April 18, 1989, filed on behalf of J.T. Moran & Co., Inc. ("Moran"). Moran was a
registered broker dealer and was the underwriter of the Company's 1986 initial
public offering. The Schedule 13D reported that Moran had acquired a total of
1,023,650 shares of which 812,500 were acquired in a private transaction with
Oxygen Enrichment Company, Ltd (OECO). The balance of 211,150 shares was
reported to have been acquired by Moran in its capacity as a market maker in the
Company's stock at various prices relative to the market. Management has been
informed that OECO and Moran have been liquidated by the Bankruptcy Courts
approximately four years ago. The Company intends to hire counsel to settle out
the rights of the parties in a declaratory judgement action in the proper
jurisdiction. The Company will assert that these shares have been terminated.
Management has stated that no one from the Bankruptcy Court ever contacted the
Company.
PROPRIETARY RIGHTS
The Company follows a policy of protecting its proprietary rights to its
products to the full extent permissible by law.
The Company's U.S. patent applications regarding the method for the treatment of
the human respiratory and equine tract with vapor phase water were issued in
September 1988 into U.S. Patent No. 4,773,410.
The Company believes that alternative suppliers exist for all products presently
licensed by the Company.
5
<PAGE> 6
CONTRACTS
The Licensing Agreement is for the licensing of United States Patent No.
4,773,410 issued September 27, 1988 ("Patent"). This Patent is the method and
apparatus for the treatment of the respiratory track with vapor-phase water. The
licensee is responsible for the payment of fees on the Patent. Licensee has
agreed to spend time, money and effort at no set amount to develop and market
new and/or improved respiratory therapy units for the human market which may or
may not incorporate the Patent; ("New Products") and which New Products will be
the sole property of Licensee. For sales of products developed by the Licensor,
Licensee shall pay a royalty as follows:
a) Ten percent (10%) of gross sales up to one million dollars ($1,000,000)
b) Seven percent (7%) of gross sales from one million and one dollar to
two million dollars ($2,000,000)
c) Five percent (5%) of gross sales above two million dollars ($2,000,000)
and
d) 50% of the above commission rate to be paid on membrane cartridges sold
separately.
For sales of New Products the Licensor shall receive royalties as follows:
a) Five percent (5%) of gross sales up to one million dollars ($1,000,000)
b) Three and one half percent (3.5%) of gross sales from one million and
one dollar ($1,000,001) to two million dollars ($2,000,000)
c) Two and one half percent (2.5%) of gross sales above two million
dollars ($2,000,000) and
d) 50% of the above commission rate to be paid on membrane cartridges sold
separately.
The minimum to be paid for all products is $50,000 for the year ended March 31,
1999 and $100,000 for the year ended March 31, 2000. The Licensee has advised
management that it's New Products are currently under development and patents
are in process. Management has been informed that minimum royalty payments
pursuant to the Licensing Agreement can be anticipated through the second
quarter of 1999.
The Licensee is now the owner of the trademarks of the Company Transpirator and
Vapotherm.
COMPETITION
There are a number of companies, including presently manufacturing devices,
which serve the function of introducing humidity into an individual's air stream
or oxygen stream for the treatment of illness or maintenance of respiratory
health.
The Company believes its proposed less expensive human Transpirator device will
principally differ from existing personal humidifiers known to the Company in
that existing personal humidifiers are primarily intended for hospital use in
conjunction with other breathing support systems, deliver substantially lower
flow rates, do not provide for direct administration to the user, and/or are
designed to be used with medication.
Many, if not all, of the symptoms, which the Company's devices are intended to
address, can also be treated by various medications.
6
<PAGE> 7
Many of the companies competing in the human humidification or human medication
markets have greater resources than the Company and there can be no assurance
that at some point in the future devices or medications will not be developed
which may be less expensive or more effective than the Transpirator devices.
EMPLOYEES
At March 31, 2000, the Company had no full-time employees.
ITEM 2. DESCRIPTION OF PROPERTY
None.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings, the outcome of which would have a
material adverse effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET OF COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company has been dormant since 1990 and there currently is no active trading
in the Company's common stock on a recognized exchange.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
FISCAL 2000 AS COMPARED TO FISCAL 1999 AND 1998
The following discussion and analysis should be read in conjunction with the
Company's financial statements and the notes thereto included in Part II, Item 7
of this report.
