AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 2002
REGISTRATION NO. _____
====================================================================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------------------
TSET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 6799 87-0440410
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
464 COMMON STREET, SUITE 301
BELMONT, MA 02478
TELEPHONE (617) 993-9965
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive offices)
COPIES TO:
Daniel R. Dwight Clayton E. Parker, Esq.
President and Chief Executive Officer Ronald S. Haligman, Esq.
TSET, Inc. Kirkpatrick & Lockhart LLP
464 Common Street, Suite 301 201 South Biscayne Boulevard, Suite 2000
Belmont, MA 02478 Miami, FL 33131
Telephone No.: (617) 993-9965 Telephone No.: (305) 539-3300
Telecopier No.: (617) 993-9985 Telecopier No.: (305) 358-7095
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement
becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule
415 under the Securities Act, please check the following box.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration number of the earlier effective registration statement for the same
offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box
and list the Securities Act registration number of the earlier effective registration statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.
CALCULATION OF REGISTRATION FEE
=================================================================================================================================
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AMOUNT OF
BE REGISTERED REGISTERED PRICE PER SHARE(1) AGGREGATE OFFERING REGISTRATION FEE
PRICE(1)
- ---------------------------------------------------------------------------------------------------------------------------------
Common stock, par value $0.001 per 5,000,000 $0.20 $1,000,000.00 $92.00
share
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Common stock, par value $0.001 per 1,400,000 $0.20 $280,000.00 $25.76
share, underlying warrants
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TOTAL 6,400,000 $0.20 $1,280,000.00 $117.76
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(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of
1933. For the purposes of this table, we have used the average of the closing bid and asked prices as of June 21, 2002.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE
DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER
BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED _____, 2002
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALES IS NOT PERMITTED.
PROSPECTUS
TSET, INC.
6,400,000 SHARES OF COMMON STOCK
Selling stockholders are offering for sale up to 6,400,000 shares of
our common stock. Five million (5,000,000) shares of our common stock are being
offered hereby by Fusion Capital Fund II, LLC. One million four hundred thousand
(1,400,000) shares of our common stock are being offered by The Eagle Rock
Group, LLC.
The prices at which such stockholders may sell the shares will be
determined by the prevailing market price for the shares or in negotiated
transactions. We will not receive proceeds from the sale of our shares by any of
the selling stockholders.
Our common stock is quoted on the Nasdaq Over-The-Counter Bulletin
Board under the symbol "KNOS." On June 7, 2002, the average of the bid and asked
sale prices for the common stock as reported was $0.23 per share.
-------------------
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF THESE RISKS.
Fusion Capital, a selling stockholder, is an "underwriter" within the
meaning of the Securities Act of 1933, as amended.
-------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
THE DATE OF THIS PROSPECTUS IS __________, 2002
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY.............................................................3
FORWARD-LOOKING STATEMENTS.....................................................4
RISK FACTORS...................................................................5
MARKET FOR OUR COMMON STOCK....................................................8
SELECTED CONSOLIDATED FINANCIAL INFORMATION....................................9
USE OF PROCEEDS...............................................................10
DIVIDEND POLICY...............................................................10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................11
BUSINESS......................................................................16
MANAGEMENT....................................................................22
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................30
THE FUSION CAPITAL TRANSACTION................................................32
PRINCIPAL SHAREHOLDERS........................................................35
SELLING STOCKHOLDERS..........................................................36
PLAN OF DISTRIBUTION..........................................................37
SHARES ELIGIBLE FOR RESALE....................................................39
DESCRIPTION OF CAPITAL STOCK..................................................40
EXPERTS.......................................................................43
LEGAL MATTERS.................................................................43
AVAILABLE INFORMATION.........................................................44
FINANCIAL STATEMENTS.........................................................F-1
PROSPECTUS SUMMARY
BUSINESS
We are a Nevada corporation. Our principal executive offices are
located at 464 Common Street, Suite 301, Belmont, Massachusetts 02478. The
address of our website is WWW.KRONOSATI.COM. Information on our website is not
part of this prospectus.
Through our wholly-owned subsidiary, Kronos Air Technologies, we are
focused on the development and commercialization of an air movement and
purification technology known as Kronos(TM). The technology combines
state-of-the-art high voltage electronics and electrodes into an efficient but
simple electrical device. As a result of this combined technology, a Kronos(TM)
based device can move and clean air without any moving parts. The device is
versatile, energy and cost efficient, and exhibits multiple design attributes,
which may create a broad range of commercial applications.
THE OFFERING
On June 19, 2001 we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC, pursuant to which Fusion Capital has agreed to
purchase, on each trading day, $12,500 of our common stock up to an aggregate,
under certain conditions, of $10 million. Fusion Capital, a selling stockholder
under this prospectus, is offering for sale up to 5,000,000 shares of common
stock. On November 19, 2001, the Securities and Exchange Commission declared our
Registration Statement on Form S-1 effective pursuant to which we registered
6,852,500 shares of our common stock. Five million six hundred forty thousand
(5,640,000) shares of our common stock were registered on behalf of Fusion
Capital pursuant to the common stock purchase agreement and 1,212,500 shares of
our common stock were registered on behalf of other selling shareholders. As of
June 7, 2002, we had 43,937,907 shares of our common stock outstanding, which
includes 4,060,000 shares of common stock issued to Fusion Capital registered in
our previous Registration Statement, but excluding the 5,000,000 shares offered
by Fusion Capital pursuant to this prospectus. In addition to the shares of our
common stock that we are registering on behalf of Fusion Capital pursuant to
this prospectus, we are registering 1,400,000 shares of our common stock
underlying warrants held by The Eagle Rock Group, LLC. The number of shares
offered by this prospectus represents 14.6% of the total common stock
outstanding as of June 7, 2002. The number of shares ultimately offered for sale
by Fusion Capital is dependent upon the number of shares purchased by Fusion
Capital.
3
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
include statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans, (e) our anticipated needs for working
capital, and (f) the benefits related to our ownership of Kronos Air
Technologies, Inc. Forward-looking statements, which involve assumptions and
describe our future plans, strategies, and expectations, are generally
identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend," or "project" or the negative of
these words or other variations on these words or comparable terminology. This
information may involve known and unknown risks, uncertainties, and other
factors that may cause our actual results, performance, or achievements to be
materially different from the future results, performance, or achievements
expressed or implied by any forward-looking statements. These statements may be
found under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in this prospectus generally.
Actual events or results may differ materially from those discussed in
forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this prospectus generally. In light of these risks and uncertainties, there can
be no assurance that the forward-looking statements contained in this filing
will in fact occur. In addition to the information expressly required to be
included in this filing, we will provide such further material information, if
any, as may be necessary to make the required statements, in light of the
circumstances under which they are made, not misleading.
4
RISK FACTORS
You should carefully consider the risks described below before
purchasing our common stock. Our most significant risks and uncertainties are
described below; however, they are not the only risks we face. If any of the
following risks actually occur, our business, financial condition, or results or
operations could be materially adversely affected, the trading of our common
stock could decline, and you may lose all or part of your investment therein.
You should acquire shares of our common stock only if you can afford to lose
your entire investment.
WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO
CONTINUE FOR THE FORESEEABLE FUTURE
We have only recently begun implementing our plan to prioritize and
concentrate our management and financial resources to fully capitalize on our
investment in Kronos Air Technologies and have yet to establish any history of
profitable operations. For the nine months ended March 31, 2002, we incurred an
operating loss of $2,870,508. We have incurred annual operating losses of
$9,866,083, $1,965,183 and $51,674 respectively, during the past three fiscal
years of operation. As a result, at March 31, 2002, we had an accumulated
deficit of $14,912,271. We have incurred net losses from continuing operations
of $3,572,558 and $1,385,595 for the fiscal years ending June 30, 2001 and 2000.
Our revenues and cash flows from operations have not been sufficient to sustain
our operations. We expect that our revenues and cash flows from operations will
not be sufficient to sustain our operations for the foreseeable future. Our
profitability will require the successful commercialization of our Kronos(TM)
technologies. No assurances can be given when this will occur or that we will
ever be profitable.
Our independent auditors have added an explanatory paragraph to their
audit opinion issued in connection with the financial statements for the years
ended June 30, 2001 and June 30, 2000 relative to our ability to continue as a
going concern. Our ability to obtain additional funding will determine our
ability to continue as a going concern. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE
WILL NOT BE ABLE TO CONTINUE OPERATIONS
At March 31, 2002, we had a working capital deficit of $2,308,809. The
independent auditor's report for the years ended June 30, 2001 and June 30,
2000, includes an explanatory paragraph to their audit opinion stating that our
recurring losses from operations and working capital deficiency raise
substantial doubt about our ability to continue as a going concern. We had an
operating cash flow deficit of $10,524 in 1999, an operating cash flow deficit
of $288,262 in 2000 and an operating cash flow deficit of $1,613,573 in 2001.
For the nine months ended March 31, 2002, we had an operating cash flow deficit
of $1,189,286. We do not currently have sufficient financial resources to fund
our operations or pay certain existing obligations or those of our subsidiaries.
Therefore, we need additional funds to continue these operations and pay certain
existing obligations.
Subject to certain conditions, we only have the right to receive
$12,500 per trading day under the common stock purchase agreement unless our
stock price equals or exceeds $3.00, in which case the daily amount may be
increased at our option. Since we initially registered, in a Form S-1 declared
effective by the Securities and Exchange Commission on November 19, 2001,
5,000,000 shares for sale by Fusion Capital pursuant to the common stock
purchase agreement and we are registering, in the accompanying Registration
Statement, an additional 5,000,000 shares for sale by Fusion Capital pursuant to
the common stock purchase agreement, the selling price of our common stock to
Fusion Capital will have to average at least $1.85 per share for us to receive
the maximum remaining proceeds of $9.25 million without registering additional
shares of common stock or filing a post-effective amendment with respect to the
number of shares registered. As of June 7, 2002, we have received $0.75 million
in gross proceeds from Fusion Capital and we have issued 4,060,000 shares of our
common stock to Fusion Capital pursuant to the common stock purchase agreement.
Assuming a purchase price of $0.23 per share (the closing sale price of the
common stock on June 7, 2002) and the purchase by Fusion Capital of the full
5,000,000 shares offered under this prospectus, and the remaining 940,000 shares
of common stock previously registered, proceeds to us would only be $1,366,200
unless we choose to register more than the aggregate 10,000,000 shares which
have and are being registered, which we have the right, but not the obligation,
to do. The extent to which we rely on Fusion Capital as a source of funding will
depend on a number of factors including, the prevailing market price of our
common stock and the extent to which we are able to secure working capital from
other sources, such as through the sale of our Kronos(TM) air movement and
purification systems. If obtaining sufficient financing from Fusion Capital were
to prove prohibitively expensive and if we are unable to commercialize and sell
the products or technologies of our subsidiaries, we will need to secure another
5
source of funding in order to satisfy our working capital needs. Even if we are
able to access the funds available under the common stock purchase agreement, we
may still need additional capital to fully implement our business, operating and
development plans. Should the financing we require to sustain our working
capital needs be unavailable or prohibitively expensive when we require it, the
consequences would be a material adverse effect on our business, operating
results, financial condition and prospects.
WE HAVE VERY LIMITED MANUFACTURING, SALES AND MARKETING CAPABILITIES FOR OUR
Kronos(TM) PRODUCTS AND OUR FAILURE TO DEVELOP ANY OF THESE CAPABILITIES WOULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
We have only recently begun to manufacture and market prototype
versions of our Kronos Air Technologies products and we have no experience
manufacturing, marketing or distributing commercial quantities of our Kronos Air
Technologies products. Kronos Air Technologies currently does not have any
commercial-scale manufacturing facilities and only limited sales and marketing
personnel. Kronos Air Technologies does not have any relationships with third
parties to contract manufacture, market or distribute the Kronos(TM) products.
If Kronos Air Technologies is unable to acquire adequate manufacturing
capabilities and hire sales and marketing personnel or if it cannot enter into
satisfactory arrangements with third parties to manufacture, market and
distribute the Kronos(TM) products on commercially reasonable terms, the
consequences would be a material adverse effect on our business, operating
results, financial condition and prospects. There can be no assurance that we
will be able to acquire adequate manufacturing capabilities and hire sales and
marketing personnel or be able to enter into satisfactory arrangements with
third parties to manufacture, market and distribute the Kronos(TM) products.
COMPETITION IN THE MARKET FOR AIR MOVEMENT AND PURIFICATION DEVICES MAY RESULT
IN THE FAILURE OF THE KRONOS(TM) PRODUCTS TO ACHIEVE MARKET ACCEPTANCE
Kronos Air Technologies presently faces competition from other
companies that are developing or that currently sell air movement and
purification devices. Many of these competitors have substantially greater
financial, research and development, manufacturing, and sales and marketing
resources than we do. Many of the products sold by Kronos Air Technologies'
competitors already have brand recognition and established positions in the
markets that we have targeted for penetration. There can be no assurance that
the Kronos(TM) products will compete favorably with the products sold by our
competitors.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," SUBJECT TO SPECIAL REQUIREMENTS
AND CONDITIONS, AND MAY NOT BE A SUITABLE INVESTMENT
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny
stocks are stocks:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
Broker/dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker/dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to resell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline.
WE RELY ON MANAGEMENT AND KRONOS AIR TECHNOLOGIES RESEARCH PERSONNEL, THE LOSS
OF WHOSE SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT UPON OUR BUSINESS
We rely principally upon the services of our Board of Directors, senior
executive management, and certain key employees, including the Kronos Air
Technologies research team, the loss of whose services could have a material
adverse effect upon our business and prospects. Competition for appropriately
qualified personnel is intense. Our ability to attract and retain highly
qualified senior management and technical research and development personnel are
believed to be an important element of our future success. Our failure to
6
attract and retain such personnel may, among other things, limit the rate at
which we can expand operations and achieve profitability. There can be no
assurance that we will be able to attract and retain senior management and key
employees having competency in those substantive areas deemed important to the
successful implementation of our plans to fully capitalize on our investment in
Kronos Air Technologies and the Kronos(TM) technology, and the inability to do
so or any difficulties encountered by management in establishing effective
working relationships among them may adversely affect our business and
prospects. Currently, we do not carry key person life insurance for any of our
directors, executive management, or key employees.
THE SALE OF OUR COMMON STOCK TO FUSION CAPITAL MAY CAUSE DILUTION AND THE SALE
OF THE SHARES OF COMMON STOCK ACQUIRED BY FUSION CAPITAL COULD CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE
The purchase price for the common stock to be issued to Fusion Capital
pursuant to the common stock purchase agreement will fluctuate based on the
price of our common stock. All shares issued to Fusion Capital will be freely
tradable. As of June 7, 2002, we have issued 4,060,000 shares of our common
stock to Fusion Capital pursuant to the common stock purchase agreement. Fusion
Capital may sell none, some or all of the shares of common stock purchased from
us at any time. We expect that the shares sold to Fusion Capital will be sold
over a period of up to 40 months from the date of the common stock purchase
agreement. Depending upon market liquidity at the time, a sale of shares by
Fusion Capital at any given time could cause the trading price of our common
stock to decline. The sale of a substantial number of shares of our common stock
by Fusion Capital, or anticipation of such sales, could make it more difficult
for us to sell equity or equity-related securities in the future at a time and
at a price that we might otherwise wish to effect sales.
OUR FAILURE TO TIMELY FILE FEDERAL AND STATE INCOME TAX RETURNS FOR CALENDAR
YEARS 1997 THROUGH 2001 MAY RESULT IN THE IMPOSITION OF INTEREST AND PENALTIES
We failed to timely file federal and state income tax returns for
calendar years 1997 through 2001, respectively; however, we are now current in
all of our income tax filings. We had operating losses for each year during the
period 1997 through 2001, and there were no income taxes due and owing for those
years. These returns could be subject to review and potential examination by the
respective taxing authorities. Should any of these returns come under
examination by federal or state authorities, our positions on certain income tax
issues could be challenged. The impact, if any, of the potential future
examination cannot be determined at this time. If our positions are successfully
challenged, the results may have a material impact on our financial position and
results of operations.
7
MARKET FOR OUR COMMON STOCK
Our common stock trades on the Over-the-Counter Bulletin Board under
the trading symbol "KNOS." Our high and low bid prices by quarter during fiscal
2002, 2001, 2000, and 1999 are presented as follows:
FISCAL YEAR 2002
HIGH LOW
First Quarter (July 2001 to September 2001) $0.700 $0.300
Second Quarter (October 2001 to December 2001) $0.530 $0.210
Third Quarter (January 2002 to March 2002) $0.280 $0.185
Fourth Quarter (April 2002 to June 7, 2002) $0.330 $0.140
FISCAL YEAR 2001
HIGH LOW
First Quarter (July 2000 to September 2000) $3.310 $1.150
Second Quarter (October 2000 to December 2000) $2.040 $1.150
Third Quarter (January 2001 to March 2001) $1.650 $1.060
Fourth Quarter (April 2001 to June 2001) $1.210 $0.580
FISCAL YEAR 2000
HIGH LOW
First Quarter (July 1999 to September 1999) $0.875 $0.437
Second Quarter (October 1999 to December 1999) $2.625 $0.750
Third Quarter (January 2000 to March 2000) $6.750 $1.187
Fourth Quarter (April 2000 to June 2000) $3.370 $2.063
FISCAL YEAR 1999
HIGH LOW
First Quarter (July 1998 to September 1998) N/A N/A
Second Quarter (October 1998 to December 1998) $1.562 $0.625
Third Quarter (January 1999 to March 1999) $1.000 $0.250
Fourth Quarter (April 1999 to June 1999) $1.000 $0.437
On June 7, 2002, the closing price of our common stock as reported on
the Over-the-Counter Bulletin Board was $0.23 per share. On June 7, 2002, we had
approximately 1,000 beneficial stockholders of our common stock and 43,937,907
shares of our common stock were issued and outstanding.
8
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following summary statement of operations and summary balance sheet
data is derived from our consolidated financial statements and should be read in
conjunction with the unaudited consolidated financial statements as of March 31,
2002 and the Notes thereto, and the audited consolidated financial statements as
of June 30, 2001, 2000, and 1999 and 1998 and the Notes thereto. We were
basically inactive in 1997 and prior, therefore, the selected consolidated
financial information is not included for the years prior to June 30, 1998.
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED JUNE 30,
MARCH 31, ------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 2002 2001 2000 1999 1998
------------ ------------------------------------------------------
Sales $ 65,070 $ 95,000 $ -- $ -- $ --
Cost of sales 50,070 62,500 -- -- --
Gross profit 15,000 32,500 -- -- --
Total operating expenses 2,885,508 3,391,139 1,388,492 51,946 17,978
Other income (expense) 1,547 (207,793) 2,897 272 --
Interest expense (69,513) (6,126) -- -- --
Net loss from continuing operations (2,938,484) (3,572,558) (1,385,595) (51,674) (17,832)
Loss from discontinued operations -- (3,846,963) (579,588) -- --
Loss from sale of discontinued operations -- (2,446,562) -- -- --
Net loss (2,938,484) (9,866,083) (1,965,183) (51,674) (17,832)
Net loss per share-basic and diluted:
From continuing operations (0.08) (0.11) (0.05) -- (0.00)
From discontinued operations -- (0.20) (0.02) -- --
JUNE 30,
MARCH 31, ----------------------------------------------------------
BALANCE SHEET DATA: 2002 2001 2000 1999 1998
----------------------------------------------------------
Cash $ 9,721 $ 32,619 $ 102,949 $ 536 $ 3,763
Accounts Receivable, net -- -- 4,648 -- --
Prepaids and other current assets 178,829 37,679 23,253 -- --
Total Current Assets 188,550 70,298 130,850 536 3,763
Net Property & Equipment 33,209 44,707 23,019 -- --
Intangibles and other 2,280,047 2,431,524 2,970,731 2,500 3,500
Net Liabilities of Discontinued Operations -- -- 4,502,888 -- --
Deferred Financing Fees 556,152 520,800 -- -- --
Total Assets 3,057,958 3,067,329 7,627,488 3,036 7,263
Total Current Liabilities 2,497,359 1,921,213 388,796 79,841 42,396
Total Liabilities 3,494,909 2,588,763 388,796 79,841 42,396
Minority interest -- -- -- -- --
Stockholders' Equity (Deficit) (1,122,951) 478,566 7,238,692 (76,805) (35,133)
9
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by selling stockholders. We will receive no
proceeds from the sale of shares of common stock in this offering. However, we
may receive up to an available $9.25 million in proceeds from the sale of our
common stock to Fusion Capital under the $10 million common stock purchase
agreement. As of June 7, 2002, we have received $0.75 million from the sale of
our common stock to Fusion Capital under the common stock purchase agreement.
Any proceeds from Fusion Capital we receive under the common stock purchase
agreement will be used for working capital and general corporate purposes.
For illustrative purposes, we have set forth below our intended use of
proceeds for the range of net proceeds indicated below to be received from the
sale of our common stock to Fusion Capital under the common stock purchase
agreement. The table assumes estimated offering expenses of $91,000 have been
deducted from the gross proceeds.
GROSS PROCEEDS $1,800,000 $10,000,000
NET PROCEEDS $1,709,000 $9,909,000
USE OF PROCEEDS
New application and product development and production $ 830,000 $3,750,000
Research and development 250,000 1,500,000
Sales and marketing 200,000 1,500,000
Purchase of inventory 100,000 500,000
Purchase of equipment 75,000 300,000
General working capital 254,000 2,359,000
TOTAL $1,709,000 $9,909,000
DIVIDEND POLICY
We have not declared or paid dividends on our common stock during
fiscal years 1999, 2000, 2001 or 2002. Our dividend practices are determined by
our Board of Directors and may be changed from time to time. We will base any
issuance of dividends upon our earnings (if any), financial condition, capital
requirements, acquisition strategies, and other factors considered important by
our Board of Directors. Nevada law and our articles of incorporation do not
require our Board of Directors to declare dividends on our common stock. We
expect to retain any earnings generated by our operations for the development
and expansion of our business and do not anticipate paying any dividends to our
stockholders for the foreseeable future.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with our
consolidated financial statements and the notes thereto appearing elsewhere in
this prospectus.
Certain statements within this section and throughout this prospectus
and the documents incorporated herein are "forward-looking statements" as
described in the "safe harbor" provision of the Private Securities Litigation
Reform Act of 1995. These statements involve a number of risks and uncertainties
and actual results could differ materially from those projected.
GENERAL
Historically, we had been seeking select business opportunities
globally among a wide range of prospects. Over the past three years, we made
several investments, including Kronos Air Technologies and EdgeAudio. After
further evaluation of these investments, we believe our investment in and the
full development of Kronos Air Technologies and the Kronos(TM) technology
represents the single best opportunity for us. As a result, we have prioritized
our management and financial resources to fully capitalize on this investment
opportunity. Effective October 10, 2001, Jeffrey D. Wilson resigned as Chairman
of the Board and Chief Executive Officer of TSET, as well as Chairman of the
Board of Kronos Air Technologies and EdgeAudio, respectively. Mr. Wilson remains
as a director of TSET. Effective November 15, 2001, Daniel R. Dwight was
appointed President and Chief Executive Officer of TSET. Effective January 1,
2002, Richard F. Tusing was appointed Chief Operating Officer of TSET. A more
detailed explanation of Kronos Air Technologies and the current status of
EdgeAudio and the other investments made by us are discussed below.
We have reorganized our company to prioritize and focus management and
financial resources on Kronos Air Technologies and the Kronos(TM) technology.
This reorganization has resulted in the decision to sell or to no longer pursue
other investment opportunities previously identified. We sold our investment in
Atomic Soccer in April 2001; decided not to pursue investments in Cancer
Detection International, Electric Management Units, and Cancer Treatment Centers
in July 2001; established a formal plan to dispose of EdgeAudio in September
2001 and subsequently sold our investment in the company in June 2002; and
terminated by mutual consent of both parties a contract to distribute
Computerized Thermal Imaging equipment in August 2000.
Based on our decision to focus our resources on Kronos Air
Technologies, several actions were taken, most of which impacted the results of
operations. On April 11, 2001, we sold Atomic Soccer. The sale resulted in a
loss of $2,297,000. During our fourth quarter of 2001, we determined that the
assets of Aperion Audio (formerly known as EdgeAudio) were impaired and we
recognized an impairment loss of $2,294,000. On June 7, 2002, we sold our shares
of Aperion Audio to Aperion Audio's management group, which consists of 2
individuals. Pursuant to the sale, these 2 individuals will receive 500,000
share of our common stock in exchange for any rights these individuals may have
to earn-out provisions pursuant to their original agreement with TSET. In
addition, TSET will provide $214,000 in working capital to Aperion Audio in
monthly installments of $15,000 pursuant to the original agreement in TSET. We
will recognize a gain of approximately $600,000 on the sale. Based upon our
decision to discontinue the development of Cancer Detection International, we
have recognized an impairment loss of the remaining goodwill of $273,000
associated with that investment.
On January 18, 2002, we began trading shares of our common stock under
a new ticker symbol (KNOS). At the same time, we announced that our Company will
be doing business under the name of Kronos Advanced Technologies. We anticipate
asking our shareholders to vote for the approval of an amendment to our Articles
of Incorporation for a name change of our Company to Kronos Advanced
Technologies, Inc. at our annual meeting in 2002.
Kronos Air Technologies is focused on the development and
commercialization of an air movement and purification technology known as
Kronos(TM) that is more fully described below. The Kronos(TM) technology
operates through the application of high-voltage management across paired
electrical grids that creates an ion exchange which moves air and gases at high
velocities while removing odors, smoke, and particulates, as well as killing
pathogens, including bacteria. We believe the technology is cost-effective and
is more energy-efficient than current alternative fan and filter technologies.
Kronos(TM) has U.S. and international patents pending.
The Kronos(TM) device is comprised of state-of-the-art high-voltage
electronics and electrodes attached to one or more sets of corona and target
electrodes housed in a self-contained casing. The device can be flexible in
size, shape and capacity and can be used in embedded electronic devices,
standalone room devices, and integrated HVAC and industrial applications. The
Kronos(TM) device has no moving parts or degrading elements and is composed of
cost-effective, commercially available components.
11
The Kronos(TM) technology combines the benefits of silent air movement,
air cleaning, and odor removal. Because the Kronos(TM) air movement system is a
silent, non-turbulent, and energy-efficient air movement and cleaning system, we
believe that it is ideal for air circulation, cleaning and odor removal in all
types of buildings as well as compact, sealed environments such as airplanes,
submarines and cleanrooms. Additionally, because it has no moving parts or fans,
a Kronos(TM) device can instantly block or reverse the flow of air between
adjacent areas for safety in hazardous or extreme circumstances.
The U.S. Department of Defense and Department of Energy have provided
Kronos Air Technologies with various grants and contracts to develop, test and
evaluate the Kronos(TM) technology. Since May 2001, the total potential value of
Small Business Innovation Research (SBIR) contracts awarded to Kronos Air
Technologies has been $1.7 million. In December 2001, Kronos Air Technologies
was awarded an SBIR contract sponsored by the U.S. Army. This contract is
potentially worth up to $850,000 in product development and testing support for
Kronos Air Technologies. Phase One of the contract is worth up to $120,000 in
funding to investigate and analyze the feasibility of the Kronos(TM) technology
to reduce humidity in heating, ventilation and air conditioning (HVAC) systems.
Dehumidification is essential to making HVAC systems more energy efficient.
Phase Two of the contract is worth up to $730,000 in additional funding for
product development and testing. In May 2002, the U.S. Army requested the
company to submit a detailed Phase Two proposal by June 10, 2002 for review in
the current year. The proposal was submitted on June 7, 2002.
In May 2001, Kronos Air Technologies was awarded its first SBIR
contract sponsored by the U.S. Navy. That contract is potentially worth $837,000
in product development and testing support. The first phase of the contract is
worth up to $87,000 in funding for manufacturing and testing prototype devices
for air movement and ventilation onboard naval vessels. The second phase of the
contract is worth up to $750,000 in additional funding. In January 2002, Kronos
Air Technologies received a Phase II invitation letter for this grant with a
potential $750,000 commitment. The Kronos(TM) devices manufactured under this
contract will be embedded in an existing HVAC systems to move air more
efficiently than the traditional, fan based technology.
In April 2002, the U.S. Navy and Kronos mutually agreed to exercise the
option on the first phase of the U.S. Navy SBIR contract. The option is to
provide incremental funding to Kronos to further test and evaluate the
Kronos(TM) devices built during the initial SBIR funding. Testing will include
demonstrating the ability of these U.S. Navy Kronos(TM) devices to capture and
destroy biological hazards and to effectively manage electrical magnetic
interference.
RESULTS OF OPERATIONS
The comparability of our financial statements between years is not
easily susceptible to narrative comparison by virtue of the fact that (a) we
were basically inactive from the time that we discontinued operations in 1996
until the time that we reactivated operations in mid-1999, (b) from inception we
have not had significant operating revenues, and (c) we acquired Kronos Air
Technologies, Atomic Soccer, EdgeAudio, and Cancer Detection International
towards the end of the year ending June 30, 2000.
RESTATEMENT OF FINANCIAL STATEMENTS
The financial statement information presented in this discussion and
analysis of financial condition and results of operations is derived from our
financial statements for the nine months ended March 31, 2002 and for the years
ending June 30, 2001, 2000 and 1999. Our financial statements for 2000 and 1999
have been restated, as disclosed in Note 3 - Restatement of the "Notes to
Consolidated Financial Statements," and the amounts included below for 2000 and
1999 are based on those restated financial statements.
REORGANIZATION
Based on our decision to focus our resources on Kronos Air
Technologies, several actions were taken which impacted the results of
operations. On April 10, 2001, we sold Atomic Soccer. The new ownership group
consisted of Timothy G. Belinger, Todd P. Ragsdale and James Eric Anderson. At
the time of the sale, Messrs. Belinger, Ragsdale and Anderson were members of
Atomic Soccer's Board of Directors. None of these individuals were then, or
currently are, officers, directors, employees or affiliates of TSET. At the time
of the sale, Erik W. Black, an officer and director of TSET, was Atomic Soccer's
Chairman of the Board of Directors. Mr. Black resigned from Atomic Soccer's
Board of Directors immediately following the execution of the sale document and
was not a member of Atomic Soccer's new ownership group. The sale resulted in a
loss of $2,297,000. During our fourth quarter of 2001, we determined that the
assets of EdgeAudio were impaired and we recognized an impairment loss of
$2,294,000. On September 14, 2001, the board authorized management to pursue a
formal plan for disposal of EdgeAudio. The anticipated loss from operations
during the phase-out period is $150,000. We do not anticipate a loss on the sale
12
of EdgeAudio. We also decided to discontinue the development of Cancer Detection
International and we have recognized an impairment loss of the remaining
goodwill of $273,000 associated with that investment.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2002
Our net loss from continuing operations for the current year third
quarter and nine months was $0.6 million and $2.9 million, respectively,
compared with a net loss of $0.7 million and $2.1 million for the corresponding
periods of the prior year. The increase in the net loss for the nine months
ended March 31, 2002, as compared to the corresponding period in 2001, was the
result of increased professional fees and consulting services offset by a
decrease in salaries and other general and administrative expenses.
REVENUE. Revenues are generated through sales of Kronos(TM) devices at
Kronos Air Technologies, Inc. Revenue for the current year third quarter was $0
and for the current year nine months was $65,000. Revenue of $5,000 was recorded
during the corresponding periods of the prior year. These revenues were
primarily from our U.S. Navy Small Business Innovative Research contract.
COST OF SALES. Cost of sales for the current year third quarter was $0
and $50,070 for the current year nine months. Cost of sales is primarily
research and development costs associated with our U.S. Navy Small Business
Innovative Research contract.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative expenses in the current year third quarter decreased $57,000 and
in the current year nine months increased $729,000, to $0.6 million and $2.9
million, respectively. The decrease in the current year third quarter was
primarily due to a reduction in payroll and related costs of $89,000. The
increase in the current year nine months was primarily due to non-cash stock
warrants issued to the Eagle Rock Group of $686,000, non-cash stock
options/grants of $57,000 and cash-based fees paid/accrued to management
consultants, legal and accounting professionals engaged by the company of
$500,000. This was partially offset by a reduction in payroll and related costs
of $500,000 and a reduction in travel related costs of $63,000.
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2002
Our total assets at March 31, 2002 were $3.1 million compared with $3.1
million at June 30, 2001. Total assets at March 31, 2002 were comprised
primarily of $2.3 million of patents/intellectual property and $556,000 of
deferred financing fees. Total assets at June 30, 2001 were comprised primarily
of $2.4 million of patents/intellectual property and $521,800 of deferred
financing fees. Total current assets at March 31, 2002 and June 30, 2001 were
$189,000 and $70,000, respectively, while total current liabilities for those
same periods were $2.5 million and $1.9 million, respectively, creating a
working capital deficit of $2.3 million and $1.9 million at each respective
period end. This working capital deficit is primarily due to accrued expenses
for compensation, management consulting and other professional services.
Shareholders' equity as of March 31, 2002 and June 30, 2001 was $(1.1 million)
and $479,000, respectively, representing a decrease of $1.6 million. The
decrease in shareholders' equity is primarily the result of incurring a $2.9
million loss from continuing operations for the nine months ended March 31,
2002, partially offset through the sale and issuance of $1.3 million of common
stock.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 2001
REVENUE AND COST OF SALES. Revenues are generated through sales of
Kronos(TM) devices at Kronos Air Technologies, Inc. Sales for the twelve months
ended June 30, 2001 were $95,000. Cost of sales for the twelve months ended June
30, 2001 associated with the sale of Kronos(TM) devices was $62,500. There were
no sales or cost of sales of Kronos(TM) devices in periods prior to the twelve
months ended June 30, 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the twelve months ended June 30, 2001 amounted to
$3,391,139 of which compensation and benefits were 35%, professional services
were 22%, research and development was 9%, depreciation, intangibles
amortization and impairment was 17% and other general and administrative
expenses accounted for 17%. Operating expenses for the twelve months ended June
30, 2000 amounted to $1,388,492 of which compensation and benefits were 30%,
research and development was 46%, professional services were 11%, depreciation,
intangibles amortization was 7% and other general and administrative expenses
accounted for 6%.
Research and development costs in 2000 included $633,229 of expense for
in-process research and development purchased with the acquisition of Kronos Air
13
Technologies. Included in the intangible amortization and impairment in 2001 is
$272,945 for an impairment loss on Cancer Detection International. The increase
in professional services expense was the result of our efforts to better
position us to obtain additional outside financing and equity. As a result, we
engaged outside consultants to assist us.
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2001
Our total assets at June 30, 2001 were $3,067,329 compared with
$7,627,488 at June 30, 2000, a decline of $4,560,159, principally due to the
loss on disposal of discontinued operations of Atomic Soccer of $2,296,562 and
the impairment of assets for EdgeAudio of $2,294,316, which were recorded in the
fiscal year ended June 30, 2001. Total assets at June 30, 2001 were comprised
mainly of $520,800 for deferred financing fees and $2,431,524 of
patents/intellectual property. Total assets at June 30, 2000 were comprised
principally of $2,970,731 of patents/intellectual property and $4,502,888 of net
assets of discontinued operations. Total current assets at June 30, 2001 and
June 30, 2000 amounted to $70,298 and $130,850, respectively, while total
current liabilities for those same periods amounted to $1,921,213 and $388,796,
respectively, creating a working capital deficit of $1,850,915 and $257,946 at
each respective period end. This working capital deficit is principally
attributable to the increase in accrued expenses in both years for compensation
and professional services. Total liabilities as at June 30, 2001 and June 30,
2000 were $2,588,763 and $388,796, respectively, representing an increase of
$2,199,967. Shareholders equity as at June 30, 2001 and June 30, 2000 was
$478,566 and $7,238,692, respectively, representing a decrease of $6,760,126.
The decrease in shareholders equity is principally the result of incurring a
$3,572,558 loss from operations, a $3,846,963 loss from discontinued operations,
and a $2,446,562 loss on disposal of discontinued operations for the twelve
months ended June 30, 2001. In addition, equity increased during the twelve
month period ended June 30, 2001 through the sale and issuance of $3,105,956 of
common stock.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2000
REVENUE AND COST OF SALES. There were no sales or cost of sales for the
years ended June 30, 2000 and 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the twelve months ended June 30, 2000 amounted to
$1,388,492. Primarily as a result of the above, the net loss from continuing
operations for the year ended June 30, 2000 was $1,385,595, and the loss from
discontinued operations was $579,588 for a net loss of $1,965,183, thereby
increasing our accumulated deficit to $2,107,703 at June 30, 2000. Operating
expenses for the year ended June 30, 1999 were $51,946 of which compensation and
benefits accounted for $43,150 or 83%.
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2000
Our total assets at June 30, 2000 were $7,627,488. Total current assets
amounted to $130,850 while total current liabilities amounted to $388,796
thereby creating a working capital deficit of $257,946. Total liabilities as at
June 30, 2000 amounted to $388,796 and shareholders equity was $7,238,692. Total
assets at June 30, 1999 were $3,036 and total liabilities were $79,841. The
increase in assets and liabilities during 2000 occurred principally from the
acquisition of Kronos Air Technologies, EdgeAudio, Atomic Soccer and Cancer
Detection, and our emergence from our prior inactive status.
LIQUIDITY AND CAPITAL RESOURCES
Historically we have relied principally on the sale of common stock to
finance our operations. We have recently completed a successful private
placement of our common stock through which we were able to obtain commitments
for 2,738,824 shares of our common stock, valued at $0.17 per share, in
consideration of $465,600 in cash and 841,459 shares of our common stock, valued
at $0.17 per share, in consideration of commitments to convert $143,048 of debt
into equity with respect to certain members of the management team. Going
forward, in addition to continued sales of common stock, we plan to rely on the
proceeds from Small Business Innovation Research (SBIR) contracts with the U.S.
Navy and Army as well as other government contracts and grants, and cash flow
generated from the sale of Kronos(TM) devices. We have also entered into a
common stock purchase agreement with Fusion Capital under which we have the
right, subject to certain conditions, to draw down approximately $12,500 per day
from the sale of common stock to Fusion Capital. The SBIR contracts are
potentially worth up to $1.7 million in product development and testing support
for Kronos Air Technologies. The first phase of the contracts is worth up to
$207,000 in funding. If awarded to Kronos Air Technologies, the second phase of
the contracts would be worth up to $1.5 million in additional funding. In
January 2002 and May 2002 Kronos Air Technologies received Phase II invitation
letters for U.S. Navy and U.S. Army contracts, respectively, with potentially
$1.5 million in commitments.
14
Net cash flow used in operating activities was $1.2 million for the
current year nine months ended March 31, 2002. We were able to satisfy some of
our cash requirements for this period through the issuance and sale of our
common stock.
On June 19, 2001, we entered into a common stock purchase agreement
with Fusion Capital. Pursuant to the common stock purchase agreement, Fusion
Capital has agreed to purchase on each trading day during the term of the
agreement, $12,500 of our common stock or an aggregate of $10.0 million. The
$10.0 million of our common stock is to be purchased over a 40-month period,
subject to a six-month extension or earlier termination at our sole discretion
and subject to certain events. The purchase price of the shares of common stock
will be equal to a price based upon the future market price of our common stock
without any fixed discount to the then-current market price. On November 13,
2001, the common stock purchase agreement was amended to establish a floor
price. Fusion Capital is obligated to purchase shares under the agreement as
long as the share price exceeds a floor of $0.25. However, even during recent
periods in which our share price was below that $0.25 threshold, we have been
able to work with Fusion Capital to provide for most of the financing needs of
the Company. However, there can be no assurance of how much cash we will
receive, if any, under the common stock purchase agreement with Fusion Capital.
In May 2002, we completed a private placement of our common stock
pursuant to which we sold 2,559,412 shares of our common stock at $0.17 per
share to eight accredited investors for consideration of $435,100 cash and
841,459 shares of our common stock at $0.17 per share to five members of our
management team for consideration of commitments to convert $143,048 of debt.
We estimate that achievement of our business plan will require
approximately $3,000,000 of funding. We anticipate that such funding will be
obtained pursuant to the Fusion Capital transaction, cash flow generated from
government grants and contracts (including the Small Business Innovation
Research contracts sponsored by the United States Navy and Army, recently
awarded to Kronos Air Technologies), and cash flow generated from customer
revenue.
GOING CONCERN OPINION
Our independent auditors have added an explanatory paragraph to their
audit opinion issued in connection with the 2001 and 2000 financial statements
that states that we do not have significant cash or other material assets to
cover our operating costs. Our ability to obtain additional funding will largely
determine our ability to continue in business. Accordingly, there is substantial
doubt about our ability to continue as a going concern. Our financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
We can make no assurance that we will be able to successfully
transition from research and development to manufacturing and selling commercial
products on a broad basis. While attempting to make this transition, we will be
subject to all the risks inherent in a growing venture, including, but not
limited to, the need to develop and manufacture reliable and effective products,
develop marketing expertise and expand our sales force.
15
BUSINESS
OUR COMPANY
We are a Nevada corporation. Our principal executive offices are
located at 464 Common Street, Suite 301, Belmont, Massachusetts 02478. Our
telephone number is (617) 993-9965. The address of our website is
www.kronosati.com. Information on our website is not part of this prospectus.
REORGANIZATION
We had been seeking select business opportunities globally among a wide
range of prospects. Over the past two years, we made several investments,
including Kronos Air Technologies, Inc. and EdgeAudio, Inc. After further
evaluation of these investments, we believe our investment in and the full
development of Kronos Air Technologies and the Kronos(TM) technology represents
the single best opportunity for us. As a result, we are focusing substantially
all of our management and financial resources to develop and market the
Kronos(TM) technology. Effective October 10, 2001, Jeffrey D. Wilson resigned as
Chairman of the Board and Chief Executive Officer of TSET, as well as Chairman
of the Board of Kronos Air Technologies and EdgeAudio, respectively. Mr. Wilson
remains as a director of TSET. Effective October 16, 2001, Daniel R. Dwight
became our President and Chief Executive Officer. Mr. Dwight is a Director of
TSET and had been a consultant to our Company prior to accepting his new
position. Effective January 1, 2002, Richard F. Tusing became our Chief
Operating Officer. Mr. Tusing is a Director of TSET and had been a consultant to
our Company prior to accepting his new position.
We have reorganized our company to prioritize and focus management and
financial resources on Kronos Air Technologies and the Kronos(TM) technology.
This reorganization has resulted in the decision to no longer pursue other
investment opportunities previously identified. We sold our investment in Atomic
Soccer USA, Ltd. in April 2001; decided not to pursue investments in Cancer
Detection International LLC, Electric Management Units, and Cancer Treatment
Centers, Inc. in July 2001; established a formal plan to dispose of EdgeAudio in
September 2001; and terminated by mutual consent of both parties a contract to
distribute Computerized Thermal Imaging, Inc. equipment in August 2000.
CORPORATE HISTORY
TSET (formerly known as Technology Selection, Inc.) was originally
incorporated under the laws of the State of Utah on September 17, 1980 as
Penguin Petroleum, Inc. Penguin Petroleum Inc.'s stockholders approved a name
change on October 6, 1982 to Petroleum Corporation of America, Inc. On December
29, 1996, stockholders approved a reorganization whereby they exchanged their
stock on a one-for-one basis with Technology Selection, Inc., a Nevada
corporation. Technology Selection, Inc.'s shares began trading on the
Over-the-Counter Bulletin Board on August 28, 1996 under the symbol "TSET." On
November 19, 1998, Technology Selection, Inc. changed its name to TSET, Inc.
Effective January 12, 2001, we began doing business as Kronos Advanced
Technologies, Inc. and, as of January 18, 2002, we changed our ticker symbol to
"KNOS." We have confined most of our activities to classifying market and
commercial targets, investigating potential investment and acquisition
opportunities, and capitalizing on our investment in Kronos Air Technologies,
and have not, to date, generated significant operating revenues. We have never
been party to any bankruptcy, receivership, or similar proceedings and, other
than noted above, have not been party to any material reclassification, merger,
consolidation, or purchase or sale of significant assets not in the ordinary
course of our business.
KRONOS AIR TECHNOLOGIES, INC.
On March 13, 2000, we signed agreements for the acquisition of all of
the issued and outstanding shares of Kronos Air Technologies, Inc. We acquired
all of the issued and outstanding shares of Kronos Air Technologies' capital
stock in exchange for shares of our common stock. Kronos Air Technologies is
focused on the development and commercialization of an air movement and
purification technology known as Kronos(TM) which is more fully described below.
TECHNOLOGY DESCRIPTION AND BENEFITS
The Kronos(TM) technology operates through the application of high
voltage management across paired electrical grids that creates an ion exchange
16
which moves air and gases at high velocities while removing odors, smoke, and
particulates, as well as killing pathogens, including bacteria. We believe the
technology is cost effective and is more energy efficient than current
alternative fan and filter technologies. Kronos(TM) technology has multiple U.S.
and International patents pending.
The Kronos(TM) device is comprised of state-of-the-art high voltage
electronics and electrodes on a single printed circuit board attached to one or
more sets of corona and target electrodes housed in a self contained casing. The
device can be flexible in size, shape and capacity and can be used in embedded
electronic devices, standalone room devices, and integrated HVAC and industrial
applications. The Kronos(TM) device has no moving parts or degrading elements
and is composed of cost effective, commercially available components.
The Kronos(TM) technology combines the benefits of silent air movement,
air cleaning, odor removal, limited ozone generation, and static control (as a
Kronos(TM) device can produce either positive or negative ions or both, if
necessary). Because the Kronos(TM) air movement system is a silent,
non-turbulent, and energy efficient air movement and cleaning system, we believe
that it is ideal for air circulation, cleaning and odor removal in all types of
buildings as well as compact, sealed environments such as airplanes, submarines
and cleanrooms. Additionally, because it has no moving parts or fans, a
Kronos(TM) device can instantly block or reverse the flow of air between
adjacent areas for safety in hazardous or extreme circumstances. We believe that
the benefits of the Kronos(TM) technology include the following:
QUIET OPERATION: Embodied in a non-turbulent,
non-vibrating device - virtually
silent.
DURABILITY: No moving or degradable parts.
ADAPTABILITY: Scalable in shape, size and
capacity and adaptable to existing
infrastructure, hardware and HVAC
systems or can be used as a
standalone device. Operates under
both extreme high and low
temperatures; inertialess with
instantaneous air movement and is
capable of deployment in a wide
range of applications.
EFFICIENCY: Energy efficient, up to 10 times
the cubic feet per minute per watt
of a conventional fan at the same
velocity and size.
PURIFICATION: Lethal towards a wide range of
bacteria and spores and can remove
particulate matter from the air
(e.g., smoke, pollen).
ANTI-STATIC: Ions from the corona discharge
neutralize electrostaticly charged
particles in the ambient air
(e.g., use in cleanrooms).
VALUE: Built with readily available,
existing electronics and hardware
making the Kronos(TM) device cost
effective to manufacture.
RECENT ACHIEVEMENTS
LETTER OF INTENT FOR RETAIL CONSUMER PRODUCTS
In April 2001, Kronos Air Technologies completed development of a
prototype room-based air purification device and is now moving rapidly toward
commercialization of the Kronos(TM) technology outside of military applications.
In May 2002, Kronos Air Technologies executed a term sheet with a consumer
retail products company. The agreement provides for exclusive North American
retail distribution rights for a full consumer air movement and purification
product line based on the Kronos technology for a term of at least three years.
Kronos will be compensated through royalty payments with minimum annual levels.
The consumer products company has also agreed to provide Kronos with advanced
funding to pay for any development work necessary to bring a Kronos-based
consumer product line to market. Kronos will retain full rights to all of its
intellectual property, as well as manufacturing of its proprietary power supply.
The final agreement is subject to negotiations between the parties over the next
60 days. The product line launch is scheduled for first quarter 2003. Kronos is
required to keep the identity of the consumer products company confidential
until the formal announcement of the product launch.
17
UNDERWRITERS LABORATORIES' APPROVAL
In June 2001, Kronos Air Technologies obtained Underwriters
Laboratories, Inc.'s approval for the Kronos(TM) device's core electronics. The
electronic module is the key component of Kronos Air Technologies' proprietary
technology and is used in all Kronos(TM) based products. We believe the
Underwriters Laboratories' approval of the electronics should shorten the
Underwriters Laboratories' approval process for all future Kronos Air
Technologies air movement and purification products. Final Underwriters
Laboratories' approval for each Kronos(TM) based device (based on using the
current core electronics) will depend on meeting mechanical and material
standards for each device. This final Underwriters Laboratories' effort will
focus primarily on safety standards applied to the casing for the device and
materials used in final design.
LOCKHEED MARTIN AND GENERAL DYNAMICS CONTRACTS
In the fourth quarter 2001, Kronos Air Technologies began to generate
revenue for the first time in the military marketplace with the sale of
Kronos(TM) devices to Lockheed Martin and the delivery of its first
commercialized Kronos(TM) devices to Bath Iron Works, a division of General
Dynamics. The Bath Iron Works' air movement and purification devices are being
used in the chief quarters of the USS WINSTON CHURCHILL (DDG-81). Bath Iron
Works and Kronos Air Technologies have also teamed with Electric Boat, another
subsidiary of General Dynamics, and General Dynamics Advance Technology Systems
Group to examine advanced demonstration opportunities onboard other United
States naval vessels. These demonstrations are being made through the Office of
Naval Research.
SMALL BUSINESS INNOVATION RESEARCH CONTRACTS AWARDED
UNITED STATES NAVY. In May 2001, Kronos Air Technologies was awarded a
Small Business Innovation Research contract. This contract is sponsored by the
United States Navy and is potentially worth up to $837,000 in product
development and testing support for Kronos Air Technologies. The first phase of
the contract is worth up to $87,000 in funding for manufacturing and testing a
prototype device for air movement and ventilation onboard naval vessels. If
awarded to Kronos Air Technologies, the second phase of the contract would be
worth up to $750,000 in additional funding. The Kronos(TM) devices manufactured
under this contract will be embedded in an existing HVAC systems to move air
more efficiently than the current fan based technology. This contract is an
extension of the commercialization effort by Kronos Air Technologies in the
specialized military marketplace. In April 2002, the United States Navy and
Kronos mutually agreed to exercise the option on the first phase of the United
States Navy SBIR contract. The option is to provide incremental funding to
Kronos to further test and evaluate the Kronos(TM) devices built during the
initial funding. Testing will include demonstrating the ability of the United
States Navy Kronos(TM) devices to capture and destroy biological hazards to
effectively manage electrical magnetic interference.