For fiscal year 2000, the Company has royalty income of $95,833 as compared to
royalty income of $47,916 in 1998. This income is pursuant to a royalty
agreement signed in May 1997. The royalty agreement provides for minimum
royalties for three years from the signing of the agreement in the amounts of
$25,000, $50,000 and $100,000. The agreement provides for royalties on a
percentage basis from the sale of products developed from use and further
enhancement of the patents. The royalty agreement also provides an option for
the patents to be purchased for $2,000,000.
Selling, general and administrative expenses were relatively consistent for
fiscal 2000 and fiscal 1999. The expenses incurred include common stock issued
for services in the amount of $23,500 and $7,500 respectively and amortization
of patents in the amounts of $11,811 and $5,332 respectively.
7
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
Statement of Cash Flows
Net cash from operations was $43,306 for fiscal 2000 and $14,820 in fiscal 1999
respectively. The increase in cash from operations was principally due to
minimum royalties received under its licensing agreement with Vapotherm, Inc.
LIQUIDITY
The Company's annual and quarterly operating results will be affected by a
number of factors. The Company expects to receive $82,500 representing the
balance of minimum royalty payments due under its licensing agreement.
Additionally, the Company will incur legal, accounting, printing and other costs
associated with keeping its financial records current with the SEC. At the same
time, the Company has employment agreements with two officers for salaries of
$1,000 per month for 36 months which began in August, 1998. The Company expects
increased liquidity from royalty payments in excess of the operating expenses.
NET OPERATING LOSS CARRY FORWARDS
As of March 31, 2000, the Company had a net operating loss ("NOL") for Federal
Income Tax purposes of approximately $3,213,000, which begin to expire in 2001.
The ability of the Company to utilize the NOL is not probable at March 31, 2000
and therefore, no benefit has been recorded.
ITEM 7. FINANCIAL STATEMENTS
The response to this item is incorporated by reference to pages F1 - F10 herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITIONS SINCE
---- --- --------- -----
<S> <C> <C> <C>
Raymond Romano 49 Chairman of the Board,
Chief Executive Officer and
Director 1985
John Porcella 50 President and Director 1985
John Signorelli 58 Director 1987
</TABLE>
8
<PAGE> 9
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's executive officers, directors and holders of more
than 10% of the Company's Common Stock, to file reports of ownership and changes
in ownership with the Securities and Exchange Commission. Such persons are
required to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the forms filed and oral and written
representations from certain reporting persons no Forms 4 or Forms 5 were filed.
Each person has been informed and each officer is in the process of updating
these filings.
ITEM 10. EXECUTIVE COMPENSATION
The Company paid compensation in the form of a stock grant of $7,500 each to
Raymond Romano, Chief Executive Officer, John Porcella, President and John
Signorelli, a director, for the fiscal year ended March 31, 2000. Additionally,
the Company has employment agreements with each officer. The employment
agreements commenced August 1, 1998 and provide for the payment of an aggregate
salary of $1,000 per month for 36 months.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Previously a Company (OECO) owned 32% of the Company's common stock. OECO
transferred ownership of that stock to another company in 1989. Both companies
are bankrupt and out of business. The Company's position is that those shares
are still outstanding although the bankruptcy court has not contacted the
Company.
The following table sets forth certain information as of June 30, 2000 with
respect to each officer, director, all directors as a group, and the persons
(including and "group" as that term is used in section 13(d)(3) of the
Securities Exchange Act of 1934. known by the Corporation's voting securities:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Amount of and
Nature of
Name and Address Beneficial Title of
Title of Class of Beneficial Owner Ownership Class
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, $.01
par value Oxygen Enrichment Company, Ltd.
See Description of Business General
for additional information 812,500 25.00%
---------------------------------------------------------------------------------------------
Raymond J. Romano
850-870 US Highway 1
North Brunswick, NJ 08902 364,000 11.21%
---------------------------------------------------------------------------------------------
John E. Porcella
850-870 US Highway 1
North Brunswick, NJ 08902 285,000 8.78%
---------------------------------------------------------------------------------------------
John J. Signorelli
850-870 US Highway 1
North Brunswick, NJ 08902 230,000 7.09%
---------------------------------------------------------------------------------------------
All Officers, directors as a
group (3 persons) 879,000 27.08%
---------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company conducts its operations at the office facilities of an officer of
the Company at no cost. During fiscal 1998, the Company entered into employment
agreements with two officers of the company. The employment agreements commence
August 1, 1998 and provide for the payment of an aggregate salary of $1,000 per
month for 36 months.
On April 6, 1999 the Board of Directors approved the payment of 450,000 shares
of common stock to the three directors of the Company and 20,000 shares to an
attorney for services valued at $23,500.
On February 2, 1999 the Board of directors approved the payment of 150,000
shares of common stock to the three directors of the Company for services valued
at $7,500.
The officers of the Company who received stock inadvertently omitted filing form
4 and form 5 respectively. Each officer is currently in the process of updating
these filings.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Royalty agreement - Vapotherm Inc. formally Healthcare Products Inc.
(b) Consent of Accountants
(c) Form 8-K June 23, 1998
10
<PAGE> 11
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.
Transpirator Technologies, Inc.
By /s/ Raymond J. Romano
------------------------------------
Raymond J. Romano
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and 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.
/s/ Raymond J. Romano
-------------------------------
Raymond J. Romano
Chairman and Chief Executive Officer
July 21, 2000
/s/ John E. Porcella
-------------------------------
John E. Porcella
President
July 21, 2000
Directors:
/s/ Raymond J. Romano
-------------------------------
Raymond J. Romano
July 21, 2000
/s/ John E. Porcella
-------------------------------
John E. Porcella
July 21, 2000
/s/ John Signorelli
-------------------------------
John Signorelli
July 21, 2000
<PAGE> 12
INDEX TO FINANCIAL STATEMENTS
TRANSPIRATOR TECHNOLOGIES, INC.
<TABLE>
<S> <C>
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report ........................ F-2
Balance Sheets, March 31, 2000 and 1999 ............. F-3
Statements of Operations for the Years Ended
March 31, 2000 and 1999 .................... F-4
Statements of Changes in Stockholders' Equity for the
Years Ended March 31, 2000 and 1999 ........ F-5
Statements of Cash Flows for the Years Ended
March 31, 2000 and 1999 .................... F-6
Notes to Financial Statements for the Years
Ended March 31, 2000 and 1999 ....... F-7 - F-11
</TABLE>
F-1
<PAGE> 13
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors of
Transpirator Technologies, Inc
North Brunswick, New Jersey:
We have audited the accompanying balance sheets of Transpirator Technologies,
Inc., (the "Company") at March 31, 2000 and 1999 and the related statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at March 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
years then ended in conformity with generally accepted accounting principles.
BRIMMER, BUREK & KEELAN LLP
Certified Public Accountants
June 23, 2000
F-2
<PAGE> 14
TRANSPIRATOR TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 58,126 $ 14,820
Royalties receivable 74,166 33,333
----------- -----------
Total current assets 132,292 48,153
----------- -----------
Patents, net -- 11,811
----------- -----------
Total $ 132,292 $ 59,964
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 23,818 $ 9,736
Notes payable - related parties 29,750 29,750
----------- -----------
Total current liabilities 53,568 39,486
----------- -----------
Related party transactions (Note 2 and 3)
Stockholders' equity:
Preferred stock, $.10 par value - 1,000,000 shares authorized
none outstanding -- --
Common stock, $0.01 par value, 3,500,000 shares authorized;
3,245,950 and 2,775,950 shares issued and outstanding
in 2000 and 1999, respectively 32,460 27,760
Additional paid-in capital 3,593,897 3,575,097
Accumulated deficit (3,547,633) (3,582,379)
----------- -----------
Total stockholders' equity 78,724 20,478
----------- -----------
Total $ 132,292 $ 59,964
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 15
TRANSPIRATOR TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenue $ 95,833 $ 47,916
General and administrative expenses 59,005 60,142
----------- -----------
Income (loss) from operations 36,828 (12,226)
Interest income (expense) (2,082) (1,599)
----------- -----------
Net earnings (loss) $ 34,746 $ (13,825)
=========== ===========
Basic and diluted earnings (loss) per share .011 (.006)
=========== ===========
Weighted-average number of shares outstanding
for basic and diluted earnings (loss) per share 3,245,950 2,625,950
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 16
TRANSPIRATOR TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK
.01 PAR VALUE ADDITIONAL TOTAL
PREFERRED ---------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ --------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1998 -- 2,625,950 $ 26,260 $3,569,097 $(3,568,554) $ 26,803
Net loss -- -- -- -- (13,825) (13,825)
Common stock issued for
services -- 150,000 1,500 6,000 -- 7,500
------ --------- -------- ---------- ----------- --------
Balance at March 31, 1999 -- 2,775,950 27,760 3,575,097 (3,582,379) 20,478
Net earnings -- -- -- -- 34,746 34,746
Common stock issued for
services -- 470,000 4,700 18,800 -- 23,500
------ --------- -------- ---------- ----------- --------
Balance at March 31, 2000 -- 3,245,950 $ 32,460 $3,593,897 $(3,547,633) $ 78,724