UNITED STATES ARMY. In December 2001, Kronos Air Technologies was
awarded a Small Business Innovation Research contract. This contract is
sponsored by the United States Army and potentially worth up to $870,000 in
product development and testing support for Kronos Air Technologies. The first
phase of the contract is worth up to $120,000 in funding to investigate and
analyze the feasibility of the Kronos(TM) technology to reduce humidity in
heating, ventilation and air conditioning (HVAC) systems. If awarded to Kronos
Air Technologies, the second phase of the contract would be worth up to $650,000
in additional funding. The Kronos(TM) devices manufactured under this contract
will be to further demonstrate the versatility of the Kronos(TM) technology to
meet airflow, system pressure and reduced humidity requirements for HVAC
systems. This contract is an extension of the commercialization effort by Kronos
Air Technologies in the specialized military marketplace. In May 2002, the U.S.
Army requested our company to submit a detailed phase two proposal by June 10,
2002 for review in the current year. The proposal was submitted on June 7, 2002.
BUSINESS STRATEGY
Kronos Air Technologies' business development strategy is to sell and
license the Kronos(TM) technology to six distinct market segments: (1) air
movement and purification (health care, hospitality, residential and commercial
facilities); (2) air purification for unique spaces (cleanrooms, automotive,
cruise ships and airplanes); (3) specialized military (naval vessels, closed
vehicles and environmental devices); (4) embedded cooling and cleaning
(electronic devices and medical equipment); (5) industrial scrubbing (produce
storage and diesel and other emissions), and (6) hazardous gas destruction
(incineration and chemical facilities).
AIR MOVEMENT AND PURIFICATION. Indoor air pollution, including "sick
building syndrome" and "building related illness," is caused by inadequate
ventilation, chemical contaminants from indoor and outdoor sources and
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biological contaminants. The addressable air movement and purification segment
is made up of four principal applications: (1) health care, (2) hospitality (3)
residential and (4) commercial. Kronos Air Technologies is attempting to develop
a Kronos(TM) device intended to address the specific air quality issues,
including odors, found in most nursing home and assisted living facilities.
AIR PURIFICATION FOR UNIQUE SPACES. Electronics, high-tech,
semiconductor, pharmaceutical, aerospace, medical and many other producers
depend on cleanroom technology. As products such as electronic devices become
smaller, the chance of contamination in manufacturing becomes higher. For
pharmaceutical companies, clean, safe and contaminant-free products are
imperative to manufacturing and distributing a viable product. Other potential
applications for the Kronos(TM) technology include contained spaces such as
aircraft, cruise ships and other transportation modes that require people to
breathe contaminated, re-circulated air for extended periods. Kronos Air
Technologies is also evaluating the effectiveness of the Kronos(TM) technology
on reducing diesel emissions.
SPECIALIZED MILITARY. Kronos Air Technologies has been working
extensively with General Dynamics on commercializing specific military
applications of the Kronos(TM) technology. To date, Kronos Air Technologies has
developed and shipped miniature Kronos(TM) based devices for retrofitting the
sailors' bunk fans on United States Naval ships and a larger embedded device for
retrofitting fans in the ductwork of United States Naval ships. In addition,
Kronos Air Technologies was awarded a Small Business Innovation Research
contract sponsored by the United States Navy and is potentially worth up to
$837,000 in funding for product development and testing. The Kronos(TM) devices
manufactured under this contract will be embedded in existing HVAC systems to
move air more efficiently than the current fan based technology. In addition,
Kronos Air Technologies was awarded a Small Business Innovation Research
contract sponsored by the United States Army and is potentially worth up to
$850,000 in funding for product development and testing. The Kronos(TM) devices
manufactured under this contract will be used to demonstrate the ability to
commercialize the Kronos(TM) technology for mass production.
OTHER MARKET SEGMENTS. The technology demonstrated in the Small
Business Innovation Research contract has direct applications to other
commercial market segments that Kronos Air Technologies is pursuing, including
industrial ventilation for building HVAC systems, embedded cooling for
electronic equipment and hazardous gas scrubber systems.
MILESTONES
Our primary business objectives over the next twelve months are the
further development and commercialization of the Kronos(TM) technology with a
view toward generating cash flow from customers. The primary milestones
necessary to achieve these objectives are as follows:
o completion of commercialization of standalone Kronos(TM)
devices to generate revenues, including completion of design
of finished products, obtaining final Underwriters
Laboratories' approval for the finished products, and
completion of customer beta testing programs;
o development of corporate capability to manage the outsourcing
of production and post-sale servicing of Kronos(TM) products,
including final selection of contract manufacturers and design
of product tooling;
o further development and augmentation of Kronos Air
Technologies' operational capabilities to support revenue
stream, and identification of new applications for Kronos(TM)
technology;
o expansion of technical resources and product engineering to
better position Kronos Air Technologies' ability to address
specific customer issues and needs, including expanding Kronos
Air Technologies' chemical and materials technical expertise;
o hiring additional marketing and sales personnel to expand
customer base to allow Kronos Air Technologies to grow both
near term and long term revenue; and
o continuation of implementation of Kronos Air Technologies'
intellectual property strategies, including continuation of
its U.S. and international patent filing process to enable a
full development and effectively management of intellectual
property rights and assets.
We estimate that achievement of these milestones will require
approximately $3,000,000 of funding. We anticipate that such funding will be
obtained pursuant to the Fusion Capital transaction, cash flow generated from
government grants and contracts (including the Small Business Innovation
Research contracts sponsored by the United States Navy and Army, recently
awarded to Kronos Air Technologies), and cash flow generated from customer
revenue.
19
CORPORATE RESTRUCTURING AND RELATED ACTIVITIES
We have reorganized in order to prioritize and focus management and
financial resources on Kronos Air Technologies and the Kronos(TM) technology.
This reorganization has resulted in the decision to no longer pursue other
investment opportunities previously identified.
ACQUISITION AND SALE OF ATOMIC SOCCER USA, LTD. Pursuant to a Letter
Agreement dated as of April 11, 2001, we transferred ownership of 100% of the
issued and outstanding shares of common stock of Atomic Soccer to a new
ownership group comprised primarily of Atomic Soccer's current and former
management. We determined that continued financial and other support of Atomic
Soccer was not consistent with our long-term strategic plan of concentrating and
consolidating financial and management resources on Kronos Air Technologies.
OTHER INVESTMENTS. Our reorganization has resulted in our decision to
no longer pursue other investment opportunities previously identified. We
decided not to pursue further investments in Cancer Detection International LLC,
Electric Management Units, and Cancer Treatment Centers, Inc. in July 2001;
established a formal plan to dispose of EdgeAudio in September 2001; and
terminated by mutual consent a contract to distribute Computerized Thermal
Imaging, Inc. equipment in August 2000.
RETENTION OF THE EAGLE ROCK GROUP, LLC
On July 9, 2001, we signed an agreement to utilize the strategic
planning and business plan execution services of The Eagle Rock Group, LLC. The
Eagle Rock Group will work with the Kronos Air Technologies team to fully
develop and capitalize on the Kronos(TM) technology. We believe that The Eagle
Rock Group can assist us in unlocking the potential value of the Kronos(TM)
technology.
We believe that The Eagle Rock Group's multi-disciplined approach,
which uses seasoned business executives and leverages relationships and
networks, can accelerate the Kronos(TM) opportunity versus the timing and
development if we were to continue on a go-it-alone strategy or if we were to
work and coordinate with the myriad of groups necessary to duplicate The Eagle
Rock Group team. Specifically, we initially envision The Eagle Rock Group
working to augment and enhance our efforts in the following areas (i) capital
raising and allocation, (ii) strategic partner introduction and evaluation,
(iii) distribution channel development, (iv) product focus and brand
development, (v) human resource placement, and (vi) capital market introduction
and awareness.
Pursuant to the agreement that we entered into with The Eagle Rock
Group, we issued to The Eagle Rock Group a ten-year warrant granting them the
right to purchase 1,400,000 shares of our common stock at an exercise price of
$0.68 per share. The shares underlying the warrant have piggy-back and demand
registration rights, as well as subscription rights in the event that we issue
any rights to all of our stockholders to subscribe for shares of our common
stock. In addition, the warrant contains redemption rights in the event that we
enter into a transaction that results in a change of control of our company.
Effective March 11, 2002, we entered into an agreement with The Eagle
Rock Group extending our relationship with The Eagle Rock Group until March 1,
2003. Pursuant to the agreement, we agreed to convert the then-currently owed
amounts to The Eagle Rock Group of $120,000 into a promissory note due and
payable on March 1, 2003 and agreed to grant to The Eagle Rock Group a ten-year
warrant for the right to purchase 2,000,000 shares of our common stock. Five
hundred thousand (500,000) warrant shares are immediately earned and will fully
vest on March 1, 2003. The remainder of the shares may be earned, contingent
upon the occurrence of various events, including a successful capital raise,
securing contracts with the U.S. military, securing contracts with
consumer-oriented distribution organizations, and the adoption of a
branding/marketing campaign principally developed by The Eagle Rock Group. The
exercise price of these warrant shares will be equal to our common stock's
closing price as of the day an initial letter of intent or term sheet related to
such transaction is executed.
FUSION CAPITAL TRANSACTION
On June 19, 2001, we entered unto a common stock purchase agreement
with Fusion Capital. Pursuant to the common stock purchase agreement and subject
to certain conditions, Fusion Capital has agreed to purchase on each trading day
during the term of the agreement, $12,500 of our common stock or an aggregate of
$10.0 million. The $10.0 million of our common stock is to be purchased over a
40-month period, subject to a six-month extension or earlier termination at our
sole discretion and subject to certain events. The purchase price of the shares
of common stock will be equal to a price based upon the future market price of
our common stock without any fixed discount to the then-current market price.
However, there can be no assurance of how much cash we will receive, if any,
under the common stock purchase agreement with Fusion Capital. On November 13,
20
2001, the common stock purchase agreement was amended to establish a floor
price. Fusion Capital is obligated to purchase shares of common stock under the
agreement as long as the per-share price of our common stock exceeds the floor
price of $0.25.
LEGAL PROCEEDINGS
On June 6, 2002, Dutchess Advisors Ltd. initiated legal proceedings in
Middlesex County, Massachusetts, against TSET. The complaint alleges, among
other things, breach of contract, QUANTUM MERUIT, unjust enrichment and
conversion with respect to a letter agreement, dated June 19, 2001, between TSET
and Dutchess Advisors Ltd., and seeks, among other things, a judgment in the
amount of $75,000, exclusive of pre-judgment interest, costs and attorneys'
costs. The Company believes it has meritorious defenses and intends to
vigorously defend.
On February 2, 2001, we initiated, together with Kronos Air
Technologies, legal proceedings in Clackamas County, Oregon against W. Alan
Thompson, Ingrid T. Fuhriman, and Robert L. Fuhriman II, each of whom were
formerly executive officers and members of the Board of Directors of Kronos Air
Technologies. This suit alleges, among other things, breach of fiduciary duties
and breach of contract by these individuals, and seeks, among other things, an
order from the court referring the dispute to arbitration in accordance with the
terms of these individuals. We have agreed to a change of venue of this matter
to King County, Washington, and arbitrators have been selected. The parties are
in the process of exchanging and complying with requests for discovery.
On January 13, 2000, we initiated legal proceedings in Clackamas
County, Oregon against Foster & Price Ltd., an Isle of Man corporation, seeking,
among other things, a judicial declaration that a certain term sheet signed by
us and Foster & Price was lawfully terminated by us due to Foster & Price's
failure to perform certain terms thereunder and was therefore null and void, and
that we and Foster & Price had no further contractual obligations between
ourselves. Foster & Price claimed entitlement to the issuance of 10,000,000
shares of our common stock, notwithstanding its alleged nonperformance of
certain important obligations under the term sheet. On July 7, 2001, we entered
into a mutual release and settlement agreement with Foster & Price and Alex D.
Saenz, pursuant to which our company, Foster & Price and Mr. Saenz mutually and
fully released each other from all related claims and counterclaims and agreed
to the dismissal of the litigation initiated by us against Foster & Price on
January 13, 2000. The settlement agreement does not contain any admission of
liability or fault by any party. The parties also agreed, among other things, to
not institute any future litigation relating to the term sheet of the previous
relationship. As settlement consideration, we delivered to Foster & Price and
Mr. Saenz, collectively, a total of 375,000 registered shares of our common
stock. Foster & Price and Mr. Saenz have agreed that in no case shall they sell
on any given trading day more than 5,000 shares, or more than 12,500 shares in
any consecutive five-day trading period, or more than 50,000 shares in any
30-day consecutive trading period. Foster & Price and Mr. Saenz have agreed to
certain confidential provisions and to indemnify us against claims arising out
of any dispute between Foster & Price and Mr. Saenz relating to any allocation
of shares between them as well as claims brought by persons who are not parties
to the settlement agreement.
On January 11, 2002, Aperion Audio, Inc. (f/k/a EdgeAudio.com), a
company in which Kronos Advanced Technologies owns common shares, initiated
arbitration in a dispute over the Agreement and Plan of Reorganization between
the parties. Aperion Audio, Inc. requested damages of $213,900 plus
consequential damages. On June 7, 2002, TSET settled all outstanding litigation
with Aperion Audio, Inc., including the dismissal of arbitration proceedings,
pursuant to a Settlement Agreement and Mutual Release, which included the sale
of TSET-owned shares of Aperion Audio, Inc. common stock.
DESCRIPTION OF OUR PROPERTIES
Our principal executive office is located at 464 Common Street, Suite
301, Belmont, Massachusetts.
The offices of Kronos Air Technologies are located at 8549 / 8551 154th
Avenue NE, Redmond, Washington 98052. Kronos Air Technologies is committed
through June 30, 2003 to annual lease payments on operating leases for 4,000
square feet of office/research lab premises of $42,670 per year.
We consider our existing facilities to be adequate for our foreseeable
needs.
21
MANAGEMENT
Our directors and executive officers and their ages as of the date of
this prospectus are as follows:
NAME AGE POSITION
---------------------- ------- -------------------------------------------------
Daniel R. Dwight 42 Director; President and Chief Executive Officer
Richard A. Papworth 43 Director; Chief Financial Officer, Secretary, and
Treasurer
Richard F. Tusing 44 Director; Chief Operating Officer
James P. McDermott 40 Director
Charles D. Strang 79 Director
Erik W. Black 31 Director
Jeffrey D. Wilson 47 Director
DANIEL R. DWIGHT, 42, has served as a Director of TSET since November
2000, and as a Director and Chief Executive Officer of Kronos Air Technologies
since January 2001. Effective October 16, 2001, Mr. Dwight was appointed
President and Chief Executive Officer of TSET. He has extensive experience in
private equity and operations in a wide variety of high growth and core
industrial businesses. Mr. Dwight is currently an independent management
consultant who provides business development, strategic consulting, financial
planning, merchant banking, and operational execution services to a wide range
of clients. Prior to starting his consulting practice, Mr. Dwight spent 17 years
with General Electric including 10 years of operations, manufacturing, and
business development experience with GE's industrial businesses, and seven years
of international investment and private equity experience with GE Capital. He
has had responsibility for over a $1 billion in merger and acquisition and
private equity transactions at GE. Most recently, Mr. Dwight initiated GE
Capital's entry in the Asia private equity market. Between 1995 and 1999, the
Asian equity portfolio grew to include consolidations, leveraged buyouts, growth
capital and minority investments in diverse industries, including information
technology, telecommunications services, consumer products, services and
distribution, and contract manufacturing. Mr. Dwight led deal teams with
responsibility for the execution of transactions, monitoring of portfolio
companies and realization of investments. Since 1982, Mr. Dwight has held other
leadership positions domestically and internationally with GE Capital, as well
as senior positions with GE Corporate Business Development (1989-1992) and GE
Corporate Audit Staff (1984-1987). His responsibilities included identifying,
analyzing and implementing reorganizations, restructurings, consolidating
acquisitions, and divestitures of GE businesses. He also had responsibility for
the development of new business ventures and commercialization of new
technologies strategic to GE's industrial businesses. Mr. Dwight holds an MBA in
Finance and Marketing with Honors from the University of Chicago in 1989 and a
B.S. in Accounting with Honors from the University of Vermont in 1982.
RICHARD A. PAPWORTH, 43, became a Director of TSET in June 2001, was
appointed Chief Financial Officer of TSET in May 2000, and has served as a
Director, Chief Financial Officer, and Treasurer of Kronos Air Technologies
since January 2001, and as Assistant Secretary of Kronos Air Technologies since
December 2000. Mr. Papworth has had diverse finance, tax, and accounting
experience in a range of industries, including real estate
development/construction, software development, publishing, distribution,
financial institutions, and investment companies. From 1997-2000, he was
Vice-President and Controller of the U.S. and European operations of Wilshire
Financial Services Group, a Portland, Oregon-based publicly held specialty loan
servicing and investment company with more than $2 billion under management. In
this capacity, Mr. Papworth was responsible for accounting and control system,
financial reporting and analysis, and business decision support for the
worldwide organization. From 1996-97, he was Chief Financial Officer of First
Bank of Beverly Hills, a $550 million banking subsidiary of WFSG. From 1995-96,
Mr. Papworth was Treasurer for Maintenance Warehouse America Corporation in
which capacity he successfully negotiated more than $50 million of real estate
and working capital financing, and was responsible for management of Maintenance
Warehouse America Corporation's insurance program and tax compliance. From
1994-95, he maintained a private management and finance consulting practice for
select clients. From 1989-94, Mr. Papworth worked for Morrison Homes, the U.S.
home building division of U.K.-based George Wimpey Plc., during which period he
held various positions including Chief Financial Officer, Treasurer, and
Assistant Treasurer. From 1985-89, he engaged in tax consulting with Deloitte
and Touche, a Big Five accounting firm. He received a B.S. in accounting (with
minors in business, economics, and Spanish) and a Macc (Masters of Accountancy)
with emphasis in tax law, from Brigham Young University in 1984. Mr. Papworth
22
became licensed as a certified public accountant in the State of California in
1987. Mr. Papworth speaks Spanish fluently.
RICHARD F. TUSING, 44, has served as a Director of TSET since October
2000 and as a Director of Kronos Air Technologies since January 2001 and was
appointed Chief Operating Officer on January 1, 2002. Mr. Tusing has had
extensive experience in developing new enterprises, negotiating the licensing of
intellectual property rights, and managing technical and financial
organizations, and has more than 20 years of business development, operations,
and consulting experience in the technology and telecommunications industries.
He has spent four years in executive management with several emerging technology
companies, 14 years in various managerial and executive positions with MCI
Communications Corporation, and three additional years in managerial consulting.
While acting as an independent management consultant from 1996 to the present,
Mr. Tusing's experience with emerging technology companies includes serving as
Chief Executive Officer and Chief Technology Officer for Avalon Media Group (a
turnkey advertising services company); primary responsibility for technology
planning, licensing, and strategic technology architecture relationships for
ICU, Inc. (a mobile video conferencing company); and Executive Vice-President,
Chief Technology Officer, and Director of Entertainment Made Convenient (Emc3)
International, Inc. (a video and data downloading services company). Through his
private consultancy, Mr. Tusing provides, among other things, managerial,
financial planning, technical, and strategic planning services. From 1982-1996,
Mr. Tusing held multiple managerial and executive positions with MCI
Communications Corporation. From 1994-1996, he served as MCI's Director of
Strategy and Technology, managing MCI's emerging technologies division (having
primary responsibility for evaluating, licensing, investing in, and acquiring
third-party technologies deemed of strategic importance to MCI), and also
oversaw the development of several early-stage and venture-backed software and
hardware companies; in this capacity, Mr. Tusing managed more than 100
scientists and engineers developing state-of-the-art technologies. From
1992-1994, Mr. Tusing founded MCI Metro, MCI's entree into the local telephone
services business and, as MCI Metro's Managing Director, managed
telecommunications operations, developed financial and ordering systems, and led
efforts in designing its marketing campaigns. From 1990-1992, he served as
Director of Finance and Business Development for MCI's western region,
overseeing $1,000,000,000 in annual revenue and a $90,000,000 operating budget.
From 1982-1990, Mr. Tusing held other management and leadership positions within
MCI, including service as MCI's Pacific Division's Regional Financial
Controller, Manager of MCI's Western Region's Information Technology Division,
and led MCI's National Corporate Financial Systems Development Organization. Mr.
Tusing received B.S. degrees in business management and psychology from the
University of Maryland in 1979.
JAMES P. MCDERMOTT, 40 became a Director of TSET in July 2001. Mr.
McDermott has over 18 years of financial and operational problem-solving
experience. Mr. McDermott is a co-founder and is currently a Managing Director
of Eagle Rock Advisors, LLC, the Manager for The Eagle Rock Group, LLC. From
1992 through 2000, Mr. McDermott held various managerial and executive positions
with PennCorp Financial Group, Inc. and its affiliates. From 1998 through 2000,
Mr. McDermott was Executive Vice-President and Chief Financial Officer of
PennCorp Financial Group. While serving in this position, Mr. McDermott was
one-third of the executive management team that was responsible for developing
and implementing operational stabilization, debt reduction and recapitalization
plans for the company. From 1995 through 1998, Mr. McDermott served as Senior
Vice-President of PennCorp Financial Group. Mr. McDermott worked closely with
the Audit Committee of the Board of Directors on evaluating the PennCorp's
accounting and actuarial practices. In addition, Mr. McDermott was responsible
for developing a corporate-wide technology management program resulting in
technology convergence and cost savings to the company's technology budget. From
1994 through 1998, Mr. McDermott was a principal in Knightsbridge Capital Fund
I, LP, a $92 million investment fund specializing in leverage-equity
acquisitions of insurance and insurance-related businesses. Mr. McDermott was
also the founding Chairman of the e-business Internet service provider,
Kivex.com, and a senior manager of one of the world's leading public accounting
firms, KPMG. Mr. McDermott received a B.S. Degree in Business Administration
from the University of Wisconsin, Madison.
CHARLES D. STRANG, 79, has served as a Director of TSET since September
2000 and as a Director of Kronos Air Technologies since January 2001. Mr. Strang
was named National Commissioner of NASCAR (National Association for Stock Car
Racing) in 1998 and continues to serve in that capacity. In 1989 Mr. Strang
received President Bush's American Vocation Success Award; in 1992 was elected
to the Hall of Fame of the National Marine Manufacturers Association; in 1990
was awarded the Medal of Honor of the Union for International Motorboating; and
is a life member of the Society of Automotive Engineers. He also currently
serves as a Director of the American Power Boat Association (the U.S. governing
body for powerboat racing) and Senior Vice-President of the Union for
International Motorboating (the world governing body for powerboat racing, with
approximately 60 member nations). He joined Outboard Marine Corporation as
Director of Marine Engineering in 1966, and retired as Chief Executive Officer
in 1990 and as Chairman in 1993 after a more than 40-year career in the marine
industry. Mr. Strang retired as a Director of Outboard Marine Corporation in
1996 and has been retired since that time. Mr. Strang's accomplishments during
this period include the invention of the modern-day stern-drive
(inboard/outboard) power system, the evolution of high horsepower outboard
motors, dozens of patents in the field of engine design, marine propulsion
devices, and powerboats, and the movement of the marine industry to vertically
integrate engine manufacturers with boat builders; these efforts have
accelerated the consolidation of the marine industry and the trend to "packaged"
boat and motor marketing. Under his leadership, Outboard Marine Corporation was
transformed into a vertically-integrated producer of complete, factory-rigged
and -powered boats; his engineering and management leadership has had a lasting,
23
substantial influence on the marine industry. Mr. Strang graduated with a degree
in mechanical engineering from Polytechnic University in 1943 and worked for
several years in the aerospace industry (including research and testing projects
on aircraft engines) and served on the mechanical engineering staff of
Massachusetts Institute of Technology. He spent 13 years with Kiekhaefer
Corporation (manufacturer of Mercury outboard motors), rising from Director of
Research to Executive Vice-President, and was also proprietor of U.S.
Executives, Inc., a management consulting firm, and Hydro-Mechanical
Development, an engineering firm.
ERIK W. BLACK, 31, became a Director of TSET in June 2001, was
appointed Executive Vice-President - Business Development of TSET in May 2000,
and also served as Chairman of the Board of Directors of Atomic Soccer from
November 2000 until the sale of Atomic Soccer in April 2001. Mr. Black resigned
as Executive Vice-President - Business Development of TSET - effective December
31, 2001. Before joining TSET, Mr. Black served from 1997-2000 as a business and
corporate strategy consultant to the office of the Chairman on Funding
Selection, Inc., an investment banking and mergers and acquisitions company. He
also developed, launched, and managed GI Bill Express.com LLP from February 1999
until its acquisition by Military.com in April 2000. Mr. Black has also worked
as an e-business associate consultant for IBM Global Services in Phoenix,
Arizona, from March 1999 until April 2000. In addition, Mr. Black was the sole
proprietor of E.B. Web Designs, an Internet development services and consulting
company founded in 1998. Mr. Black worked as the communications coordinator for
the Synthetic Organic Chemical Manufacturers Association in Washington, D.C.
from 1996-97 and as an associate consultant for Robert Charles Lesser & Co., a
real estate consulting firm, from 1995-96. He received an M.B.A. and a Masters
of Information Management degrees from Arizona State University in 2000 (where
he received the ASU MBA Kiplinger Foundation Prize for outstanding scholarship,
service, and contribution, and served as Vice-President - communications of the
ASU MBA Student Body Association in 1999-2000), a Global Leadership Certificate
from Thunderbird - The American Graduate School of International Management in
2000, and a B.A. from Pomona College in 1995, where he graduated magna cum laude
and was elected to Phi Beta Kappa. Mr. Black speaks Russian fluently.
JEFFREY D. WILSON, 47, was appointed Chairman of the Board of Directors
and Chief Executive Officer of TSET in April 1999. On October 10, 2001, Mr.
Wilson resigned as Chairman of the Board of Directors and Chief Executive
Officer of TSET, as well as Chairman of the Board of Directors of Kronos Air
Technologies and EdgeAudio, respectively. Mr. Wilson remains a director of TSET.
Mr. Wilson has had extensive international transactions experience in Asia,
Europe, Latin America, Africa, and the U.S., having represented clients in a
wide range of joint venture, corporate finance, public and private securities,
regulatory, asset acquisition, licensing, investment, technology, mergers and
acquisitions, leveraged buy-out, and other transactions, and has assisted
clients in gaining access to foreign markets and in government lobbying
activities. Mr. Wilson served as Chairman of the Board of Directors of Kronos
Air Technologies and Atomic Soccer since March 2000; Mr. Wilson resigned as
Chairman of Atomic Soccer in November 2000. From 1992-1999, Mr. Wilson
maintained a private international consulting practice for select clients and
engaged in entrepreneurial ventures. From 1990-1992, he served as international
legal advisor for GGS Co., Ltd., a Tokyo-based Japanese investment company (and
including its Hong Kong, Australian, Canadian, and U.S. affiliates), having
primary responsibility for its international projects. From 1982-1990, he
engaged in the private practice of law. Mr. Wilson received a B.A. from Brigham
Young University in 1979 and a J.D. from the University of Kansas in 1982, where
he was also associate editor of the KANSAS LAW REVIEW and President of the
International Law Society. Mr. Wilson speaks Japanese fluently.
DIRECTORS
Our Board of Directors consists of eight seats. Directors serve for a
term of one year and stand for election at our annual meeting of stockholders.
Four of our current directors were reelected at our annual meeting of
stockholders held on December 15, 2000, and two additional directors were
appointed in June 2001. One vacancy currently exists on the Board of Directors
as of the date of this prospectus. Pursuant to our Bylaws, a majority of
directors may appoint a successor to fill any vacancy on the Board of Directors.
Daniel R. Dwight, our President and Chief Executive Officer, Richard A.
Papworth, our Chief Financial Officer, Secretary, and Treasurer, and Richard F.
Tusing, our Chief Operating Officer, are also executive officers of TSET. James
P. McDermott, a principal of The Eagle Rock Group, LLC, was nominated to our
Board of Directors in July 2001.
ADVISORY BOARD
We established an Advisory Board in July 2001 to assist management in
the development of long-range business plans for our Company. Currently, William
24
Poster is the sole Advisory Board Member. Mr. Poster is a seasoned entrepreneur
with a successful track record as a founder of several businesses spanning five
continents. Mr. Poster has experience in developing business opportunities in
the United States, Europe, Asia and the Middle East. Mr. Poster recently stepped
down as President of Computer Systems & Communications Corporation, a
wholly-owned subsidiary of General Dynamics. Computer Systems & Communications
Corporation is a cutting-edge communications and technology company that Mr.
Poster founded and later sold to General Dynamics.
We will continue to evaluate additional potential candidates for our
Advisory Board.
COMMITTEES
On September 11, 2001, the Board of Directors established a
Compensation Committee consisting of two independent members of the Board of
Directors. The Compensation Committee and Chairman will be designated annually
by the Board of Directors. The Compensation Committee is charged with reviewing
and making recommendations concerning TSET's general compensation strategy,
reviewing salaries for officers, reviewing employee benefit plans, and
administering TSET's stock incentive plan, once adopted and implemented.
COMPENSATION OF DIRECTORS
CASH COMPENSATION. Our Bylaws provide that, by resolution of the Board
of Directors, each director may be reimbursed his expenses of attendance at
meetings of the Board of Directors; likewise, each director may be paid a fixed
sum or receive a stated salary as a director. As of the date of this prospectus,
no director receives any salary or other form of cash compensation for such
service. No director is precluded from serving our Company in any other capacity
and receiving compensation from us in connection therewith.
SHARE-BASED COMPENSATION. Each director is entitled to receive annually
50,000 restricted shares of our common stock, either granted as shares or in the
form of fully-vested options, as compensation for their services as members of
our Board of Directors. The Chairman of our Board of Directors is entitled to
receive annually an additional 50,000 shares of our common stock, either granted
as shares or in the form of fully-vested options, as compensation for his
services as Chairman of our Board of Directors. As of the date of this
prospectus, Messrs. Wilson and Strang have been granted 200,000 and 50,000
options, respectively as compensation for Mr. Wilson's services as Chairman of
our Board of Directors and Mr. Strang's services as a member of our Board of
Directors. Messrs. Tusing and Dwight have each been granted 50,000 shares of our
common stock as compensation for their services as members of our Board of
Directors.
25
EXECUTIVE COMPENSATION
The following table sets forth compensation for the fiscal year ended
June 30, 2001 for our executive officers:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------------------------- ------------------------------------------------------
AWARDS PAYOUTS
--------------------------- -------------------------
RESTRICTED SECURITIES ALL
OTHER STOCK UNDERLYING LTIP OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SAR'S PAYOUTS COMPENSATION
FISCAL POSITION YEAR $ $ $ $ # $ $
- ---------------------- ----------- --------- ------- -------------- ------------- --------------- ------- ------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
- ---------------------- ----------- --------- ------- -------------- ------------- --------------- ------- ------------
Jeffrey D. Wilson, 2001 180,000 -- 12,000 -- 600,000(2) -- --
Former Chairman of 2000 155,000(3) 30,000(4) 2,670(5) 700,000(6) -- -- --
the Board of 1999 25,000(3) -- -- 300,000 -- -- --
Directors and Chief
Executive Officer(1)
Richard A. Papworth, 2001 120,000 -- 2,000 -- 448,475(8) -- --
Chief Financial 2000 10,000(7) -- -- 50,000(9) -- -- --
Officer 1999 -- -- -- -- -- -- --
Erik W. Black, 2001 100,000 -- 6,000 -- 50,000(10) -- --
Former Executive 2000 4,167(12) -- 4,500(13) -- -- -- --
Vice-President - 1999 -- -- -- -- -- -- --
Business
Development(11)
- --------------------
(1) Effective October 10, 2001, Mr. Wilson resigned as Chairman of the Board of Directors and Chief Executive Officer of
TSET pursuant to a mutual agreement between TSET and Mr. Wilson.
(2) Mr. Wilson was granted 350,000 options pursuant to a letter agreement dated April 10, 2001 amending Mr. Wilson's
employment agreement, dated April 16, 1999. 125,000 options were fully vested as of April 10, 2001 and the remaining
225,000 options were to vest upon the achievement of certain performance objectives. The exercise price was equal to
$0.885 per share, which was the closing price of our Company's common stock as quoted on the Over-the-Counter Bulletin
Board on April 9, 2001. TSET has determined that the options to purchase 350,000 shares of common stock granted to Mr.
Wilson pursuant to the letter agreement are void as of April 10, 2001, the effective date of the letter agreement. Mr.
Wilson was granted 50,000 options on April 9, 2001. These options are fully vested and the exercise price is equal to
$0.885 per share. In addition, Mr. Wilson, was granted 200,000 options on May 3, 2001, in connection with his service
as Chairman of the Board of Directors in 1999 and 2000. These options are fully vested and the exercise price is equal
to $0.71 per share.
(3) Mr. Wilson's 1999 salary of $25,000 consisted of two months at $12,500. Mr. Wilson's 2000 salary of $155,000 consisted
of ten months at $12,500 and two months at $15,000. Mr. Wilson deferred all salary during fiscal years 1999 and 2000
and was entitled to receive 12% annual interest on all deferred amounts. Pursuant to an agreement between TSET and Mr.
Wilson effective October 10, 2001, TSET issued a promissory note in the amount of $350,000 and will pay $30,000 in
cash within sixty days of October 15, 2001, which represents all of Mr. Wilson's accrued salary, bonus and interest.
In addition, TSET will also pay Mr. Wilson his unpaid reimbursable expenses.
(4) Under the terms of his employment agreement, Mr. Wilson was to receive a cash bonus of $30,000 on or before May 1,
2000; however, Mr. Wilson deferred his cash bonus during fiscal year 2000 and was entitled to receive 12% annual
interest on all deferred compensation. Pursuant to an agreement between TSET and Mr. Wilson dated October 10, 2001,
TSET issued a promissory note in the amount of $350,000 and will pay $30,000 in cash within sixty days of October 15,
2001, which represents all of Mr. Wilson's accrued salary, bonus and interest. In addition, TSET will pay Mr. Wilson
his unpaid reimbursable expenses.
(5) Mr. Wilson was entitled to an automobile allowance of $1,000 per month, of which $2,670 was received in fiscal year
2000.
(6) As a signing bonus to his employment agreement, Mr. Wilson's nominee, The Pangaea Group LLC, received 1,000,000
restricted shares of our common stock. Such stock vested at a rate of 100,000 shares per month over a 10-month period;
700,000 shares vested during fiscal year 2000. The $700,000 value was obtained by multiplying the vested shares with
the closing market price of our unrestricted common stock ($1.00 per share) on the date such shares were granted
(April 20, 1999). Notwithstanding the above calculation, we expensed such stock transaction at a value of $300,000, or
$0.30 per share. TSET has determined that the issuance of the 1,000,000 shares of common stock is void as of April 16,
1999, the effective date of Mr. Wilson's employment agreement.
(7) Mr. Papworth joined our Company in May 2000. He is compensated $120,000 annually.
(8) Mr. Papworth was granted an option to purchase 398,475 restricted shares of our common stock pursuant to a letter
agreement dated April 10, 2001 amending Mr. Papworth's employment agreement, dated May 19, 2000. The options were
fully vested as of April 10, 2001 and the exercise price is equal to $0.885 per share, which was the closing price of
our common stock as quoted on the Over-the-Counter Bulletin Board on April 9, 2001. In addition, Mr. Papworth was
granted 50,000 options on April 9, 2001. These options are fully vested and the exercise price is equal to $0.885 per
share.
(9) As a signing bonus to his employment agreement, Mr. Papworth received 14,815 restricted shares of our common stock.
The $50,000 value is determined by multiplying the number of such shares with the closing market price of our
Company's unrestricted common stock ($3.374 per share) on the date such shares were granted (May 19, 2000).
(10) Mr. Black was granted 50,000 options on April 9, 2001. These options are fully vested and the exercise price is equal
to $0.885 per share.
(11) Mr. Black resigned as Executive Vice-President - Business Development of TSET effective December 31, 2001.
(12) Mr. Black joined our Company in May 2000. He was compensated $100,000 annually, of which $4,167 was received in fiscal
year 2000. (13) Mr. Black was entitled to an automobile allowance of $500 per month, and a one-time relocation
allowance of $5,000, of which $4,500 was received in fiscal year 2000.
26
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES(1)
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS/SAR'S AT OPTIONS/SAR'S AT
NAME EXERCISE REALIZED ($) FISCAL YEAR END(1) FISCAL YEAR END(2)
- ----------------------------- ----------------- ---------------- ------------------------- --------------------
Jeffrey D. Wilson -0- -0- Exercisable: 375,000(4) $0
Former Chairman of the Board of Unexercisable: 225,000(4) $0
Directors and
Chief Executive Officer(3)
Richard A. Papworth -0- -0- Exercisable: 448,475 $0
Chief Financial Officer Unexercisable: 0 $0
Erik W. Black -0- -0- Exercisable: 50,000 $0
Former Executive Unexercisable: 0 $0
Vice-President
Business Development(5)
- ---------------------------------
(1) These grants represent options to purchase common stock. No SAR's have been granted.
(2) The value of the unexercised in-the-money options were calculated by determining the difference between the fair
market value of the common stock underlying the options and the exercise price of the options as of June 30, 2001.
(3) Effective October 10, 2001, Mr. Wilson resigned as Chairman of the Board of Directors and Chief Executive Officer of
TSET pursuant to a mutual agreement between TSET and Mr. Wilson.
(4) TSET has determined that the options to purchase 350,000 shares of common stock granted to Mr. Wilson pursuant to a
letter agreement dated April 10, 2001 are void as of April 10, 2001, the effective date of the letter agreement. Of
these options to purchase 350,000 shares of common stock, options to purchase 125,000 shares of common stock were
exercisable at fiscal year end 2001 and 225,000 options were unexercisable at fiscal year end 2001.
(5) Mr. Black resigned as Executive Vice President - Business Development of TSET effective as of December 31, 2001.
OPTION/SAR GRANTS TABLE
% TOTAL
NO. OF SECURITIES OPTIONS/SAR'S
UNDERLYING GRANTED TO
OPTIONS/SAR'S EMPLOYEES IN FISCAL EXERCISE OR BASE PRICE
NAME GRANTED (#) YEAR (%) ($ PER SHARE) EXPIRATION DATE
- -------------------------------- ------------------- --------------------- ----------------------- -------------------
Jeffrey D. Wilson 50,000 4.6% $0.885 April 9, 2006
Former Chairman of the 350,000(2) 31.9% $0.885 April 9, 2011
Board of Directors and 200,000 1.8% $0.710 May 3, 2011
Chief Executive Officer(1)
Richard A. Papworth 50,000 4.6% $0.885 April 9, 2006
Chief Financial Officer 398,475 36.3% $0.885 April 9, 2011
Erik W. Black 50,000 4.6% $0.885 April 9, 2006
Former Executive
Vice-President
Business Development(3)
- ---------------------------------
(1) Effective October 10, 2001, Mr. Wilson resigned as Chairman of the Board of Directors and Chief Executive Officer of
TSET pursuant to a mutual agreement between TSET and Mr. Wilson.
(2) TSET has determined that the options to purchase 350,000 shares of common stock granted to Mr. Wilson pursuant to a
letter agreement dated April 10, 2001 are void as of April 10, 2001, the effective date of the letter agreement.
(3) Mr. Black resigned as Executive Vice President - Business Development of TSET effective as of December 31, 2001.
27
STOCK OPTION PLAN
On February 12, 2002, the Board of Directors approved the TSET, Inc.
Stock Option Plan under which TSET's key employees, consultants, independent
contractors, officers and directors are eligible to receive grants of stock
options. TSET has reserved a total of 6,250,000 shares of common stock under the
Stock Option Plan. It is presently administered by TSET's Board of Directors.
Subject to the provisions of the Stock Option Plan, the Board of Directors has
full and final authority to select the individuals to whom options will be
granted, to grant the options and to determine the terms and conditions and the
number of shares issued pursuant thereto.
EMPLOYMENT AGREEMENTS
The Employment Agreement of Jeffrey D. Wilson, our former Chairman and
Chief Executive Officer, was dated as of April 20, 1999 and continued for an
"evergreen" term of five years unless Mr. Wilson provided at least 60 days'
prior written notice of his resignation. Such agreement provided for base cash
compensation during the first 12-month period in the amount of $12,500 per
month, plus a cash bonus in the amount of $30,000 to be paid in one lump sum on
or before May 1, 2000. During the second 12-month period, Mr. Wilson's base cash
compensation was to increase to $15,000 per month, and during the third 12-month
period such base cash compensation was to increase to $20,000 per month. Mr.
Wilson deferred all cash and bonus compensation from April 1999 through August
2000; however, commencing in September 2000, Mr. Wilson began receiving cash
compensation in the amount of $17,500 per month, approved by the Board of
Directors, in consideration of his previous deferral of such compensation. We
were obligated to pay interest at the rate of 12% annually on all compensation
deferred by Mr. Wilson until all such amounts have been paid in full. Mr.
Wilson's nominee, The Pangaea Group, LLC, received a signing bonus of 100,000
fully vested and non-forfeitable restricted shares of our common stock; The
Pangaea Group, LLC received an additional 900,000 restricted shares of our
common stock, which vested at the rate of 100,000 shares per month over the
9-month period following Mr. Wilson's acceptance of the terms of his employment
agreement. Mr. Wilson was entitled to fully participate in any and all 401(k),
stock option, stock bonus, savings, profit-sharing, insurance, and other similar
plans and benefits of employment; however, as of the date of this prospectus, we
have not adopted or implemented any such plans. Mr. Wilson had "piggyback"
registration rights with respect to all restricted shares owned by him, as well
as "demand" registration rights with respect thereto exercisable two times
during each 5-year term of his employment. The cost of exercising such piggyback
and demand registration rights was to be borne by us. As of the date of this
prospectus, Mr. Wilson had not exercised such registration rights. Mr. Wilson is
entitled to be indemnified, defended, and held harmless by us from and against
any and all costs, losses, damages, penalties, fines, or expenses (including,
without limitation, reasonable attorneys' fees, court costs, and associated
expenses) suffered, imposed upon, or incurred by him in any manner in connection
with his service as our Chairman and Chief Executive Officer.
On April 10, 2001, we entered into a Letter Agreement with Mr. Wilson
amending Mr. Wilson's Employment Agreement. Pursuant to the Letter Agreement,
Mr. Wilson waived the anti-dilution provision of his Employment Agreement in
consideration for options to purchase 350,000 shares of our restricted common
stock. The option to purchase 125,000 shares of common stock was fully vested as
of April 10, 2001 and the remaining 225,000 share option was to vest upon the
achievement of certain performance objectives. The exercise price of these
options was equal to $0.885 per share, which was the closing price of our common
stock as quoted on the Over-the-Counter Bulletin Board on April 9, 2001.
In September 2001, TSET determined that, among other things, our Board
of Directors never validly approved Mr. Wilson's Employment Agreement.
Accordingly, TSET determined that Mr. Wilson's Employment Agreement and the
Letter Agreement are null and void from their inception. As a consequence, TSET
has determined that the issuance of 1,000,000 shares of common stock pursuant to
Mr. Wilson's Employment Agreement and the grant of options to purchase 350,000
shares of common stock pursuant to the Letter Agreement are void as of the
effective dates of the Employment Agreement and Letter Agreement, respectively,
and that these shares of common stock and options are treated as if they were
never issued or granted, as the case may be. Effective October 10, 2001, Mr.
Wilson resigned as Chairman of the Board of Directors and Chief Executive
Officer of TSET. Mr. Wilson remains as a director of TSET.
Daniel R. Dwight, our President and Chief Executive Officer, and our
company entered into an Employment agreement effective as of November 15, 2001.
The initial term of Mr. Dwight's Employment Agreement is for 2 years and will
automatically renew for successive 1 year terms unless TSET or Mr. Dwight
provide the other party with written notice within 3 months of the end of the
initial term or any subsequent renewal term. Mr. Dwight's Employment Agreement
provides for base cash compensation of $180,000 per year. Mr. Dwight is eligible
for annual incentive bonus compensation in an amount equal to Mr. Dwight's
annual salary based on the achievement of certain bonus objectives. In addition,
TSET granted Mr. Dwight 1,000,000 immediately vested and exercisable, ten-year
stock options at various exercise prices. Mr. Dwight will be entitled to fully
participate in any and all 401(k), stock option, stock bonus, savings,
profit-sharing, insurance, and other similar plans and benefits of employment.
Mr. Dwight is entitled to be indemnified, defended, and held harmless by us from
28
and against any and all costs, losses, damages, penalties, fines, or expenses
(including, without limitation, reasonable attorneys' fees, court costs, and
associated expenses) suffered, imposed upon, or incurred by him in any manner in
connection with his service as our Chief Executive Officer.
Richard A. Papworth, our Chief Financial Officer, has an Employment
Agreement dated as of May 19, 2000, which continues for an "evergreen" term of
two years, unless Mr. Papworth provides at least 90 days' prior written notice
of his resignation. Mr. Papworth's Employment Agreement provides for base cash
compensation in the amount of $10,000 per month, a signing bonus of $50,000
worth of fully vested and non-forfeitable restricted shares of our common stock,
plus a year-end bonus payable in cash and additional shares, in a "blended"
amount to be determined. Mr. Papworth will be entitled to fully participate in
any and all 401(k), stock option, stock bonus, savings, profit-sharing,
insurance, and other similar plans and benefits of employment; however, as of
the date of this prospectus, we have not adopted or implemented any such plans.
Mr. Papworth is entitled to be indemnified, defended, and held harmless by us
from and against any and all costs, losses, damages, penalties, fines, or
expenses (including, without limitation, reasonable attorneys' fees, court
costs, and associated expenses) suffered, imposed upon, or incurred by him in
any manner in connection with his service as our Chief Financial Officer.
On April 10, 2001, we entered into a Letter Agreement with Mr. Papworth
amending Mr. Papworth's Employment Agreement. Pursuant to the Letter Agreement,
Mr. Papworth waived the anti-dilution provision of his Employment Agreement in
consideration for an option to purchase 398,475 shares of our restricted common
stock. The option was fully vested as of April 10, 2001 and the exercise price
is equal to $0.885 per share, which was the closing price of our common stock as
quoted on the Over-the-Counter Bulletin Board on April 9, 2001.
EXECUTIVE SEVERANCE AGREEMENTS
The Employment Agreement of Richard A. Papworth, our Chief Financial
Officer, provides that upon the occurrence of any transaction involving a change
of control of TSET pursuant to which his employment is terminated, any shares of
our common stock to which Mr. Papworth is entitled through any stock option or
other stock ownership plan shall immediately vest and Mr. Papworth will be
entitled to receive all the compensation and benefits of employment that he
would have received for the full term of his employment but for such termination
(i.e., given the 2-year "evergreen" term of his employment, Mr. Papworth would
therefore receive two years' worth of such compensation), the immediate vesting
of shares in any stock option or other stock ownership plan, and the immediate
vesting of all matching contributions made by us in any 401(k), savings,
profit-sharing, or other similar plan or benefit program.
The Employment Agreement of Daniel R. Dwight, our Chief Executive
Officer, provides that, upon the occurrence of any transaction as defined as a
"change of control" of TSET, Mr. Dwight shall receive his salary and benefits
for a period of time that is the greater of (i) one year or (ii) the remainder
of Mr. Dwight's employment term.
As of the date of this prospectus, we have not adopted any separate
executive severance agreements.
29
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We believe that all prior related party transactions have been entered
into upon terms no less favorable to us than those that could be obtained from
unaffiliated third parties. Our reasonable belief of fair value is based upon
proximate similar transactions with third parties or attempts to obtain the
consideration from third parties. All ongoing and future transactions with such
persons, including any loans or compensation to such persons, will be approved
by a majority of disinterested members of the Board of Directors.
In connection with his Employment Agreement, Jeffrey D. Wilson's
nominee, The Pangaea Group LLC, received a signing bonus of 100,000 restricted
shares of our common stock; such shares were fully vested and non-forfeitable
upon issuance. In addition, The Pangaea Group LLC received an additional 900,000
restricted shares of our common stock, vesting at the rate of 100,000 shares per
month over the 9-month period ended January 2000. In September 2001, TSET
determined that, among other things, our Board of Directors never validly
approved Mr. Wilson's Employment Agreement. Accordingly, TSET has determined
that Mr. Wilson's Employment agreement is null and void from its inception. As a
consequence, TSET has determined that the issuance of 1,000,000 shares of common
stock pursuant to Mr. Wilson's Employment Agreement is void as of the effective
date of the Employment Agreement, and that these shares of common stock are
treated as if they were never issued.
On August 11, 2000, we entered into a Finders Agreement with Richard F.
Tusing and Daniel R. Dwight, pursuant to which Messrs. Tusing and Dwight will
introduce us to prospective investors and brokers that would thereafter make
similar introductions, and otherwise assist us in corporate finance matters. We
approved the list of prospective investors and brokers provided by Messrs.
Tusing and Dwight contemporaneously with the execution and delivery of the
Finders Agreement. Under the Finders Agreement, we will pay to Messrs. Tusing
and Dwight a finders fee equal to 1% of the total investment value realized from
investors introduced by them that provide equity or debt capital to us. In the
case of provision of equity or debt capital by investors introduced by brokers
introduced by Messrs. Tusing and Dwight, the finders fee will be equal to 0.25%
of the total investment value realized from such investors. We retain the right
to negotiate the specific terms of any financing transaction arising out of any
such introductions and are not obligated to accept any financing offered by any
such investors or through any such brokers. Out-of-pocket expenses incurred by
Messrs. Tusing and Dwight in connection with provision of their services under
the Finders Agreement will be reimbursed by us up to $15,000, unless expenses in
excess of this limit are approved in writing by us. The Finders Agreement was
entered into prior to Messrs. Tusing's and Dwight's appointment as members of
our Board of Directors in October 2000 and was negotiated at arm's length. We
intend that the Finders Agreement will remain in place, notwithstanding the
appointment of Messrs. Tusing and Dwight to our Board of Directors. We believe
that the compensation and other provisions of the Finders Agreement are fair,
reasonable, customary, and favorable to us.
On August 11, 2000, we entered into a Consulting Agreement with Richard
F. Tusing and Daniel R. Dwight, pursuant to which Messrs. Tusing and Dwight will
provide management, financial, strategic, and other consulting services to us in
exchange for consulting fees payable in cash and options of our common stock.
Out-of-pocket expenses incurred by Messrs. Tusing and Dwight in connection with
provision of their services under the Consulting Agreement will also be
reimbursed by us. The Consulting Agreement was entered into prior to Messrs.
Tusing's and Dwight's appointment as members of our Board of Directors in
October 2000 and was negotiated at arm's length. We believe that the
compensation and other provisions of the Consulting Agreement are fair,
reasonable, customary, and favorable to us. The Consulting Agreement was renewed
with Dwight, Tusing & Associates on similar terms and conditions with a rate
adjustment as of January 1, 2001, and was amended on April 12, 2001 to decrease
the strike price of the options granted as partial compensation thereunder.