====== ========= ======== ========== =========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 17
TRANSPIRATOR TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 34,746 $(13,825)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Common stock issued for services - legal expenses 22,500 7,500
Common stock issued for services - Directors fees 1,000 --
Amortization 11,811 5,332
(Increase) decrease in:
Accounts receivable (40,833) (33,333)
Accounts payable and accrued expenses 14,082 4,614
Deferred royalty income -- (2,083)
-------- --------
Net cash provided by (used in) operating activities 43,306 (31,795)
-------- --------
Net increase (decrease) in cash 43,306 (31,795)
Cash at beginning of year 14,820 46,615
-------- --------
Cash at end of year $ 58,126 $ 14,820
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ -- $ 1,736
======== ========
Common stock issued for services $ 23,500 $ 7,500
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 18
TRANSPIRATOR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AT MARCH 31, 2000 AND 1999
(1) DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES
DESCRIPTION OF BUSINESS. Transpirator Technologies, Inc. was organized on
December 22, 1986 as a Delaware corporation and filed an S-1 Registration
Statement on April 8, 1987. The Company was organized to design, develop
and market respiratory therapy products for veterinary and human use. The
main products developed by the Company were the ET-1000 Equine
Transpirator Respiratory Unit ("Equine Unit") and the MT-1000 Human
Transpirator Respiratory Unit ("Human Unit").
In the initial years of operation, the Company had sales of the Equine
Unit as well as rental of the Equine Unit. However, sales of the Equine
product were not substantial enough to be profitable and on January 25,
1990, the Company granted all rights to the future sales of the Equine
Unit to another party in exchange for a note in the amount of $263,000,
plus $20,000 in cash and royalties of $200 for each unit sold. The note
was payable monthly and was paid off by 1993. The Company has received no
royalties from the sale of Equine Units under the royalty agreement.
Subsequent to March 31, 1989, and the sale of the rights to the Equine
Unit, the Company wound down its activities by paying off its creditors.
The Company could not continue the development and marketing plans for
the Human Unit without additional funding. The Company has been fairly
dormant since March 31, 1990 except for keeping its patents current and
the receipt of royalty income as stated in Note 5.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. A summary of the significant
accounting policies followed in preparing the accompanying financial
statements is as follows:
REVENUE RECOGNITION. Revenue consists of royalties and is recognized when
the royalty is earned under the terms of the associated licensing
agreement. Royalty payments received prior to the consummation of the
earnings process are included in deferred royalty income and are
recognized in accordance with the terms of the licensing agreement.
INCOME TAXES. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the carrying
amounts of existing assets and liabilities measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(continued)
F-7
<PAGE> 19
TRANSPIRATOR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(1) DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES, CONTINUED
PATENTS. Amortization of patent costs is based upon the royalty income as a
percentage of projected minimum royalties under the terms of the Human
Unit royalty agreement commencing in the fiscal year ended March 31,
1998. Amortization expense totaled $11,811 and $5,332 for the years ended
March 31, 2000 and 1999, respectively.
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE. Basic and diluted earnings
(loss) per share were computed based on the weighted average number of
common shares outstanding during the period. There were no Diluted
Potential Common Shares outstanding during the years ended March 31, 2000
and 1999.
STOCK-BASED COMPENSATION. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," encourages, but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
ACCOUNTING REQUIREMENTS. Financial Accounting Standards 130 - Reporting
Comprehensive Income establishes standards for reporting comprehensive
income. The Standard defines comprehensive income as the change in equity
of an enterprise except those resulting from stockholder transactions.
All components of comprehensive income are required to be reported in a
new financial statement that is displayed with equal prominence as
existing financial statements. The company had no comprehensive income in
the year ended March 31, 2000.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company, in estimating its fair
value disclosures for financial instruments, uses the following methods
and assumptions:
CASH, ROYALTIES RECEIVABLE AND ACCRUED EXPENSES: The carrying amounts
reported in the balance sheet for cash, royalties receivable and
accrued expenses approximate their fair value due to the relatively
short maturity.