Effective October 10, 2001, we entered into a Consulting Agreement with
Jeffrey D. Wilson, pursuant to which Mr. Wilson will provide thirty-five hours
per month of management and other consulting services to us in exchange for
consulting fees payable in cash and options of our common stock. Out-of-pocket
expenses incurred by Mr. Wilson in connection with provision of his services
under the Consulting Agreement will also be reimbursed by us. The Consulting
Agreement was negotiated at arm's length. We believe that the compensation and
other provisions of the Consulting Agreement are fair, reasonable, customary,
and favorable to us.
30
Pursuant to Daniel R. Dwight's Employment Agreement, effective November
15, 2001, our company and Mr. Dwight agreed that the Consulting Agreement, dated
January 1, 2001, between our company and Mr. Dwight and the Finders Agreement,
dated August 11, 2000, between our company and Mr. Dwight were terminated
effective November 15, 2001. We acknowledged and agreed that pursuant to the
terms of the Consulting Agreement, we owe Mr. Dwight past-due amounts equal to
$250,582. We agreed that this past-due amount will accrue interest at 1% per
month until paid in full. Payments from our company to Mr. Dwight shall be
allocated first to out-of-pocket expenses, second to salary, and third to
repayment of the past-due amount. In addition, we acknowledged and agreed that,
pursuant to the Consulting Agreement and the Finders Agreement, Mr. Dwight has
earned 271,700 options that are fully vested and exercisable under the terms and
conditions of the Consulting Agreement, the Finders Agreement and a Letter
Agreement, dated April 12, 2001 between our company and Mr. Dwight.
31
THE FUSION CAPITAL TRANSACTION
GENERAL
On June 19, 2001, we entered into a common stock purchase agreement
with Fusion Capital pursuant to which Fusion Capital agreed to purchase on each
trading day during the term of the agreement, $12,500 of our common stock or an
aggregate, under certain conditions, of $10.0 million. The $10.0 million of
common stock is to be purchased over a 40-month period, subject to a six-month
extension or earlier termination at our discretion. The purchase price of the
shares of common stock will be equal to the then current market price of the
common stock without any fixed discount to the market price. On November 19,
2001, the Securities and Exchange Commission declared our Registration Statement
on Form S-1 effective pursuant to which we registered 6,852,500 shares of our
common stock. Five million six hundred forty thousand (5,640,000) shares of our
common stock were registered on behalf of Fusion Capital pursuant to the common
stock purchase agreement. As of June 7, 2002, we have received $750,000 from
Fusion Capital and we have issued 4,060,000 shares of our common stock to Fusion
Capital pursuant to the common stock purchase agreement.
PURCHASE OF SHARES UNDER THE COMMON STOCK PURCHASE AGREEMENT
Under the common stock purchase agreement, on each trading day Fusion
Capital is obligated to purchase a specified dollar amount of our common stock.
Subject to our right to suspend such purchases at any time and our right to
terminate the agreement with Fusion Capital at any time, each as described
below, Fusion Capital shall purchase on each trading day during the term of the
agreement $12,500 of our common stock. We may decrease this daily purchase
amount at any time. We also have the right to increase the daily purchase amount
at any time, provided however, we may not increase the daily purchase amount
above $12,500 unless our stock price is above $3.00 per share for five
consecutive trading days. The purchase price per share is equal to the lesser
of:
o the lowest sale price of our common stock on the purchase date; or
o the average of the three (3) lowest closing sale prices of our common
stock during the twelve (12) consecutive trading days prior to the date
of a purchase by Fusion Capital.
The purchase price will be adjusted for any reorganization,
recapitalization, non-cash dividend, stock split or other similar transaction
occurring during the trading days in which the closing sale price is used to
compute the purchase price. Fusion Capital may not purchase shares of our common
stock under the common stock purchase agreement if Fusion Capital, together with
its affiliates, would beneficially own more than 9.9% of our common stock
outstanding at the time of the purchase by Fusion Capital. However, even though
Fusion Capital may not receive additional shares of our common stock in the
event that the 9.9% limitation is ever reached, Fusion Capital is still
obligated to pay to us $12,500 on each trading day, unless the common stock
purchase agreement is suspended, an event of default occurs or the agreement is
terminated. Under these circumstances, Fusion Capital would have the right to
acquire additional shares in the future should its ownership subsequently become
less than the 9.9%.
The following table sets forth the number of shares of our common stock
that would be sold to Fusion Capital under the common stock purchase agreement
at varying purchase prices with respect to the remaining $9.25 million available
to us under such agreement:
32
PERCENTAGE OUTSTANDING PROCEEDS FROM THE SALE OF
ASSUMED AVERAGE NUMBER OF SHARES TO BE AFTER GIVING EFFECT TO THE SHARES TO FUSION CAPITAL UNDER THE
PURCHASE PRICE ISSUED IF FULL PURCHASE ISSUANCE TO FUSION CAPITAL(1) COMMON STOCK PURCHASE AGREEMENT
- ------------------ --------------------------- ------------------------------- -------------------------------------
$0.25 5,000,000 10.22% $1,250,000
$0.50 5,000,000 10.22% $2,500,000
$0.75 5,000,000 10.22% $3,750,000
$1.00 5,000,000 10.22% $5,000,000
$1.50 5,000,000 10.22% $7,500,000
$2.00 4,625,000 9.52% $9,250,000
$3.00 3,083,333 6.56% $9,250,000
$4.00 2,312,500 5.00% $9,250,000
- --------------------
(1) Based on 43,937,907 shares outstanding as of June 7, 2002. Includes the issuance of 640,000 shares of common stock
issued to Fusion Capital as a commitment fee and the number of shares issuable at the corresponding assumed purchase
price set forth in the adjacent column.
FLOOR PRICE
Pursuant to the common stock purchase agreement, we had the right to
set a minimum purchase price (referred to as a "floor price" in the common stock
purchase agreement) for shares of our common stock to be purchased by Fusion
Capital. We had the ability to increase or decrease the floor price at any time
upon one trading day prior notice to Fusion Capital. Fusion Capital is not
permitted nor obligated to purchase shares of our common stock if the purchase
price is less than the applicable floor price as established by us. On November
13, 2001, the common stock purchase agreement was amended to establish a floor
price. Fusion Capital is obligated to purchase shares of common stock under the
agreement as long as the per-share price of our common stock exceeds the floor
price of $0.25.
OUR RIGHT TO SUSPEND PURCHASES
We have the unconditional right to suspend purchases at any time for
any reason effective upon one trading day's notice. Any suspension would remain
in effect until our revocation of the suspension. To the extent we need to use
the cash proceeds of the sales of common stock under the common stock purchase
agreement for working capital or other business purposes, we do not intend to
restrict purchases under the common stock purchase agreement.
OUR RIGHT TO INCREASE AND DECREASE THE DAILY PURCHASE AMOUNT
We have the unconditional right to decrease the daily amount to be
purchased by Fusion Capital at any time for any reason effective upon one
trading day's notice. We also have the right to increase the daily purchase
amount at any time for any reason; provided however, we may not increase the
daily purchase amount above $12,500 unless our stock price has been above $3.00
per share for five consecutive trading days. For any trading day that the sale
price of our common stock is below $3.00, the daily purchase amount shall not be
greater than $12,500.
OUR TERMINATION RIGHTS
We have the unconditional right at any time for any reason to give
notice to Fusion Capital terminating the common stock purchase agreement. Such
notice shall be effective one trading day after Fusion Capital receives such
notice.
EFFECT OF PERFORMANCE OF THE COMMON STOCK PURCHASE AGREEMENT ON OUR STOCKHOLDERS
We are obligated to register the shares to be sold under the common
stock purchase agreement as well as the 640,000 shares issued as a commitment
fee. On November 19, 2001, the Securities and Exchange Commission declared our
Registration Statement on Form S-1 effective pursuant to which we registered
6,852,500 shares of our common stock. Five million six hundred forty thousand
(5,640,000) shares of our common stock were registered on behalf of Fusion
Capital pursuant to the common stock purchase agreement. As of June 7, 2002, we
have issued 4,060,000 shares of our common stock to Fusion Capital pursuant to
the common stock purchase agreement. All shares so registered are freely
tradable. It is anticipated that such shares will be sold over a period of up to
40 months from the date of this prospectus. The sale of a significant amount of
shares at any given time could cause the trading price of our common stock to
decline and to be highly volatile. Fusion Capital may ultimately purchase all of
the shares of common stock issuable under the common stock purchase agreement,
and it may sell some, none or all of the shares of common stock it acquires upon
purchase. Therefore, the purchases under the common stock purchase agreement may
result in substantial dilution to the interests of other holders of our common
stock. However, we have the right at any time for any reason to: (1) reduce the
33
daily purchase amount, (2) suspend purchases of the common stock by Fusion
Capital and (3) terminate the common stock purchase agreement.
NO SHORT-SELLING OR HEDGING BY FUSION CAPITAL
Fusion Capital has agreed that neither it nor any of its affiliates
shall engage in any direct or indirect short-selling or hedging of our common
stock during any time prior to the termination of the common stock purchase
agreement.
EVENTS OF DEFAULT
Generally, Fusion Capital may terminate the common stock purchase
agreement without any liability or payment to the Company upon the occurrence of
any of the following events of default:
o if for any reason the shares registered pursuant to the terms
of the common stock purchase agreement cannot be sold for a
period of ten consecutive trading days or for more than an
aggregate of 30 trading days in any 365-day period;
o suspension by our principal market of our common stock from
trading for a period of ten consecutive trading days or for
more than an aggregate of 30 trading days in any 365-day
period;
o our failure to satisfy any listing criteria of our principal
market for a period of ten consecutive trading days or for
more than an aggregate of 30 trading days in any 365-day
period;
o the transfer agent's failure for 5 trading days to issue to
Fusion Capital shares of our common stock which Fusion Capital
is entitled to under the common stock purchase agreement;
o any material breach of the representations or warranties or
covenants contained in the common stock purchase agreement or
any related agreements which has or which could have a
material adverse affect on us subject to a cure period of 10
trading days;
o a default by us of any payment obligation in excess of $1.0
million; or
o any participation or threatened participation in insolvency or
bankruptcy proceedings by or against us.
COMMITMENT SHARES ISSUED TO FUSION CAPITAL
Under the terms of the common stock purchase agreement Fusion Capital
has received 640,000 shares of our common stock as a commitment fee. Unless an
event of default occurs, Fusion Capital must maintain ownership of at least
640,000 shares for 40 months from the date of the common stock purchase
agreement or until the date the common stock purchase agreement is terminated.
NO VARIABLE PRICED FINANCINGS
Until the termination of the common stock purchase agreement, we have
agreed not to issue, or enter into any agreement with respect to the issuance
of, any variable priced equity or variable priced equity-like securities unless
we have obtained Fusion Capital's prior written consent.
34
PRINCIPAL SHAREHOLDERS
The following table presents certain information regarding the
beneficial ownership of all shares of common stock at June 7, 2002 for each
executive officer and director of our company and for each person known to us
who owns beneficially more than 5% of the outstanding shares of our common
stock. The percentage ownership shown in such table is based upon the 43,937,907
common shares issued and outstanding at June 7, 2002 and ownership by these
persons of options or warrants exercisable within 60 days of such date. Also
included is beneficial ownership on a fully diluted basis showing all
authorized, but unissued, shares of our common stock at June 7, 2002 as issued
and outstanding. Unless otherwise indicated, each person has sole voting and
investment power over such shares.
COMMON STOCK
BENEFICIALLY OWNED
------------------------------------
NAME AND ADDRESS NUMBER PERCENT
- -------------------------------- ----------------- -----------------
Daniel R. Dwight 3,215,818(1) 7.1%
464 Common Street
Suite 301
Belmont, MA 02478
Richard A. Papworth 822,114(2) 1.9%
464 Common Street
Suite 301
Belmont, MA 02478
Richard F. Tusing 1,701,218(3) 3.8%
464 Common Street
Suite 301
Belmont, MA 02478
Jeffrey D. Wilson 310,000(4) *
464 Common Street
Suite 301
Belmont, MA 02478
Erik Black 272,983(5) *
464 Common Street
Suite 301
Belmont, MA 02478
Charles D. Strang 100,000(6) *
464 Common Street
Suite 301
Belmont, MA 02478
James P. McDermott 294,118 *
464 Common Street
Suite 301
Belmont, MA 02478
All Officers and Directors of TSET 6,716,251(7) 14.4%
- ---------------
* Less than 1%.
(1) Includes options to purchase 1,321,700 shares of common stock that can be acquired within sixty days of June 7, 2002
(2) Includes options to purchase 448,475 shares of common stock that can be acquired within sixty days of June 7, 2002.
(3) Includes options to purchase 457,100 shares of common stock that can be acquired within sixty days of June 7, 2002.
(4) Includes options to purchase 310,000 shares of common stock that can be acquired within sixty days of June 7, 2002.
(5) Includes options to purchase 50,000 shares of common stock that can be acquired within sixty days of June 7, 2002.
(6) Includes options to purchase 100,000 shares of common stock that can be acquired within sixty days of June 7, 2002.
(7) Includes options to purchase 2,687,275 shares of common stock that can be acquired within sixty days of June 7, 2002.
We are unaware of any arrangement or understanding that may, at a subsequent date, result in a change of control of
our company.
35
SELLING STOCKHOLDERS
SELLING STOCKHOLDER
The following table presents information regarding the selling
stockholders. Fusion Capital has not held a position or office, or had any other
material relationship, with our Company. Mr. James P. McDermott, a director of
our Company, is currently a Managing Director of Eagle Rock Advisors, LLC, the
Manager for The Eagle Rock Group, LLC.
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
SHARES SHARES SHARES
BENEFICIALLY BENEFICIALLY BENEFICIALLY
SELLING OWNED BEFORE OWNED BEFORE SHARES TO BE SOLD OWNED AFTER
STOCKHOLDER OFFERING OFFERING(1) IN THE OFFERING OFFERING(2)
--------------------------- ---------------- ---------------- ----------------- ----------------
Fusion Capital Fund II, LLC(3) 5,940,000(4) 11.9%(4) 5,000,000 0.0%
The Eagle Rock Group, LLC 1,400,000(5) 3.1% 1,400,000 0.0%
- -----------------------------------------
(1) Percentage of outstanding shares is based on 43,937,907 shares of common stock outstanding as of June 7, 2002, which
includes all shares of common stock beneficially owned by the selling shareholders before this offering.
(2) Percentage of outstanding shares is based on 43,937,907 shares of common stock outstanding as of June 7, 2002,
together with remaining 5,940,000 shares of common stock that may be purchased by Fusion Capital from TSET under the
common stock purchase agreement. The shares to be issued to Fusion Capital under the common stock purchase agreement
are treated as outstanding for the purpose of computing Fusion Capital's percentage ownership.
(3) Steven G. Martin and Joshua B. Scheinfeld, the principals of Fusion Capital, are deemed to be the beneficial owners of
all of the shares owned by Fusion Capital. Messrs. Martin and Scheinfeld have shared voting and dispositive power of
the shares being offered under this Prospectus.
(4) Includes 5,940,000 shares which Fusion Capital may acquire in the future under the common stock purchase agreement.
Fusion Capital may not purchase shares of our common stock under the common stock purchase agreement if Fusion
Capital, together with its affiliates, would beneficially own more than 9.9% of our common stock outstanding at the
time of the purchase by Fusion Capital. However, even though Fusion Capital may not receive additional shares of our
common stock in the event that the 9.9% limitation is ever reached, Fusion Capital is still obligated to pay to us
$12,500 on each trading day, unless the common stock purchase agreement is suspended, an event of default occurs or
the agreement is terminated. Under these circumstances, Fusion Capital would have the right to acquire additional
shares in the future should its ownership subsequently become less than the 9.9%.
(5) Includes 1,400,000 shares which The Eagle Rock Group, LLC may acquire pursuant to an outstanding warrant.
Fusion Capital may acquire additional shares under the common stock purchase agreement.
36
PLAN OF DISTRIBUTION
The common stock offered by this prospectus is being offered by selling
stockholders. The common stock may be sold or distributed from time to time by
the selling stockholders directly to one or more purchasers or through brokers,
dealers, or underwriters who may act solely as agents, at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices, or at fixed prices, which may be changed. The sale
of the common stock offered by this prospectus may be effected in one or more of
the following methods:
o o ordinary brokers' transactions;
o transactions involving cross or block trades or otherwise on the
Over-the-Counter Bulletin Board;
o "at the market" into an existing market for the common stock;
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected
through agents;
o in privately negotiated transactions; or
o any combination of the foregoing.
In order to comply with the securities laws of certain states, if
applicable, the shares may be sold only through registered or licensed brokers
or dealers. In addition, in certain states, the shares may not be sold unless
they have been registered or qualified for sale in the state or an exemption
from the registration or qualification requirement is available and complied
with.
Brokers, dealers, underwriters, or agents participating in the
distribution of the shares as agents may receive compensation in the form of
commissions, discounts, or concessions from the selling stockholders and/or
purchasers of the common stock for whom the broker-dealers may act as agent. The
compensation paid to a particular broker-dealer may be less than or in excess of
customary commissions.
Fusion Capital, a selling stockholder, is an "underwriter" within the
meaning of the Securities Act of 1933, as amended.
Neither we nor the selling stockholders can presently estimate the
amount of compensation that any agent will receive. We know of no existing
arrangements between the selling stockholders, any other stockholders, broker,
dealer, underwriter, or agent relating to the sale or distribution of the
shares. At the time a particular offer of shares is made, a prospectus
supplement, if required, will be distributed that will set forth the names of
any agents, underwriters, or dealers and any compensation from the selling
stockholders and any other required information.
We will pay all of the expenses incident to the registration, offering,
and sale of the shares to the public other than commissions or discounts of
underwriters, broker-dealers, or agents. We have also agreed to indemnify Fusion
Capital against specified liabilities, including liabilities under the
Securities Act of 1933, as amended.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to our directors, officers, and
controlling persons, we have been advised that in the opinion of the Securities
and Exchange Commission this indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is therefore,
unenforceable.
Fusion Capital and its affiliates have agreed not to engage in any
direct or indirect short selling or hedging of our common stock during the term
of the common stock purchase agreement.
We have advised the selling stockholders that while they are engaged in
a distribution of the shares included in this prospectus they are required to
comply with Regulation M promulgated under the Securities Exchange Act of 1934,
as amended. With certain exceptions, Regulation M precludes the selling
37
stockholders, any affiliated purchasers, and any broker-dealer or other person
who participates in the distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security. All of
the foregoing may affect the marketability of the shares offered hereby this
prospectus.
This offering will terminate on the date that all shares offered by
this prospectus have been sold by the selling stockholders.
38
SHARES ELIGIBLE FOR RESALE
Sales of substantial amounts of our common stock in the public market
following this offering could negatively affect the market price of our common
stock. Such sales could also impair our future ability to raise capital through
the sale of our equity securities.
Upon the completion of the offering of common stock by this prospectus,
we will have outstanding 43,937,907 shares of our common stock. Of these shares,
approximately:
o 32,181,203 shares will be freely tradable by persons, other
than "affiliates", without restriction under the Securities
Act of 1933, as amended; and
o 11,756,704 shares will be "restricted" securities, within the
meaning of Rule 144 under the Securities Act of 1933, as
amended, and may not be sold in the absence of registration
under the Securities Act of 1933, as amended, unless an
exemption from registration is available, including the
exemption provided by Rule 144. As of June 7, 2002, 978,973
shares are held by affiliates of our Company, and may only be
sold pursuant to Rule 144.
In general, under Rule 144, a person or persons whose shares are
aggregated, including any affiliate of our Company who has beneficially owned
restricted securities for at least one year, would be entitled to sell within
any three-month period, a number of shares that does not exceed 1% of the number
of common stock then outstanding.
Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about our
Company. Under Rule 144(k), a person who is not considered to have been an
affiliate of our Company at any time during the 90 days preceding a sale, and
who has beneficially owned restricted securities for at least two years,
including the holding period of any prior owner except an affiliate of our
Company, may sell these shares without following the terms of Rule 144.
39
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 500,000,000 shares of common
stock, par value $0.001 per share, and 50,000,000 shares of preferred stock, no
par value. As of June 7, 2002, 43,937,907 shares of common stock were issued and
outstanding; no shares of our preferred stock are issued and outstanding. In
this offering, we may issue up to an additional 5,000,000 shares of common
stock, all of such common stock to be issued in connection with the common stock
purchase agreement. The rights and preferences of the preferred stock will be
determined upon issuance by our Board of Directors. The following description is
a summary of our capital stock and contains the material terms thereof.
Additional information can be found in our Articles of Incorporation and Bylaws,
which were filed as exhibits to our Registration Statement on Form S-1 with the
Securities and Exchange Commission.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders, including the election
of directors. Accordingly, holders of a majority of our common stock entitled to
vote in any election of directors may elect all of the directors standing for
election should they choose to do so. Neither our Articles of Incorporation nor
our Bylaws provide for cumulative voting for the election of directors. Holders
of our common stock are entitled to receive their pro rata share of any
dividends declared from time to time by the Board of Directors out of funds
legally available therefor. Holders of our common stock have no preemptive,
subscription, conversion, sinking fund, or redemption rights. All outstanding
shares of our common stock are fully paid and non-assessable. In the event of
liquidation, dissolution, or winding up of TSET, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock (if any) then
outstanding.
PREFERRED STOCK
Our Articles of Incorporation authorizes 50,000,000 shares of preferred
stock, no par value. No shares of preferred stock are issued and outstanding as
of the date of this prospectus. The Board of Directors is authorized, subject to
any limitations prescribed by the Nevada Revised Statutes, or the rules of any
quotation system or national securities exchange on which our stock may be
quoted or listed, to provide for the issuance of shares of preferred stock in
one or more series; to establish from time to time the number of shares to be
included in each such series; to fix the rights, powers, preferences, and
privileges of the shares of such series, without further vote or action by the
stockholders. Depending upon the terms of the preferred stock established by the
Board of Directors, any or all series of preferred stock could have preference
over the common stock with respect to dividends and other distributions and upon
liquidation of TSET or could have voting or conversion rights that could
adversely affect the holders of the outstanding common stock. As of the date of
this prospectus, the voting and other rights associated with the preferred stock
have yet to be determined by the Board of Directors. There are no present plans
by the Board of Directors to issue preferred shares or address the rights to be
assigned thereto.
OPTIONS
In April 2001, we entered into agreements with employees, consultants
and directors for the grant of stock options to purchase shares of our common
stock. All stock option grants are exercisable at the fair market value of the
shares on the date of grant, except for those options granted to the
consultants. The exercise price in the consulting agreements is fixed and in
excess of the fair market value on the date of grants. On April 10, 2001,
Messrs. Jeffrey D. Wilson and Richard A. Papworth were granted options to
acquire, collectively, 748,475 shares of common stock in consideration for their
relinquishment of the anti-dilution clauses in their employment agreements. We
have determined that the options to purchase 350,000 shares of common stock
granted to Mr. Wilson on April 10, 2001 are void as of that date, and these
options are treated as if they were never granted. On April 10, 2001, members of
our management team and Board of Directors were granted stock options totaling
450,000 shares. On May 4, 2001, two members of the Board of Directors were
granted stock options for 250,000 shares of common stock. On February 12, 2002,
eight employees of TSET were granted stock options for 4,580,000 shares of
common stock. On November 15, 2001, Daniel R. Dwight was granted stock options
for 1,000,000 shares of common stock as a signing bonus in connection with Mr.
Dwight's Employment Agreement.
As of June 7, 2002, the following options had been granted in the
amounts and to the individuals shown below; as of the date hereof, none of such
options has been exercised:
40
- -------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
NAME OPTIONS STRIKE PRICE DATE OF GRANT EXPIRATION
- -------------------------------------------------------------------------------------------------------------------------------
Jeffrey D. Wilson 50,000 $0.885 04/09/01 04/09/06
200,000(1) $0.710 05/03/01 05/03/11
50,000(2) $0.360 10/10/01 10/10/04
10,000 $0.210 03/31/02 03/31/05
Richard A. Papworth 50,000 $0.885 04/09/01 04/09/06
398,475 $0.885 04/09/01 04/09/11
100,000 $0.680 02/12/02 02/12/12
200,000 $0.250 02/12/02 02/12/12
Richard F. Tusing 50,000 $0.885 04/09/01 04/09/06
252,500(3) $0.960 05/07/01 05/07/04
154,600(3) $0.960 06/07/02 06/07/05
600,000 $0.680 02/12/02 02/12/12
350,000 $0.250 02/12/02 02/12/12
Erik W. Black 50,000 $0.885 04/09/01 04/09/06
Charles H. Wellington, Jr. 50,000 $0.885 04/09/01 04/09/06
J. Alexander Chriss 50,000 $0.885 04/09/01 04/09/06
162,400(4) $1.120 04/30/01 04/30/04
96,400(4) $1.120 12/31/01 12/31/04
350,000 $0.680 02/12/02 02/12/12
300,000 $0.250 02/12/02 02/12/12
Igor Krichtafovitch 50,000 $0.885 04/09/01 04/09/06
600,000 $0.680 02/12/02 02/12/12
400,000 $0.250 02/12/02 02/12/12
Charles D. Strang 50,000 $0.885 04/09/01 04/09/06
50,000(5) $0.710 05/03/01 05/03/11
Daniel R. Dwight 50,000 $0.885 04/09/01 04/09/06
245,800(6) $0.960 05/07/01 05/07/04
25,900(6) $0.960 11/15/01 11/15/04
1,000,000 $0.680 02/12/02 02/12/12
600,000 $0.250 12/12/02 02/12/12
500,000(7) $0.420 11/15/01 11/15/11
250,000(7) $0.560 11/15/01 11/15/11
250,000(7) $0.660 11/15/01 11/15/11
Vladimir Gorobets 40,000 $0.250 02/12/02 02/12/12
41
- -------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
NAME OPTIONS STRIKE PRICE DATE OF GRANT EXPIRATION
- -------------------------------------------------------------------------------------------------------------------------------
Bruce Long 20,000 $0.250 02/12/02 02/12/12
Jacob Oharah 20,000 $0.250 02/12/02 02/12/12
- ---------------------------------------
(1) Mr. Wilson was granted options to purchase 100,000 shares of common stock annually for his service as Chairman of
TSET's Board of Directors. Options shown reflect such options for such service for years 1999 and 2000, respectively.
(2) Pursuant to an agreement dated October 10, 2001 between TSET and Mr. Wilson, Mr. Wilson was granted an option to
purchase 50,000 shares of common stock in consideration of Mr. Wilson's service in year 2001, prior to his
resignation, as Chairman of TSET's Board of Directors.
(3) Pursuant to consulting agreements dated as of August 11, 2000 (individually) and January 1, 2001 (as Dwight Tusing &
Associates), as amended April 12, 2001.
(4) Pursuant to a consulting agreement dated as of March 18, 2001; option grant effective as of April 30, 2001.
(5) Mr. Strang is entitled to receive 50,000 restricted shares of common stock annually for his service as a member of
TSET's Board of Directors.
(6) Pursuant to consulting agreements dated as of August 11, 2000 (individually) and January 1, 2001 (as Dwight Tusing &
Associates), as amended April 12, 2001.
(7) Pursuant to an employment agreement dated April 1, 2002 and a corresponding stock option agreement dated April 1,
2002.
WARRANTS
On August 7, 2001, we entered into a Warrant Agreement with The Eagle
Rock Group, LLC, pursuant to which The Eagle Rock Group was granted a ten-year
warrant to acquire 1,400,000 shares of our common stock at an exercise price of
$0.68 per share (the fair market value on the date of grant). The shares
underlying the warrant have piggyback and demand registration rights, as well as
subscription rights in the event that we issue any rights to all of our
stockholders to subscribe for shares of our common stock. In addition, the
warrant contains redemption rights in the event that we enter into a transaction
that results in a change of control of our company. We are obligated to register
all of the shares underlying The Eagle Rock Group's warrant in a shelf
registration to be effected within a specified period after we file our
quarterly report on Form 10-Q with the Securities and Exchange Commission for
the period ending December 31, 2001.
Effective March 11, 2002, we entered into an agreement with The Eagle
Rock Group extending our relationship with The Eagle Rock Group until March 1,
2003. Pursuant to the agreement, we agreed to convert the then-currently owed
amounts to The Eagle Rock Group of $120,000 into a promissory note due and
payable on March 1, 2003 and agreed to grant to The Eagle Rock Group a ten-year
warrant for the right to purchase 2,000,000 shares of our common stock. Five
hundred thousand (500,000) warrant shares will fully vest on March 1, 2003. The
remainder of the shares may be earned, contingent upon the occurrence of various
events, including a successful capital raise, securing contracts with the U.S.
military, securing contracts with consumer-oriented distribution organizations,
and the adoption of a branding/marketing campaign principally developed by The
Eagle Rock Group. The exercise price of these warrant shares will be equal to
our common stock's closing price as of the day an initial letter of intent or
term sheet related to such transaction is executed.
LIMITATION OF LIABILITY; INDEMNIFICATION
As permitted by the Nevada Revised Statutes, our Bylaws provide for the
indemnification of our directors, officers, and employees or of any corporation
in which any such person serves as a director, officer, or employee at our
request, to the fullest extent allowed by the Nevada Revised Statutes, against
expenses (including, without limitation, attorney's fees, judgments, awards,
fines, penalties, and amounts paid in satisfaction of judgment or in settlement
of any action, suit, or proceeding) incurred by any such director, officer, or
employee. The Nevada Revised Statutes currently provides that such liability may
be so limited, except for: (a) acts or omissions which involve intentional
misconduct, fraud, or a knowing violation of law; or (b) the payment of
distributions in violation of Nevada Revised Statutes 78.300. As a result of
this provision, our company and our stockholders may be unable to obtain
monetary damages from such persons for breach of their duty of care. Although
stockholders may continue to seek injunctive and other equitable relief for an
alleged breach of fiduciary duty by such persons, stockholders may have no
42
effective remedy against the challenged conduct if equitable remedies are
unavailable.
We provide director and officer liability insurance and pays all
premiums and other costs associated with maintaining such insurance coverage. We
have also entered into indemnification agreements with each director and
officer.
REGISTRATION RIGHTS
On July 7, 2001, we entered into a Warrant Agreement with The Eagle
Rock Group, LLC, pursuant to which The Eagle Rock Group was granted a ten-year
warrant to acquire 1,400,000 shares of our common stock. The shares underlying
the warrant have piggyback and demand registration rights, as well as
subscription rights in the event that we issue any rights to all of our
stockholders to subscribe for shares of our common stock. We will pay all costs
associated with the exercise of the registration rights of The Eagle Rock Group.
We are obligated to register all of the shares underlying The Eagle Rock Group's
warrant to be effected within a specified period after we file our quarterly
report on Form 10-Q with the Securities and Exchange Commission for the period
ending December 31, 2001.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Merit Transfer
Company, 68 South Main Street, Suite 708, Salt Lake City, UT 84101, Telephone
(801) 531-7558.
EXPERTS
The consolidated financial statements of TSET and its subsidiaries as
of June 30, 2001 and 2000 have been included in the registration statement in
reliance upon the report of Grant Thornton LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of TSET and its subsidiaries as
of June 30, 1999 have been included in the registration statement in reliance
upon the report of Randy Simpson CPA, P.C., independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
Kirkpatrick & Lockhart LLP, Miami, Florida, has passed upon the
validity of the issuance of the shares of common stock offered under this
prospectus.
43
AVAILABLE INFORMATION
For further information with respect to us and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto. Statements herein concerning the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
such contract or other statement filed with the Securities and Exchange
Commission or included as an exhibit, or otherwise, each such statement, being
qualified by and subject to such reference in all respects.
We are a reporting company and have distributed to our stockholders
annual reports containing audited financial statements. Our annual report on
Form 10-K for the fiscal year ended June 30, 2001 has been filed with the
Securities and Exchange Commission.
Reports, registration statements, proxy and information statements, and
other information filed by us with the Securities and Exchange Commission can be
inspected and copied at the public reference room maintained by the Securities
and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies of these materials may be obtained at prescribed
rates from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
Securities and Exchange Commission maintains a site on the World Wide Web
(http://www.sec.gov) that contains reports, registration statements, proxy and
information statements and other information. You may obtain information on the
Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330.
44
INDEX TO FINANCIAL STATEMENTS
Page
--------
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AT MARCH 31, 2002 (UNAUDITED)
Consolidated Balance Sheets as of March 31, 2002 (Unaudited) and June 30, 2001......................... F-2
Consolidated Statements of Operations for the three months and nine months ended March 31, 2002 and
2001 (Unaudited)................................................................................... F-3
Consolidated Statements of Cash Flows for the nine months ended March 31, 2002 and 2001 (Unaudited).... F-4
Consolidated Statement of Changes of Shareholders' Equity for the nine months ended March 31, 2002
(Unaudited)........................................................................................ F-5
Notes to Consolidated Financial Statements............................................................. F-6
CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2001
Report of Independent Certified Public Accountants..................................................... F-12
Report of Randy Simpson, C.P.A., P.C................................................................... F-13
Consolidated Balance Sheets as of June 30, 2001 and 2000............................................... F-14
Consolidated Statements of Operations for the years ended June 30, 2001, 2000 and 1999................. F-15
Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000 and 1999................. F-16
Consolidated Statement of Changes of Shareholders' Equity for the years ended June 30, 2001, 2000 and
1999............................................................................................... F-17
Notes to Consolidated Financial Statements............................................................. F-19
F-1
TSET, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30,
2002 2001
(Unaudited)
----------------- ---------------
ASSETS
CURRENT ASSETS
Cash $ 9,721 $ 32,619
Prepaids and other current assets 178,829 37,679
----------------- ---------------
TOTAL CURRENT ASSETS 188,550 70,298
----------------- ---------------
PROPERTY AND EQUIPMENT 62,723 62,723
Less Accumulated Depreciation (29,514) (18,016)
----------------- ---------------
NET PROPERTY AND EQUIPMENT 33,209 44,707
------------------ ---------------
OTHER ASSETS
Intangibles 2,280,047 2,431,524
Deferred financing fees 556,152 520,800
------------------ ---------------
TOTAL OTHER ASSETS 2,836,199 2,952,324
------------------ ---------------
TOTAL ASSETS $ 3,057,958 $ 3,067,329
================== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,275,817 $ 323,045
Accrued expenses 877,642 1,284,268
Notes payable, current portion 343,900 313,900
------------------- ---------------
TOTAL CURRENT LIABILITIES 2,497,359 1,921,213
------------------- ---------------
LONG TERM LIABILITIES
Notes payable 250,000
-------------------
TOTAL LONG TERM LIABILITIES 250,000
-------------------
------------------- ---------------
Net lilabilities of discontinued operations 747,550 667,550
------------------- ---------------
TOTAL LIABILITIES ------------------ ---------------
3,494,909 2,588,763
------------------ ---------------
REDEEMABLE WARRANTS 686,000 -
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock authorized 500,000,000 39,386 34,001
shares of $.001 par value
Capital in excess of par value 13,749,933 12,418,350
Retained earnings (Accumulated deficit) (14,912,271) (11,973,785)
------------------ ---------------
TOTAL SHAREHOLDERS' EQUITY(DEFICIT) (1,122,952) 478,566
------------------ ---------------
TOTAL LIBILITIES AND SHAREHOLDERS' EQUITY $ 3,057,958 $ 3,067,329
================== ===============
The accompanying notes are an integral part of this financial statement.
F-2
TSET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------------------------- ----------------------------------
2002 2001 2002 2001
-------------- ------------------- ----------------- -------------
Sales $ - $ 5,000 $ 65,070 $ 5,000
Cost of Sales - - 50,070 0
-------------- ------------------- ----------------- -------------
Gross Margin - 5,000 15,000 5,000
-------------- ------------------- ----------------- -------------
Selling General and Administrative expenses
Compensation and benefits 141,261 230,771 401,115 898,717
Research and Development 58,682 16,038 197,516 127,905
Professional services 225,078 187,088 1,750,454 474,170
Depreciation and amortizaton 71,674 80,544 215,021 220,738
Other selling general & administrative expenses 126,256 165,576 321,401 435,456
-------------- ------------------- ----------------- -------------
Total Selling, General and Administrative expenses 622,952 680,017 $ 2,885,508 2,156,986
-------------- ------------------- ----------------- -------------
Net Operating Income (Loss) (622,952) (675,017) (2,870,508) (2,151,986)
Other Income (expense) $0 1,050 1,537 5,591
Interest Expense (34,349) - (69,513) -
Minority Interests - -
-------------- ------------------- ----------------- -------------
Net Income (Loss) Before Taxes (657,251) (673,967) (2,938,484) (2,146,395)
Provision for Taxes - - - -
-------------- ------------------- ----------------- -------------
Net Income (Loss) from continuing operations (657,251) (673,967) (2,938,484) (2,146,395)
Income (Loss) from discontinued operations, net
of income tax of $0 (2,510,000) (2,510,000)
-------------- ------------------- ----------------- -------------
Net Income (Loss) $ (657,251) $ (3,564,576) $ (2,938,484) (5,827,499)
============== =================== ================= =============
Basic Earnings (Loss) Per Share
Income (loss) from continung operations (0.02) (0.02) (0.08) (0.07)
Loss from discontinued operations - (0.09) - (0.12)
-------------- ------------------- ----------------- -------------
Net Income (loss) $ (0.02) $ (0.11) $ (0.08) $ (0.19)
============== =================== ================= =============
Diluted Earnings (Loss) Per Share
Income (loss) from continuing operaitons (0.02) (0.02) (0.08) (0.07)
Loss from discontinued operations - (0.09) - (0.12)
-------------- ------------------- ----------------- -------------
Net Income (Loss) $ (0.02) $ (0.11) $ (0.08) $ (0.19)
============== =================== ================= =============
The accompanying notes are an integral part of this financial statement.
F-3
TSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31,
-------------------------------------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES -------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS $ (2,938,484) $ (2,156,395)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(used in) provided by operations
Depreciation and amortization 215,021 220,738
Common stock issued for compensation/services 814,532 83,954
CHANGE IN
Accounts receivable - 6,000
Prepaid expenses and other asets (176,502) (489)
Accounts payable 952,772 193,732
Accrued expenses and other liabilities (56,626) 189,322
-------------------------------------------
NET CASH (USED IN) PROVIDED BY CONTINUING OPERATION (1,189,286) (1,453,088)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment - (77,614)
Investment in patent protection 15,795 -
Cash used in discontinued operations (84,014) (177,594)
-------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (64,219) (255,208)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 1,234,607 1,719,740
-------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES $ 1,234,607 1,719,740
-------------------------------------------
NET (DECREASE) INCREASE IN CASH (22,898) 11,444
CASH
BEGINNING OF PERIOD 32,619 102,949
-------------------------------------------
END OF PERIOD $ 9,721 $ 114,493
===========================================
Supplemental schedule of non-cash investing and financing activities:
Debt satisfied with stock $ 100,000 $ 419,143
Note payable issued in satisfaction of accrued liability $ 350,000 -
The accompanying notes are an integral part of this financial statement.
F-4
TSET, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK
----------------------------- RETAINED
CAPITAL IN EARNINGS TOTAL
EXCESS OF PAR (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT VALUE DEFICIT EQUITY (DEFICIT)
------------------------------------------------------------------------
BALANCE at June 30, 2001 34,000,978 $ 34,001 $ 12,418,350 $ (11,973,785) $ 478,566
Shares issued on July 6, 2001 for cash 238,806 239 70,761 80,000
Shares issued on July 20, 2001 as compensation 250 113 113
Shares issued on October 1, 2001 for consulting services 360,000 360 100,440 100,800
Shares issued on October 1, 2001 as compensation 2,250 2 1,446 1,448
Shares issued on October 1, 2001 for cash 1,000,000 1,000 446,982 447,982
Shares issued on November 30, 2001 for cash 100,000 100 23,400 23,500
Shares issued on December 10, 2001 for cash 50,000 50 10,950 11,000
Shares issued on December 12, 2001 for cash 100,000 100 20,900 21,000
Shares issued on December 13, 2001 for cash 75,000 75 16,050 16,125
Shares issied on December 14, 2001 for cash 500,000 500 107,000 107,500
Shares issued in January 2002 to Fusion Capital for cash 925,000 925 194,700 195,625
Shares issued in February 2002 to Fusion Capital for cash 350,000 350 69,150 69,500
Shares issued in March 2002 to Fusion Capital for cash 1,683,333 1,684 260,691 262,375
Net loss for the period ended March 31, 2002 (2,938,484) (2,938,484)
------------------------------------------------------------------------
Balance at March 31, 2002 (Unaudited) 39,385,617 $ 39,386 $ 13,749,933 $ (14,912,271) $ (1,122,951)
========================================================================
The accompanying notes are an integral part of this financial statement.
F-5
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACCOUNTING MATTERS
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments necessary to present fairly the
information set forth therein have been included. Operating results for the
three-month and nine-month periods ended March 31, 2002 are not necessarily
indicative of the results that may be experienced for the fiscal year ending
June 30, 2002.
These financial statements are those of the Company and its wholly-owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in the preparation of the consolidated financial statements. Aperion
Audio, Inc. is disclosed as discontinued operations in these financial
statements.
The accompanying financial statements should be read in conjunction with the
TSET, Inc. Form 10-K for the fiscal year ended June 30, 2001 filed on October
15, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS. On July 20, 2001, the FASB issued Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." These statements make
significant changes to the accounting for business combinations, goodwill, and
intangible assets.
SFAS No. 141 establishes new standards for accounting and reporting requirements
for business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited. This statement is effective for
business combinations initiated after June 30, 2001.
SFAS No. 142 establishes new standards for goodwill acquired in a business
combination, eliminates amortization of goodwill and instead sets forth methods
to periodically evaluate goodwill for impairment. Intangible assets with a
determinable useful life will continue to be amortized over that period. The
Company adopted this statement during the quarter ending September 30, 2002.
Goodwill and intangible assets acquired after June 30, 2001 will be subject
immediately to the non-amortization and amortization provisions of the
statement. The Company does not currently have any goodwill recorded on its
financial statements and it is expected that there will be no immediate impact
on the Company's financial statements as a result of the adoption of this
statement.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This statement addresses the
financial accounting and reporting for the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company believes the
adoption of SFAS 143 will have no significant impact on its financial
statements.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. The Company believes the adoption of SFAS 144 will have no
significant impact on its financial statements.
F-6
NOTE 2 -- INCOME TAXES
The composition of deferred tax assets and the related tax effects at March 31,
2002 and June 30, 2001 are as follows:
MARCH 31, 2002
(UNAUDITED) JUNE 30, 2001
--------------------- ----------------
Benefit from carryforward of net operating $2,202,150 $ 1,538,645
losses
Other temporary differences 245,121 228,121
Less:
Valuation allowance (2,447,271) (1,766,766)
-------------- ------------
Net deferred tax asset
$ - $ -
============== ============
The other temporary differences shown above relate primarily to accrued and
deferred compensation. The difference between the income tax benefit in the
accompanying statements of operations and the amount that would result if the
U.S. Federal statutory rate of 34% were applied to pre-tax loss is as follows:
MARCH 31, 2002
(UNAUDITED) JUNE 30, 2001
---------------------------------- ------------------------------
% OF % OF
AMOUNT PRE-TAX LOSS AMOUNT PRE-TAX LOSS
------------------ ------------------ ------------ ---------------
Benefit for income tax at federal statutory rate $ 999,086 34.0% $ 3,354,468 34.0%
Non-deductible expenses (318,580) (10.8)% (1,803,355) (18.3%)
Disposed subsidiary NOL - -% (578,370) (5.9%)
Increase in valuation allowance (680,506) (23.2)% (972,743) (9.8%)
------------------ ------------------ ------------ ---------------
$ - 0.0% $ - 0.0%
================== ================== ============ ===============
The non-deductible expenses shown above related primarily to the amortization of
intangible assets and to the accrual of stock options for compensation using
different valuation methods for financial and tax reporting purposes.
The Company has filed all of its federal and state income tax returns for all
years through June 30, 2001. The Company is current on all income tax filings.
At March 31, 2002, for federal income tax and alternative minimum tax reporting
purposes, the Company has approximately $6.5 million of unused net operating
losses available for carryforward to future years. The benefit from carryforward
of such net operating losses will expire in various years between 2011 and 2023
and could be subject to limitations if significant ownership changes occur in
the Company. Of the $6.5 million of unused net operating losses noted above,
approximately $178,000 relates to losses incurred by the Company's subsidiary,
Aperion Audio. In fiscal years prior to June 30, 2000, Aperion Audio did not
file its tax returns on a consolidated basis with the Company. Accordingly, the
$178,000 loss incurred by Aperion Audio is further subject to separate
limitations that restrict the ability of the Company to use such losses.
NOTE 3 - SEGMENTS OF BUSINESS
The Company operates principally in one segment of business: The Kronos segment
licenses, manufactures and distributes air movement and purification devices
utilizing the Kronos(TM) technology. All other segments have been disposed of or
discontinued. In the nine months ended March 31, 2002, the Company operated only
in the U.S.
NOTE 4 - EARNINGS PER SHARE
On March 11, 2002, Board approved a compensation committee recommendation for
the grant of stock options to employees totaling 4,639,600 shares. As of March
F-7
31, 2002, there were outstanding options to purchase 6,563,575 shares of the
Company's common stock. These options have been excluded from the earnings per
share calculation as their effect is anti-dilutive.
NOTE 5 - DISCONTINUED OPERATIONS
In early January 2001, management committed to a formal plan of action to sell
or otherwise dispose of Atomic Soccer. Agreement was reached with a buyer group,
that included current and former Atomic Soccer management, to sell them the
outstanding shares of common stock of Atomic Soccer for $1,000. The transaction
was effective on April 11, 2001. On September 14, 2001 the board approved a
formal plan of action to sell or otherwise dispose of Aperion Audio (formerly
EdgeAudio). The Company has accrued $150,000 for anticipated operating losses
during the phase-out period. The sale of TSET-owned shares of Aperion Audio
common stock was completed on June 7, 2002, pursuant to a Settlement Agreement
and Mutual Release. The Company sold the shares to Aperion Audio's management
group, which consists of 2 individuals. Pursuant to the sale, these 2
individuals will receive 500,000 share of our common stock in exchange for any
rights these individuals may have to earn-out provisions pursuant to their
original agreement with the Company. In addition, the Company will provide
$214,000 in working capital to Aperion Audio in monthly installments of $15,000
pursuant to the original agreement withe the Company. The sale of Aperion Audio
will result in a gain of approximately $600,000. As a result, both Atomic Soccer
and Aperion are included in the financial statements as discontinued operations.
The Company's consolidated financial statements for all periods have been
reclassified to report separately results of operations and operating cash flows
from continuing operations and the discontinued operations. The net revenues are
included in the financial statements under Net Income (Loss) from Discontinued
Operations. The assets and liabilities of Aperion at March 31, 2002 are included
in the balance sheet as Net Liabilities of Discontinued Operations. Net
liabilities of discontinued operations at March 31, 2002 and operating results
of discontinued operations for the nine-months ended March 31, are as follows:
NET LIABILITIES OF DISCONTINUED OPERATIONS
APERION AUDIO
-----------------
Current Assets $335,466
Net Property and Equipment 44,654
Current Liabilities (601,859)
Minority Interest (525,811)
--------------
Net Assets (Liabilities) $(747,550)
==============
OPERATING RESULTS OF DISCONTINUED OPERATIONS:
OPERATING RESULTS OF DISCONTINUED OPERATIONS:
---------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------
2002 2001
----------------- -------------------------------------------------------
APERION AUDIO ATOMIC APERION AUDIO TOTAL
------------------ ----------------- ------------------ ----------------
Sales $733,183 $ 714,464 $ 587,570 $1,302,034
Cost of sales (273,282) (512,282) (304,488) (816,770)
Depreciation and amortization (9,927) (215,398) (198,111) (413,509)
General and administrative (545,964) (369,058) (927,871) (1,296,929)
------------------ ----------------- ----------------- ----------------
Operating income (loss) (95,990) (382,274) (842,900) (1,225,174)
Other income 22,217 735 (537) 198
Interest expense (25,584) (69,232) (8,279) (77,511)
Provision for future operating losses 79,485 - - -
Minority interest 19,871 - 131,383 131,383
------------------ ----------------- ----------------- ----------------
Income (Loss) pre-tax 0 (450,771) (720,333) (1,171,104)
Income taxes (benefits) - - - -
------------------ ----------------- ----------------- ----------------
Loss from discontinued operations $0 $ (450,771) $(720,333) $ (1,171,104)
================== ================= ================= ================
F-8
NOTE 6 - NOTES PAYABLE
On October 15, 2001, the Company entered into an agreement with Jeffrey D.
Wilson pursuant to which the Company issued a promissory note for compensation
which was accrued but not paid to him during the time he served as an executive
officer of the Company. The amount of the note is for $350,000 and calls for
quarterly payments of principal and interest of $20,000 until the note is paid
in full. The interest is being accrued at the rate of 4.59%.
NOTE 7 - ISSUANCE OF WARRANTS
On July 9, 2001, the Company signed an agreement to utilize the strategic
planning and business plan execution services of The Eagle Rock Group, LLC. The
Eagle Rock Group will work with the Kronos Air Technologies team to fully
develop and capitalize the Kronos(TM) technology.
Pursuant to the agreement that the Company entered into with The Eagle Rock
Group, the Company issued to The Eagle Rock Group a ten-year warrant granting
them the right to purchase 1,400,000 shares of the Company's common stock at an
exercise price of $0.68 per share. The warrant was valued at $686,000 using the
Black-Scholes option valuation mode and was initially recorded as deferred
equity compensation to amortized into current period professional services
expense at a rate of $137,200 per month over 5 months. Amortization for the
three-months and nine-months ended March 31, 2002 was $0 and $686,000,
respectively. The shares underlying the warrant have piggy-back and demand
registration rights, as well as subscription rights in the event that the
Company issues any rights to all of its stockholders to subscribe for shares of
the Company's common stock. In addition, the warrant contains redemption rights
in the event that the Company enters into a transaction that results in a change
of control of the Company.
NOTE 8 - CONSULTING AGREEMENT WITH THE EAGLE ROCK GROUP
On March 1, 2002, the company entered into a 12 month consulting agreement with
The Eagle Rock Group. Pursuant to the agreement, the company will grant The
Eagle Rock Group a 10 year warrant for up to 2,000,000 shares. 500,000 shares
are immediately earned and will fully vest on March 1, 2003. The remainder of
the shares may be earned contingent upon the occurrence of various events
including a successful capital raise equal to or greater than $1.5 million,
securing contracts with the U.S. military, securing contracts with
consumer-oriented distribution organizations, and the adoption of a
branding/marketing campaign which has been principally developed by The Eagle
Rock Group.
NOTE 9 - SUBSEQUENT EVENTS
On April 1, 2002, the company entered into an Employment agreement with Daniel
R. Dwight, our President and Chief Executive Officer, effective as of November
15, 2001. The initial term of Mr. Dwight's Employment Agreement is for 2 years
and will automatically renew for successive 1 year terms unless TSET or Mr.