(2) NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
2000 1999
---------- -------
<S> <C> <C>
7% notes payable to related parties payable on demand $ 29,750 $29,750
========== =======
</TABLE>
(continued)
F-8
<PAGE> 20
TRANSPIRATOR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(3) RELATED PARTY TRANSACTIONS
The Company conducts its operations at the office facilities of an officer
of the Company at no cost. During fiscal 1998, the Company entered into
employment agreements with two officers of the company. The employment
agreements commenced August 1, 1998 and provide for the payment of an
aggregate salary of $1,000 per month for 36 months. Included in accrued
expenses is an amount of $12,000 which is officers' salary accrual for
the year ended March 31, 2000.
The Board of Directors approved the payment of 450,000 and 150,000 shares of
common stock to the three directors of the Company for services valued at
$22,500 and $7,500 for the years ended March 31, 2000 and 1999
respectively. The Board of Directors also approved the payment of 20,000
shares of common stock for legal services valued at $1,000. These items
have been included in general and administrative expenses in the
accompanying statements of operations for the years ended March 31, 2000
and 1999 respectively.
(4) STOCK OPTION PLAN
The Company has a stock option plan whereby key full or part-time employees
are eligible to receive Incentive Stock Options (ISO) and Nonqualified
Stock Options and certain directors are eligible to receive nonqualified
stock options. The plan provides for awarding options for a minimum of
450,000 shares of the Company's common stock at an exercise price not
less than fair market value at the date of the grant. Options are
nontransferable and expire within ten years from the date of grant. The
period for which options are exercisable is determined by the Board of
Directors, however, in no event can options designated as an ISO vest
more than $100,000 in any one year, determined at the time of grant. At
March 31, 2000 and 1999, no options are issued or outstanding. The plan
has been extended through May 17, 2008.
(5) ROYALTY LICENSING AGREEMENT
The Company entered into a royalty license agreement with a unrelated party
on May 17, 1997. The agreement provides for the payment of royalties
based on sales of the Human Unit products. The agreement provides for the
payment of minimum royalty payments of $25,000, $50,000 and $100,000 for
the fiscal years ended March 31, 1998, 1999 and 2000, respectively. The
royalty being accounted for from the date of the contract which was
signed on May 17, 1997. In addition, the agreement provides for the
payment of royalties based on the percentage of sales of products ranging
from 5% to 10% on existing Human Unit products and 2.5% to 5% for sales
of newly developed Human Unit products. The agreement provides the
licensee with the option to purchase the patents subject to the licensing
agreement for $2,000,000. The agreement can be cancelled by the licensee
at any time by giving the Company thirty days written notice of
termination. The Company received $55,000 during the year ended March 31,
2000. A royalty receivable of $74,166 is included in the year ended March
31, 2000.
(continued)
F-9
<PAGE> 21
TRANSPIRATOR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(5) ROYALTY LICENSING AGREEMENT, CONTINUED
The Company has also entered into a technology licensing agreement with
respect to the Equine Unit. The agreement expires January 25, 2010. The
agreement provides for the payment of $200 for each Equine Unit produced
by the licensee. During the two-year period ended March 31, 2000, the
Company has not received any payments with respect to this agreement
because no Equine Units have been produced by the licensee.
(6) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset are presented below:
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,205,750 $ 1,398,117
General business credit carryforwards 2,739 58,225
Amortization 3,943 1,505
----------- -----------
Total gross deferred tax assets 1,212,432 1,457,847
Less valuation allowance (1,212,432) (1,457,847)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
A valuation allowance has been established to reduce the deferred tax
assets to an amount that management believes will ultimately be realized.
Realization of deferred tax assets is dependent upon sufficient future
taxable income during the period that temporary differences and
carryforwards are expected to be available to reduce taxable income. With
respect to the resulting deferred tax assets at March 31, 2000 and 1999,
based on the Company's history of operating earnings and expectations for
the future, management believes sufficient uncertainty exists regarding
the realizability of these items that a valuation allowance is required.
(continued)
F-10
<PAGE> 22
TRANSPIRATOR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6) INCOME TAXES, CONTINUED
At March 31, 2000, the Company has net operating loss carryforwards for tax
reporting purposes totaling approximately $3,203,090. These carryforwards
will expire in the following fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------
<S> <C>
2001 $ 219,000
2002 352,000
2003 926,000
2004 1,468,000
2005 204,000
2007 7,000
2008 4,000
2009 13,000
2010 2,000
2011 2,000
2012 6,000
2013 90
----------
$3,203,090
==========
</TABLE>
At March 31, 2000, the Company has a general business credit carryforward of
$2,739, which will expire in fiscal year 2002.
F-11