Dwight provide the other party with written notice within 3 months of the end of
the initial term or any subsequent renewal term. Mr. Dwight's Employment
Agreement provides for base cash compensation of $180,000 per year. Mr. Dwight
is eligible for annual incentive bonus compensation in an amount equal to Mr.
Dwight's annual salary based on the achievement of certain bonus objectives. In
addition, TSET granted Mr. Dwight 1,000,000 immediately vested and exercisable,
ten-year stock options at various exercise prices. Mr. Dwight will be entitled
to fully participate in any and all 401(k), stock option, stock bonus, savings,
profit-sharing, insurance, and other similar plans and benefits of employment.
Mr. Dwight is entitled to be indemnified, defended, and held harmless by us from
and against any and all costs, losses, damages, penalties, fines, or expenses
(including, without limitation, reasonable attorneys' fees, court costs, and
associated expenses) suffered, imposed upon, or incurred by him in any manner in
connection with his service as our Chief Executive Officer.
In May 2002, the Company completed a private placement of its common stock
pursuant to which it sold 2,551,412 shares of its common stock at $0.17 per
share to eight accredited investors for consideration of $435,100 in cash and
841,459 shares of its common stock at $0.17 per share to five members of the
Company's management team for consideration of commitments to convert $143,048
of debt.
On June 7, 2002, the company completed the sale of its ownership in Aperion
Audio, Inc. (f/k/a EdgeAudio, Inc.) pursuant to a Settlement Agreement and
Mutual Release. This disposition completed a formal plan of action by the
company's board of directors, adopted September 14, 2001, to sell or otherwise
dispose of the company's ownership in Aperion Audio, Inc. The company previously
established an allowance for impairment in the value of its ownership of Aperion
Audio, Inc. and as a result the company will recognize a gain of approximately
$600,000 in connection with the current sale transaction.
NOTE 10 - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. The Company
has sustained losses from operations in recent years, and such losses have
F-9
continued through the current year nine months ended March 31, 2002. In
addition, the Company has used, rather than provided cash in its operations. The
Company is currently using its resources to raise capital necessary to complete
research and development work, and to provide for the working capital needs of
itself and its subsidiaries.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which in
turn is dependent upon the Company's ability to meet its financing requirements
on a continuing basis, to maintain present financing and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Management has taken the following steps with respect to its operating
and financial requirements, which it believes are sufficient to provide the
Company with the ability to continue in existence:
1. In May 2001, Kronos Air Technologies was awarded a
Small Business Innovation Research contract. This
contract is sponsored by the United States Navy and
is potentially worth up to $837,000 in product
development and testing support for Kronos Air
Technologies. The first phase of the contract is
worth up to $87,000 in funding for manufacturing and
testing a prototype device for air movement and
ventilation onboard naval vessels. In April 2002, the
U.S. Navy and Kronos mutually agreed to exercise the
option on the first phase of the U.S. Navy SBIR
contract. The option is to provide incremental
funding to Kronos to further test and evaluate
Kronos(TM)devices built during the initial SBIR
funding. Testing will include demonstrating the
ability of these U.S. Navy Kronos(TM) devices to
capture and destroy biological hazards and to
effectively manage electrical magnetic interference.
If awarded to Kronos Air Technologies, the second
phase of the contract would be worth up to $750,000
in additional funding. The Kronos(TM)devices
manufactured under this contract will be embedded in
an existing HVAC systems to move air more efficiently
than the current fan based technology. This contract
is an extension of the commercialization effort by
Kronos Air Technologies in the specialized military
marketplace. We are currently waiting for the
announcement of the award of the phase II contracts
by the Navy.
2. In December 2001, Kronos Air Technologies was awarded
an SBIR contract sponsored by the U.S. Army. This
contract is potentially worth up to $850,000 in
product development and testing support for Kronos
Air Technologies. Phase One of the contract is worth
up to $120,000 in funding to investigate and analyze
the feasibility of the Kronos(TM)technology to reduce
humidity in heating, ventilation and air conditioning
(HVAC) systems. Dehumidification is essential to
making HVAC systems more energy efficient. Phase Two
of the contract is worth up to $730,000 in additional
funding for product development and testing. In May
2002, the U.S. Army requested the company to submit a
detailed Phase Two proposal by June 10, 2002 for
review in the current year. We submitted the proposal
on June 7, 2002.
3. On June 19, 2001, we entered into a common stock
purchase agreement with Fusion Capital pursuant to
which Fusion Capital agreed to purchase on each
trading day during the term of the agreement, $12,500
of our common stock or an aggregate, under certain
conditions, of $10.0 million. The $10.0 million of
common stock is to be purchased over a 40 month
period, subject to a six-month extension or earlier
termination at our discretion. The purchase price of
the shares of common stock will be equal to the then
current market price of the common stock without any
fixed discount to the market price. The agreement is
dependent on the Company registering the associated
shares and on the ability to Fusion Capital to fund
the purchase of those shares. Assuming the Company's
share price remains at current levels, the 5 million
shares that the Company is currently registering
would allow the Company to raise approximately $1.5
to $2.0 million without registering additional
shares. We have already sold approximately 4,060,000
shares to Fusion Capital and raised $750,000.
F-10
4. On July 2, 2001, we signed an agreement to utilize
the strategic planning and business plan execution
services of The Eagle Rock Group, LLC. The Eagle Rock
Group will work with the Kronos Air Technologies team
to fully develop and capitalize on the Kronos(TM)
technology. We believe that The Eagle Rock Group can
assist us in unlocking the potential value of the
Kronos(TM)technology. The Eagle Rock Group's
multi-disciplined approach, which uses seasoned
business executives and leverages relationships and
networks, can accelerate the Kronos(TM)opportunity
versus the timing and development if we were to
continue on a go-it-alone strategy or if we were to
work and coordinate with the myriad of groups
necessary to duplicate The Eagle Rock Group team.
Specifically, we initially envision The Eagle Rock
Group working to augment and enhance our efforts in
the following areas (i) capital raising and
allocation, (ii) strategic partner introduction and
evaluation, (iii) distribution channel development,
(iv) product focus and brand development, (v) human
resource placement, and (vi) capital market
introduction and awareness. Pursuant to the agreement
that we entered into with The Eagle Rock Group, we
issued to The Eagle Rock Group a ten-year warrant
granting them the right to purchase 1,400,000 shares
of our common stock at an exercise price of $0.68 per
share. The shares underlying the warrant have
piggy-back and demand registration rights, as well as
subscription rights in the event that we issue any
rights to all of our stockholders to subscribe for
shares of our common stock. In addition, the warrant
contains redemption rights in the event that we enter
into a transaction that results in a change of
control of our company.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
LITIGATION. On June 6, 2002, Dutchess Advisors Ltd. initiated legal
proceedings in Middlesex County, Massachusetts, against TSET. The complaint
alleges, among other things, breach of contract, QUANTUM MERUIT, unjust
enrichment and conversion with respect to a letter agreement, dated June 19,
2001, between TSET and Dutchess Advisors Ltd., and seeks, among other things, a
judgment in the amount of $75,000, exclusive of pre-judgment interest, costs and
attorneys' costs. The Company believes it has meritorious defenses and intends
to vigorously defend. On February 2, 2001, we initiated, together with Kronos
Air Technologies, legal proceedings in Clackamas County, Oregon against W. Alan
Thompson, Ingrid T. Fuhriman, and robber L. Fuhriman II, each of whom were
formerly executive officers and members of the Board of Directors of Kronos Air
Technologies. This suit alleges, among other things, breach of fiduciary duties
and breach of contract by these individuals, and seeks, among other things, an
order form the court referring the dispute to arbitration in accordance with the
terms of these individuals' respective employment agreements, which were
terminated by us on January 30, 2001, and other appropriate equitable relief.
Arbitration has been ordered and the arbitrators selected. The Company ahs
agreed to arbitration proceedings in the state of Washington. The parties are in
the process of exchanging and complying with requests for discovery.
APERION AUDIO "EARN-OUT" PROVISION. Part of the consideration given by
the Company for Aperion Audio is related to an earn-out provision in which the
Company would award $3.75 million of additional common stock of the Company as
Aperion Audio achieves stipulated revenue milestones over a five year period
commencing on May 4, 2000. The earn out provides five cumulative gross revenue
milestones that range between $1,764,271 and $22,187,203. Upon achieving each
milestone, an additional $750,000 of TSET common stock will be issued. The share
conversion is to be based on an average of the closing price of the shares for
the five trading days immediately preceding the date that the revenue milestone
is achieved. Through June 7, 2002, EdgeAudio has not achieved any of these
milestones. As part of the settlement and sale of Aperion Audio, all parties
have agreed to relinquish all rights to this earn-out provision. Therefore,
there is no longer a contingency for it.
INCOME TAXES. The company has filed all of its federal and state income
tax returns through June 30, 2001 and is therefore, current in all of its income
tax filings. As with the tax returns of any other corporation, these returns
could be subject to review and potential examination by the respective taxing
authorities. Should any of these returns come under examination by federal or
state authorities, the Company's positions on certain income tax issues could be
challenged. The impact, if any, of the potential future examination cannot be
determined at this time. If the Company's positions are successfully challenged,
the results may have a material impact on the Company's financial position and
results of operations.
F-11
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
TSET, Inc.
We have audited the accompanying consolidated balance sheets of TSET, Inc. and
its subsidiaries as of June 30, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended June 30, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of TSET,
Inc. and its subsidiaries as of June 30, 2001 and 2000, and the consolidated
results of their operations and their consolidated cash flows for each of the
two years in the period ended June 30, 2001 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss from continuing operations of $3,572,558 during
the year ended June 30, 2001, and, as of that date, the Company's current
liabilities exceeded its current assets by $1,850,915. These factors, among
others, as discussed in Note 4 of Notes to Consolidated Financial Statements,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 4. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
Portland, Oregon
October 8, 2001
F-12
RANDY SIMPSON C.P.A., P.C.
11775 SOUTH NICKLAUS ROAD
SANDY, UTAH 84092
FAX & PHONE (801) 572 - 3009
Board of Directors and Stockholders
TSET, Inc.
(Formerly Technology Selection, Inc.)
Salt Lake City, Utah
Independent Auditor's Report
We have audited the balance sheet of TSET, Inc. (formerly Technology Selection,
Inc.) as of June 30, 1999 and the related statements of operations and
accumulated development stage costs, changes in stockholders' equity and cash
flows for the year then ended. Our responsibility is to express an opinion on
these financial statements based on our audit.
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, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of TSET, Inc.
(formerly Technology Selection, Inc.) as of June 30, 1999 and the results of its
operations and its cash flows for year then ended in conformity with generally
accepted accounting principles.
/s/ Randy Simpson C.P.A., P.C.
Randy Simpson C.P.A., P.C.
A Professional Corporation
March 17, 2000
Except for Note 3 which is date is October 8, 2001 Salt Lake City, Utah
F-13
TSET, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
-----------------------------------------------------
2001 2000
(RESTATED)
------------------ ------------------
ASSETS
CURRENT ASSETS
Cash $ 32,619 $ 102,949
Accounts receivable, net - 4,648
Prepaids 37,679 23,253
------------------ ------------------
TOTAL CURRENT ASSETS 70,298 130,850
------------------ ------------------
PROPERTY AND EQUIPMENT 62,723 25,216
Less: Accumulated Depreciation (18,016) (2,197)
------------------ ------------------
NET PROPERTY AND EQUIPMENT 44,707 23,019
------------------ ------------------
OTHER ASSETS
Intangibles 2,431,524 2,970,731
Net assets of discontinued operations - 4,502,888
Deferred financing fees 520,800 -
------------------ ------------------
TOTAL OTHER ASSETS 2,952,324 7,473,619
------------------ ------------------
TOTAL
ASSETS $ 3,067,329 $ 7,627,488
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 323,045 $ 22,213
Accrued expenses 1,284,268 301,400
Notes payable, current portion 313,900 65,183
------------------ ------------------
TOTAL CURRENT LIABILITIES 1,921,213 388,796
------------------ ------------------
------------------ ------------------
NET LIABILITIES OF DISCONTINUED OPERATIONS 667,550 -
------------------ ------------------
------------------ ------------------
TOTAL LIABILITIES 2,588,763 388,796
------------------ ------------------
SHAREHOLDERS' EQUITY
Common stock, authorized 500,000,000 34,001 29,652
shares of $.001 par value
Capital in excess of par value 12,418,350 9,316,743
Retained earnings (Accumulated deficit) (11,973,785) (2,107,703)
------------------ ------------------
TOTAL SHAREHOLDERS' EQUITY 478,566 7,238,692
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,067,329 $ 7,627,488
================== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-14
TSET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
----------------------------------------------
2001 2000 1999
(RESTATED) (RESTATED)
----------------------------------------------
Sales $ 95,000 $ - $ -
Cost of sales 62,500 - -
----------------------------------------------
Gross Profit 32,500 - -
----------------------------------------------
Selling, General and Administrative expenses
Compensation and benefits 1,201,048 413,414 43,150
Research and development 297,004 636,175 -
Professional services 735,296 151,989 -
Impairment of investment in CDI 272,945 - -
Depreciation and amortization 323,164 98,543 -
Other selling general & administrative expenses 561,682 88,371 8,796
----------------------------------------------
Total Selling, General and Administrative expenses 3,391,139 1,388,492 51,946
----------------------------------------------
Net Operating Income (Loss) (3,358,639) (1,388,492) (51,946)
Other Income/(expense) (207,793) 2,897 272
Interest Expense (6,126) - -
----------------------------------------------
Net Income (Loss) Before Taxes (3,572,558) (1,385,595) (51,674)
Provision for Taxes - - -
----------------------------------------------
Net Income (Loss) from continuing operations (3,572,558) (1,385,595) (51,674)
Income (Loss) from discontinued operations, net of (3,846,963) (579,588) -
income tax of $0
Loss on disposal of discontinued operations, net of
income tax of $0 (2,446,562) - -
----------------------------------------------
Net Income (Loss) $ (9,866,083) $ (1,965,183) $ (51,674)
==============================================
Basic Earnings (Loss) Per Share
Income (loss) from continuing operations (0.11) (0.06) -
Loss from discontinued operations (0.20) (0.02) -
----------------------------------------------
Net Income (loss) $ (0.31) $ (0.08) $ -
==============================================
Diluted Earnings (Loss) Per Share
Income (loss) from continuing operations (0.11) (0.06) -
Loss from discontinued operations (0.20) (0.02) -
----------------------------------------------
Net Income (loss) $ (0.31) $ (0.08) $ -
==============================================
Weighted average shares outstanding 31,481,874 25,263,333 23,997,730
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-15
TSET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
----------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES (RESTATED) (RESTATED)
----------------------------------
NET LOSS FROM CONTINUING OPERATIONS ($3,572,558)($1,385,595)($51,674)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATIONS
Depreciation and amortization 332,528 98,542 1,000
In-process technology - 633,229 -
Impairment of investment in CDI 272,945 50,000 -
Common stock issued for compensation/services 111,973 50,000 10,000
Cancellation of note payable (22,383)
CHANGE IN
Accounts receivable 4,648 (4,648) -
Prepaid expenses and other assets (14,426) (23,253) -
Accounts Payable 300,832 22,213 -
Accrued Expenses and other liabilities 982,868 271,250 30,150
----------------------------------
NET CASH (USED IN) PROVIDED BY CONTINUING (1,613,573) (288,262) (10,524)
OPERATIONS
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (37,507) (22,712) -
Investment in patent protection (79,697) - -
Cash used in discontinued operations (435,823) (726,225) -
----------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING (553,027) (748,937) -
ACTIVITIES
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 2,056,270 1,124,125 -
Proceeds from short-term borrowings 100,000 15,490 7,297
Deferred finance costs paid (60,000) - -
----------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 2,096,270 1,139,615 7,297
----------------------------------
NET (DECREASE) INCREASE IN CASH (70,330) 102,413 (3,227)
CASH
BEGINNING OF PERIOD 102,949 536 3,763
----------------------------------
END OF PERIOD $32,619 $102,949 $536
==================================
Supplemental schedule of non-cash investing and financing activities:
Supplemental disclosure of cash flow information:
Interest paid in cash $ - $ - $ -
Income taxes - - -
Non-cash investing and financing activities:
Deferred financing fees $ 460,800 $ - $ -
Debt satisfied with stock 516,163 - -
Issuance of notes payable 213,900 - -
Acquisition of subsidiaries with stock - 8,106,555 -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
F-16
TSET INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK
------------------------
RETAINED
CAPITAL IN EARNINGS TOTAL
EXCESS OF PAR (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT VALUE DEFICIT) EQUITY (DEFICIT)
-----------------------------------------------------------------------
BALANCE at June 30, 1998 24,001,730 $ 24,001 $ 41,718 $ (90,847) $ (25,128)
Shares certificate cancelled (4,000) (4) (4)
Net loss for the year ended June 30, 1999 (51,673) (51,673)
-----------------------------------------------------------------------
BALANCE at June 30, 1999 23,997,730 23,997 41,718 (142,520) (76,805)
Shares reissued from prior year cancellation 4,000 4 4
Shares issued on August 31, 1999 to acquire the
patents and technology of the utility meter 100,000 100 49,900 50,000
Shares issued on March 14, 2000 to acquire Atomic
Soccer USA, Ltd 1,000,000 1,000 1,805,250 1,806,250
Shares issued on March 14, 2000 37,555 38 (38) -
Shares issued on March 14, 2000 to acquire Kronos Air
Technologies, Inc. 2,250,000 2,250 3,344,625 3,346,875
Shares issued on May 9, 2000 to acquire EdgeAudio.com,
Inc. 1,298,701 1,299 2,548,701 2,550,000
Shares issued on May 9 to acquire Cancer Detectio
International Inc. 180,000 180 353,250 353,430
Shares issued on May 19, 2000 as compensation 14,815 15 49,985 50,000
Shares of restricted common stock issued on June 30,
2000 for cash 768,860 769 1,123,352 1,124,121
Net loss for the year ended June 30, 2000 (1,965,183) (1,965,183)
-----------------------------------------------------------------------
BALANCE at June 30, 2000 29,651,661 29,652 9,316,743 (2,107,703) 7,238,692
Purchase price adjustment on Cancer Detection
International, Inc. (20,000) (20) (39,230) (39,250)
F-17
COMMON STOCK
------------------------
RETAINED
CAPITAL IN EARNINGS TOTAL
EXCESS OF PAR (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT VALUE DEFICIT) EQUITY (DEFICIT)
-----------------------------------------------------------------------
Shares issued on July 20, 2000 for cash 161,538 161 188,839 189,000
Shares issued on August 3, 2000 5,000 5 6,555 6,560
Shares issued to liquidate debt of Atomic Soccer USA,
Ltd 362,259 362 375,981 376,343
Shares issued in September 2000 for cash 832,000 832 831,168 832,000
Shares issued in September to liquidate TSET, Inc. debt 42,800 43 42,757 42,800
Shares issued on December 8, 2000 for cash 168,492 169 99,831 100,000
Shares issued on December 27, 2000 for cash 39,091 39 22,301 22,340
Shares issued on January 8, 2001 for cash 687,500 688 399,312 400,000
Shares issued on January 12, 2001 for cash 57,693 57 34,943 35,000
Shares issued on January 19, 2001 for cash 10,000 10 6,390 6,400
Shares issued on January 19, 2001 for services and comp 44,915 45 56,098 56,143
Shares issued on March 23, 2001 for cash 186,302 186 134,814 135,000
Shares issued on April 9, 2001 as compensation 2,000 2 1,768 1,770
Shares issued on April 9, 2001 to liquidate debt of
Atomic Soccer 97,020 97 96,923 97,020
Shares issued in April 2001 for cash 38,038 38 17,492 17,530
Shares issued on May 3, 2001 for cash 52,778 53 18,947 19,000
Shares issued on May 7, 2001 for cash 891,891 892 299,108 300,000
Shares issued on June 14, 2001 as compensation 50,000 50 47,450 47,500
Shares issued on June 29, 2001 as a financing fee 640,000 640 460,160 460,800
Net loss for the year ended June 30, 2001 (9,866,083) (9,866,083)
-----------------------------------------------------------------------
BALANCE at June 30, 2001 34,000,978 $ 34,001 $ 12,418,350 $(11,973,785) $ 478,566
=======================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
F-18
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
TSET, Inc. (formerly, Technology Selection, Inc.), is a Nevada
corporation (the "Company") and was originally organized on September 17, 1980
as Penguin Petroleum, Inc. ("PPI") under the laws of the State of Utah.
Stockholders approved a name change of the corporation on October 6, 1982 to
Petroleum Corporation of America, Inc. On December 29, 1996, stockholders
approved a reorganization whereby they exchanged their stock on a one-for-one
basis with Technology Selection, Inc., a Nevada corporation ("TSI"). TSI's
shares began trading on the over-the-counter bulletin board exchange on August
28, 1996 under the symbol "TSET." On November 19, 1998, TSI changed its name to
TSET, Inc.
In March 2000, the Company purchased Atomic Soccer USA, Ltd. ("Atomic
Soccer"), a sports apparel manufacturer and distributor. Atomic Soccer was sold
on April 11, 2001 (See note 15). In March 2000, the Company also acquired Kronos
Air Technologies, Inc. ("Kronos Air Technologies") which is developing
applications for its patent pending air movement and purification process. In
May 2000, the Company purchased EdgeAudio.com,Inc. ("EdgeAudio"), a manufacturer
and distributor of home theater speaker systems incorporating licensed
DiAural(R) crossover circuitry. In May 2000, the Company also purchased Cancer
Detection International ("CDI") which performs state-of-the-art blood laboratory
analysis for the very early detection of cancer
The Company historically had been seeking select business opportunities
globally among a wide range of prospects. Over the past two years the Company
made several investments, including Kronos Air Technologies, Atomic Soccer and
EdgeAudio. After further evaluation of these investments, the Company decided to
only continue with the development of Kronos Air Technologies. As a result, the
Company has prioritized its management and financial resources to focus on this
investment opportunity. In April 2001, the Company sold Atomic Soccer. Further,
the Company has decided not to pursue its investment in CDI and has adopted a
formal plan to dispose of EdgeAudio (See note 15).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING METHOD. The Company's financial statements are prepared
using the accrual method of accounting. The Company has elected a June 30 fiscal
year end.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of
the Company include those of the Company and of each of its subsidiaries for the
periods in which the subsidiaries were owned/held by the Company. All
significant intercompany accounts and transactions have been eliminated in the
preparation of the consolidated financial statements. Atomic Soccer and
EdgeAudio are disclosed as discontinued operations in these financial statements
and CDI's carrying value is $0 due to impairment
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the periods. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK. Financial instruments which can
potentially subject the Company to concentrations of credit risk consist
principally of trade receivables. The Company manages its exposure to risk
through ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains an allowance for doubtful accounts for
potential losses and does not believe it is exposed to concentrations of credit
risk that are likely to have a material adverse impact on the Company's
financial position or results of operations.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
short-term investments, with a remaining maturity of three months or less when
purchased, to be cash equivalents.
ACCOUNTS RECEIVABLE. The Company provides an allowance for losses on
trade receivables based on a review of the current status of existing
receivables and management's evaluation of periodic aging of accounts. Accounts
receivable are shown net of allowances for doubtful accounts of $0 and $0 at
June 30, 2001 and June 30, 2000, respectively. The Company charges off accounts
receivable against the allowance for losses when an account is deemed to be
uncollectable.
F-19
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the assets, which
range from three to seven years. Expenditures for major renewals and betterments
that extend the original estimated economic useful lives of the applicable
assets are capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred. The cost and related accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts, and any gain
or loss is included in operations.
INTANGIBLES. Intangible assets include marketing intangibles and
developed and purchased patent technology which are being amortized over 10
years. Patent technology represents acquired patents which are being further
developed to achieve commercial viability and generate revenue. The carrying
value of intangibles are reviewed whenever circumstances occur that indicate the
carrying values may not be recoverable.
INCOME TAXES. Income taxes are accounted for in accordance with the
provisions of SFAS No. 109. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are 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. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amounts expected to be realized, but no less than quarterly.
RESEARCH AND DEVELOPMENT EXPENSES. Costs related to research and
development are charged to research and development expense as incurred.
EARNINGS (LOSS) PER SHARE. Basic earnings (loss) per share is computed
using the weighted average number of shares outstanding. Diluted earnings (loss)
per share is computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding options and
warrants to purchase common stock, when their effect is dilutive.
REVENUE RECOGNITION. Revenues from sales for EdgeAudio and Atomic
Soccer are recognized upon shipment of the product to customers. As discussed in
Note 15 - Discontinued Operations, the operations of Atomic Soccer have been
disposed of and management has committed to a formal plan of action to sell or
otherwise dispose of the operations of EdgeAudio. Kronos Air Technologies
recognizes revenue on the sale of non-custom stock units upon shipment of the
product to customers. Kronos Air Technologies recognizes revenue on the sale of
custom-designed contract sales under the percentage of completion method of
accounting in the ratio that costs incurred to date bear to estimated total
costs. For uncompleted contracts where costs and estimated profits exceed
billings, the net amount is included as an asset in the balance sheet. For
uncompleted contracts where billings exceed costs and estimated profits, the net
amount is included as a liability in the balance sheet. Sales are reported net
of applicable cash discounts and allowances for returns.
STOCK ISSUED FOR SERVICES. Issuances of shares of the Company's stock
to employees or third-parties for compensation or services is valued using the
closing market price on the date of grant for employees and the date services
are completed for non-employees.
STOCK OPTIONS. The Company accounts for its stock option plans under
SFAS No. 123 "Accounting for Stock-Based Compensation." As allowed under this
statement, the Company continues to account for stock options for employees
under APB No. 25, "Accounting for Stock Issued to Employees," and has adopted
the disclosure only requirements of SFAS No. 123. Accordingly, no compensation
expense has been recognized for stock option grants to employees since the
options have exercise prices equal to the market value of the stock on the date
of grant.
OTHER ASSETS. Deferred Financing costs associated with a common stock
purchase agreement will be ratably offset against the proceeds as they are
received.
RECENT ACCOUNTING PRONOUNCEMENTS. On July 20, 2001, the FASB issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." These statements make significant changes to the accounting
for business combinations, goodwill, and intangible assets.
SFAS No. 141 establishes new standards for accounting and reporting
requirements for business combinations and will require that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001. Use of the pooling-of-interests method will be prohibited. This statement
is effective for business combinations initiated after June 30, 2001.
F-20
SFAS No. 142 establishes new standards for goodwill acquired in a
business combination, eliminates amortization of goodwill and instead sets forth
methods to periodically evaluate goodwill for impairment. Intangible assets with
a determinable useful life will continue to be amortized over that period. The
Company expects to adopt this statement during the quarter ending September 30,
2002. Goodwill and intangible assets acquired after June 30, 2001 will be
subject immediately to the non-amortization and amortization provisions of the
statement. The Company does not currently have any goodwill recorded on its
financial statements and it is expected that there will be no immediate impact
on the Company's financial statements as a result of the adoption of this
statement.
RECLASSIFICATION. Certain reclassifications have been made to the 2000
financial statements in order to conform to the 2001 presentation.
NOTE 3 - RESTATEMENT
In September 2001, the Company determined that a 1999 employment
agreement between the Company and its Chief Executive Officer was not properly
executed under the laws of the State of Nevada (the state of incorporation.) As
a result, the Company has determined that the employment agreement was null and
void from its inception. During 1999 and 2000, the Company recognized
compensation expense as a result of stock grants and contingent stock grants
under the agreement. The Company has now determined that it is appropriate to
restate the 1999 and 2000 financial statements to correct this error in
previously issued financial statements
The effect of the change on the 2000 financial statements was to
decrease compensation expense and net loss by $892,476 and decrease the basic
and diluted loss per share by $0.03. The effect of the change on the 1999
financial statements was to decrease compensation expense and net loss by
$300,000, and decrease the basic and diluted loss per share by $0.01.
NOTE 4 - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. The Company
has sustained losses from operations in recent years, and such losses have
continued through the current year ended June 30, 2001. In addition, the Company
has used, rather than provided cash in its operations. The Company is currently
using its resources to raise capital necessary to complete research and
development work, and to provide for the working capital needs of itself and its
subsidiaries.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which in
turn is dependent upon the Company's ability to meet its financing requirements
on a continuing basis, to maintain present financing and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Management has taken the following steps with respect to its operating
and financial requirements, which it believes are sufficient to provide the
Company with the ability to continue in existence:
1. In May 2001, Kronos Air Technologies was awarded a Small
Business Innovation Research contract. This contract is
sponsored by the United States Navy and is potentially worth
up to $837,000 in product development and testing support for
Kronos Air Technologies. The first phase of the contract is
worth up to $87,000 in funding for manufacturing and testing a
prototype device for air movement and ventilation onboard
naval vessels. If awarded to Kronos Air Technologies, the
second phase of the contract would be worth up to $750,000 in
additional funding. The phase two award, if any, will be
announced in December 2001. The Kronos(TM) devices
manufactured under this contract will be embedded in an
existing HVAC systems to move air more efficiently than the
current fan based technology. This contract is an extension of
the commercialization effort by Kronos Air Technologies in the
specialized military marketplace.
2. On June 19, 2001, we entered into a common stock purchase
agreement with Fusion Capital pursuant to which Fusion Capital
agreed to purchase on each trading day during the term of the
agreement, $12,500 of our common stock or an aggregate, under
certain conditions, of $10.0 million. The $10.0 million of
common stock is to be purchased over a 40 month period,
subject to a six-month extension or earlier termination at our
discretion. The purchase price of the shares of common stock
will be equal to the then current market price of the common
stock without any fixed discount to the market price. The
F-21
agreement is dependent on the Company registering the
associated shares and on the ability of Fusion Capital to fund
the purchase of those shares. Assuming the Company's share
price remains at current levels, the 5 million shares that the
Company is currently registering would allow the Company to
raise approximately $1.5 to $2.0 million without registering
additional shares.
3. On July 2, 2001, we signed an agreement to utilize the
strategic planning and business plan execution services of The
Eagle Rock Group, LLC. The Eagle Rock Group will work with the
Kronos Air Technologies team to fully develop and capitalize
on the Kronos(TM) technology. We believe that The Eagle Rock
Group can assist us in unlocking the potential value of the
Kronos(TM) technology. The Eagle Rock Group's
multi-disciplined approach, which uses seasoned business
executives and leverages relationships and networks, can
accelerate the Kronos(TM) opportunity versus the timing and
development if we were to continue on a go-it-alone strategy
or if we were to work and coordinate with the myriad of groups
necessary to duplicate The Eagle Rock Group team.
Specifically, we initially envision The Eagle Rock Group
working to augment and enhance our efforts in the following
areas (i) capital raising and allocation, (ii) strategic
partner introduction and evaluation, (iii) distribution
channel development, (iv) product focus and brand development,
(v) human resource placement, and (vi) capital market
introduction and awareness. Pursuant to the agreement that we
entered into with The Eagle Rock Group, we issued to The Eagle
Rock Group a ten-year warrant granting them the right to
purchase 1,400,000 shares of our common stock at an exercise
price of $0.68 per share. The shares underlying the warrant
have piggy-back and demand registration rights, as well as
subscription rights in the event that we issue any rights to
all of our stockholders to subscribe for shares of our common
stock. In addition, the warrant contains redemption rights in
the event that we enter into a transaction that results in a
change of control of our company (See note 19).
NOTE 5 - BUSINESS COMBINATIONS
On March 13, 2000, the Company acquired Kronos Air Technologies (a
development stage company), a Nevada corporation. Kronos Air Technologies is a
research and development company having headquarters in Redmond, Washington.
Kronos Air Technologies owns all of the intellectual property rights, including
certain patents pending, for a technology known as "Kronos(TM)" (formerly named
the "electron wind generator"). The consideration for the acquisition was
2,250,000 shares of the Company's common stock. The Company acquired all of the
issued and outstanding shares of Kronos Air Technologies. The transaction was
accounted for using the purchase method of accounting, accordingly, the results
of operations from March 13, 2000 are included in the consolidated statement of
operations. The total purchase price of $3.3 million was determined based upon
the market value of stock issued which incorporates the restrictions on the
transferability of the shares and was allocated to the net assets acquired based
on their fair market values at the date of acquisition. Of the purchase price,
$633,000 was allocated to in-process technology which had not reached
technological feasibility which the Company expensed as of the acquisition date.
The remainder of the purchase price was allocated to purchased technology ($2.1
million) and identifiable intangibles ($0.6 million), which are being amortized
on a straight line basis over 10 years.
On March 6, 2000, the Company acquired of all of the issued and
outstanding shares of Atomic Soccer, a Wisconsin corporation (See note 15). The
consideration for the acquisition was 1,000,000 shares of TSET common stock. The
transaction was accounted for using the purchase method of accounting. The total
purchase price of $1.8 million was determined based upon the market value of
stock issued which incorporates the restrictions on the transferability of the
shares and was allocated to the net assets acquired based on their fair market
values at the date of acquisition. The fair value of the tangible assets
acquired and liabilities assumed were $700,000 and $1.6 million, respectively.
The remainder of the purchase price was allocated to goodwill ($2.7 million).
This subsidiary was sold in April 2001 generating a loss of $2.3 million.
On May 4, 2000, the Company acquired EdgeAudio. The Company acquired
all of EdgeAudio's issued and outstanding shares in exchange for 1,298,701
shares of the Company's common stock. The transaction was accounted for using
the purchase method of accounting. The total purchase price of $2.6 million was
determined based upon the market value of stock issued which incorporates the
restrictions on the transferability of the shares and was allocated to the net
assets acquired based on their fair market values at the date of acquisition. At
the time this acquisition was completed, the purchase price was allocated to
goodwill ($2.6 million) which management determined was fully impaired at June
30, 2001. EdgeAudio is included in the financial statements as a discontinued
operation of the Company. The resulting impairment adjustment of $2.3 million is
disclosed as a loss from discontinued operations.
F-22
On May 4, 2000, the Company acquired 100% ownership of CDI, in exchange
for 160,000 shares of the Company's common stock. The transaction was accounted
for using the purchase method of accounting. The total adjusted purchase price
of $314,000 was determined based upon the market value of stock issued which
incorporates the restrictions on the transferability of the shares and was
allocated to the net assets acquired based on their fair market values at the
date of acquisition. Since CDI is a development stage company, the purchase
price was allocated to goodwill which management determined was fully impaired
at June 30, 2001.
The following table reflects the unaudited proforma combined results of
operations of the Company, Kronos Air Technologies, Atomic Soccer, EdgeAudio and
CDI as if the acquisitions had taken place at the beginning of the fiscal year
for each of the periods presented, excluding the effects of the one time charge
of in-process technology and the reclassifications resulting from Atomic Soccer
and EdgeAudio as discontinued operations:
June 30, 2000 June 30, 1999
(In thousands, except per share data) (Restated) (Restated)
-------------------- ---------------
Revenue $ 960 $ 730
========= =======
Net Income (loss) $ (2,392) $ (1,134)
========= =======
Basic earnings (loss) per share $( 0.09) $( 0.05)
========= =========
Number of shares used in computing 25,263 24,001
basic earnings per share ========= =========
In management's opinion, the unaudited pro forma combined results of
operations are not necessarily indicative of the actual results that would have
occurred had the acquisitions been consummated at the beginning of the
respective years under the management of the Company.
NOTE 6 - PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets at June 30, consist of the following:
2001 2000
------------------- -------------------
Lease deposits $ 29,110 $ 23,253
Professional retainers 8,569 -
------------------- -------------------
Prepaid assets $ 37,679 $ 23,253
=================== ===================
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, consists of the following:
2001 2000
---------------------------- --------------------------
Leasehold improvements $ 5,139 $ -
Office furniture and fixtures 54,061 25,216
Machinery and equipment 3,522 -
---------------------------- --------------------------
62,722 25,216
Less accumulated depreciation (18,015) (2,197)
---------------------------- --------------------------
Net property and equipment $ 44,707 $ 23,019
============================ ==========================
Depreciation expense for the years ended June 30, 2001 and 2000 was $16,456 and $2,197, respectively.
F-23
NOTE 8 - INTANGIBLES
Intangible assets at June 30, consist of the following:
2001 2000
------------------------ ------------------------
Marketing intangibles $ 587,711 $ 587,711
Purchased patent technology 2,125,935 2,125,935
Developed patent technology 79,697 -
Goodwill - 353,430
------------------------ ------------------------
2,793,343 3,067,076
Less accumulated amortization (361,819) (96,345)
------------------------ ------------------------
Net intangible assets $ 2,431,524 $ 2,970,731
======================== ========================
Amortization expense for the years ended June 30, 2001 and 2000 was $306,709 and $96,345, respectively. The Company
recognized an impairment loss of $272,945 on the goodwill of CDI during 2001.
NOTE 9 - ACCRUED EXPENSES
Accrued expenses at June 30, consist of the following:
2001 2000 (Restated)
---------------------- ----------------------
Accrued compensation cash $ 238,740 $ 35,000
Accrued compensation stock 241,642 -
Deferred compensation 200,000 180,000
Accrued interest 33,423 11,400
Accrued professional services 420,463 75,000
Other accruals 150,000 -
---------------------- ----------------------
$ 1,284,268 $ 301,400
====================== ======================
NOTE 10 - NOTES PAYABLE
There are no outstanding notes payable at June 30 that are long-term in
nature. The current portion of notes payable outstanding at June 30, 2001 of
$313,900 consists of a $100,000 advance from Fusion Capital, which was satisfied
subsequent to year end, and $213,900 of working capital due to EdgeAudio under
the EdgeAudio acquisition agreement (see Note 17).
NOTE 11 - LEASES
The Company has entered into noncancelable operating leases for
facilities. Rental expense was approximately $53,000 and $12,000 for years ended
June 30, 2001 and 2000, respectively. Future minimum lease payments under these
operating leases for the years ending June 30, are as follows:
Year Ended Redmond,
June 30, WA Tigard Total
----------------- -------------- --------- ---------
2002 $ 42,670 $ 6,900 $ 49,570
2003 36,633 - 36,633
Thereafter - - -
-------------- ---------- --------
Total $ 79,303 $ 6,900 $ 86,203
============== ========== ========
F-24
NOTE 12 - EARNINGS (LOSS) PER SHARE
As of June 30, 2001, there were outstanding options to purchase
1,557,075 shares of TSET common stock. These options have been excluded from the
earnings per share calculation as their effect is anti-dilutive.
NOTE 13 - INCOME TAXES
The composition of deferred tax assets and the related tax effects at
June 30, 2001 and 2000 are as follows:
2001 2000 (Restated)
---------------------- -----------------------
Benefit from carryforward of net operating losses $ 1,538,645 $ 713,373
Other temporary differences 228,121 80,920
Less:
Valuation allowance (1,766,766) (794,293)
---------------------- -----------------------
Net deferred tax asset $ - $ -
====================== =======================
The other temporary differences shown above relate primarily to loss on
discontinued operations, impairment reserves for intangible assets, and accrued
and deferred compensation. The difference between the income tax benefit in the
accompanying statements of operations and the amount that would result if the
U.S. Federal statutory rate of 34% were applied to pre-tax loss is as follows:
June 30,
--------------------------------------------------------------------------------
2001 2000 (Restated)
------------------------------------------- ------------------------------------
Amount % of pre-tax Loss Amount % of pre-tax
Loss
----------------------- ------------------- ---------------- -------------------
Benefit for income tax at
federal statutory rate $ 3,354,468 34.0% $ 668,162 34.0%
Non-deductible expenses (1,803,355) (18.3)% (303,665) (15.5)%
Acquired NOL and other (578,370) (5.9)% 393,054 20.0%
Increase in valuation allowance (972,743) (9.8)% (757,551) (38.5)%
----------------------- ------------------- ---------------- -------------------
$ - 0.0% $ - 0.0%
======================= =================== ================ ===================
The non-deductible expenses shown above related primarily to the
amortization of intangible assets and to the accrual of stock options for
compensation using different valuation methods for financial and tax reporting
purposes.
At June 30, 2001, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $4.9 million of unused net
operating losses available for carryforward to future years. The benefit from
carryforward of such net operating losses will expire in various years between
2011 and 2020 and could be subject to limitations if significant ownership
changes occur in the Company. Of the $4.9 million of unused net operating losses
noted above, approximately $1.1 million relates to losses incurred by the
Company's subsidiaries, Atomic Soccer and EdgeAudio. In fiscal years prior to
June 30, 2000, Atomic Soccer and EdgeAudio did not file their tax returns on a
consolidated basis with the Company. Accordingly, the $1.1 million loss incurred
by Atomic Soccer and EdgeAudio is further subject to separate limitations that
restrict the ability of the Company to use such losses.
NOTE 14 -- PURCHASED IN PROCESS RESEARCH AND DEVELOPMENT
Purchased in process research and development (IPR&D) represents the
value assigned in a purchase business combination to research and development
projects of the acquired business that had commenced but had not yet been
completed at the date of acquisition and which have no alternative future use.
In accordance with SFAS No. 2, "Accounting for Research and Development Costs,"
as clarified by FASB Interpretation No. 4, amounts assigned to IPR&D meeting the
above stated criteria must be charged to expense as part of the allocation of
the purchase price of the business combination. Accordingly, charges totaling
$633,000 were recorded during fiscal 2000 as part of the allocation of the
purchase price related to the acquisition of Kronos.
The method used to determine the purchase price allocations of IPR&D
was an income or cash flow method. The calculations were based on estimates of
F-25
operating earnings, capital charges (representing the effect of capital
expenditures), trade name royalties, charges for core technology, and working
capital requirements to support the cash flows attributed to the technologies.
The after tax cash flows were bifurcated to reflect the stage of development of
the technology. A discount rate reflecting the stage of development and the risk
associated with the technology was used to value IPR&D. The Company believes
there is limited risk that the projects described below will not be concluded
within reasonable proximity to the expected completion date.
The allocation of the purchase price of Kronos Air Technologies
resulted in the recording of an IPR&D charge of $633,000, which has been
included in the Kronos Air Technologies segment. Projects associated with the
Kronos(TM) technology acquired include development of the technology and
development of devices incorporating the Kronos(TM) technology in a full range
of automotive, military, hospital/medical clinic, medical equipment, hotel, and
home applications. These projects were approximately 40 percent complete, with
expected completion in years 2000 through 2004.
NOTE 15 - DISCONTINUED OPERATIONS
In early January 2001, management committed to a formal plan of action
to sell or otherwise dispose of Atomic Soccer. Agreement was reached with a
buyer group, that included current and former Atomic Soccer management, to sell
them the outstanding shares of common stock of Atomic Soccer for $1,000. The
transaction was effective on April 11, 2001. On September 14, 2001 the board
approved a formal plan of action to sell or otherwise dispose of EdgeAudio. The
Company has accrued $150,000 for anticipated operating loses during the
phase-out period. As a result, both Atomic Soccer and EdgeAudio are included in
the financial statements as discontinued operations.
The Company's audited consolidated financial statements for all periods
have been reclassified to report separately results of operations and operating
cash flows from continuing operations and the discontinued operations. The net
revenues are included in the financial statements under Net Income (Loss) from
Discontinued Operations. The assets and liabilities of EdgeAudio and Atomic
Soccer at June 30, 2000 are included in the balance sheet under Net Assets of
Discontinued Operations and the assets and liabilities of EdgeAudio at June 30,
2001 are included in Net Liabilities of Discontinued Operations. Net assets of
discontinued operations at June 30, and operating results of discontinued
operations for the year ended June 30, are as follows:
Net Assets (Liabilities) of Discontinued Operations
2001 2000
--------------------------------------------------------------------------------------------------
Atomic Soccer Edge Audio Total Atomic Soccer Edge Audio Total
--------------------------------------------------------------------------------------------------
Current Assets $ - $ 294,100 $ 294,100 $ 739,057 $ 24,192 $ 763,249
Net Property and Equip - 48,835 48,835 66,458 25,090 91,548
Goodwill - - - 2,617,826 2,554,052 5,171,878
Current Liabilities - (464,788) (464,788) (1,258,853) (88,592) (1,347,445)
Notes payable - - - (176,342) - (176,342)
Minority interest (545,697) (545,697) - - -
-------------- --------------- --------------- -------------- ------------- ------------------
Net Assets (Liabilities)
of discontinued operations $ - $ (667,550) $ (667,550) $1,988,146 $2,514,742 $4,502,888
============== =============== =============== ============== ============= ==================
F-26
Operating Results of Discontinued Operations
2001 2000
-----------------------------------------------------------------------------------------------------
Atomic Soccer Edge Audio Total Atomic Soccer Edge Audio Total
-----------------------------------------------------------------------------------------------------
Sales $ 714,464 $ 757,100 $ 1,471,564 $ 292,889 $ 13,182 $ 306,071
Cost of sales (512,282) (381,341) (893,623) (248,773) (7,820) (256,593)
Depn and amort (215,398) (270,071) (485,469) (98,138) (43,289) (141,427)
General and Admin (369,058) (1,107,041) (1,476,099) (261,600) (184,255) (445,855)
------------- ---------------------------------------------------------------------------------------
Operating income (loss) (382,274) (1,001,353) (1,383,627) (315,622) (222,182) (537,804)
Other Income 735 (239,858) (239,123) - - -
Interest expense (69,232) (14,968) (84,200) (41,784) - (41,784)
Provision for asset
impairment - (2,294,316) (2,294,316) - - -
Minority interest - 154,303 154,303 - - -
------------ ---------------- ----------------- --------------- --------------- ---------------------
Income (Loss) pre-tax (450,771) (3,396,192) (3,846,963) (357,406) (222,182) (579,588)
Income taxes (benefits) - - - -
------------ ---------------- ----------------- --------------- --------------- ---------------------
Loss from disc'd ops $(450,771) $(3,396,192) $ (3,846,963) $(357,406) $(222,182) $ (579,588)
============ ================ ================= =============== =============== =====================
NOTE 16 - STOCK OPTIONS
The Company has no formal stock option plan but has offered as special
compensation to certain officers, directors and third party consultants the
granting of non-qualified options to purchase Company shares at the market price
of such shares as of the option grant date. The options generally have terms of
three to ten years. The Company granted non-qualified stock options totaling
1,557,075, 0, and 0 shares in the years ended June 30, 2001, 2000 and 1999,
respectively.
The Company has elected to follow APB No. 25; "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations in accounting for
its employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant, no compensation expense is recognized. Pro forma
information regarding net income per share is required by SFAS No. 123,
"Accounting for Stock-Based Compensation", and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that statement. The fair value of these options was estimated at the date of
grant using Black-Scholes option pricing model with the following range of
assumptions for the year ended June 30, 2001:
2001
----------------------------------
Risk free interest rate 4.473% to 4.888%
Expected dividend yield 0%
Expected lives 3 to 10 years
Expected volatility 90.76%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in the Company's opinion the existing available models do
not necessarily provide a reliable single measure of the fair value of the
Company's employee stock options.
F-27
Using the Black-Scholes option valuation model, the weighted average
grant date fair value of options granted during the years ended June 30, 2001,
2000 and 1999 was $.65, $0, and $0 per option share, respectively.
For the purpose of pro forma disclosures, the estimated fair value of
the options is amortized over the vesting period.
The Company's pro forma information is as follows (in thousands, except
per share amounts):
June 30,
----------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------------------------------------
Pro Pro Pro
Reported Forma Reported Forma Reported Forma
--------------- --------------- --------------- ------------ ---------------- -----------
Net income (loss) $ (9,866) $ (10,642) $ (1,965) $ (1,965) $ (52) $ (52)
Earnings (loss) per Share:
Basic (0.31) (0.34) (0.07) (0.07) (0.00) (0.00)
Diluted (0.31) (0.34) (0.07) (0.07) (0.00) (0.00)
A summary of the Company's stock option activity and related
information for the years ended June 30, 2001, 2000 and 1999 is as follows (in
thousands, except per share amounts):
Weighted
Average
Shares Exercise Price
--------------- ------------
Outstanding at June 30, 1998 0 $ -
Granted (1) 0 -
Exercised 0 -
Cancelled 0 -
--------------- ------------
Outstanding at June 30, 1999 0 -
Granted 0 -
Exercised 0 -
Cancelled 0 -
--------------- ------------
Outstanding at June 30, 2000 0 -
Granted 1,557 0.89
Exercised 0 -
Cancelled 0 -
--------------- ------------
Outstanding as June 30, 2001 1,557 $ 0.89
========= ========
A summary of options outstanding and exercisable at June 30, 2001 is as
follows (in thousands, except per share amounts):
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Life Exercise Exercise
Exercise Prices Options (in years) Price Options Price
------------------- ------------- ------------------ ------------- ------------ --------------
$0.71 - $1.12 1,557 7.14 $ 0.89 1,557 $ 0.89
F-28
NOTE 17 - COMMITMENTS AND CONTINGENCIES
Litigation. On February 2, 2001, we initiated, together with Kronos Air
Technologies, legal proceedings in Clackamas County, Oregon against W. Alan
Thompson, Ingrid T. Fuhriman, and Robert L. Fuhriman II, each of whom were
formerly executive officers and members of the Board of Directors of Kronos Air
Technologies. This suit alleges, among other things, breach of fiduciary duties
and breach of contract by these individuals, and seeks, among other things, an
order from the court referring the dispute to arbitration in accordance with the
terms of these individuals' respective employment agreements, which were
terminated by us on January 30, 2001, and other appropriate equitable relief.
Arbitration has been ordered and the arbitrators selected. The Company has
agreed to arbitration proceedings in the state of Washington. The parties are in
the process of exchanging and complying with requests for discovery.
EdgeAudio "Earn-out" provision. Part of the consideration given by the
Company for EdgeAudio is related to an earn-out provision in which the Company
would award $3.75 million of additional common stock of the Company as EdgeAudio
achieves stipulated revenue milestones over a five year period commencing on May
4, 2000. The earn out provides five cumulative gross revenue milestones that
range between $1,764,271 and $22,187,203. Upon achieving each milestone, an
additional $750,000 of TSET common stock will be issued. The share conversion is
to be based on an average of the closing price of the shares for the five
trading days immediately preceding the date that the revenue milestone is
achieved. Through June 30, 2001, EdgeAudio has not achieved any of these
milestones.
Placement agent fee. We have engaged Dutchess Advisors Ltd. to act as
our placement agent in connection with the Fusion Capital equity line of credit.
We will pay to Dutchess Advisors Ltd. a one-time cash fee equal to $75,000 once
we have received $575,000 under the common stock purchase agreement with Fusion
Capital.
Income taxes. The company is delinquent in filing its 1997 through 2000
federal and state income tax returns. When filed, these returns could be subject
to review and potential examination by the respective taxing authorities. Should
any of these returns come under examination by federal or state authorities, the
Company's positions on certain income tax issues could be challenged. The
impact, if any, of the potential future examination cannot be determined at this
time. If the Company's positions are successfully challenged, the results may
have a material impact on the Company's financial position and results of
operations.
NOTE 18 - SEGMENTS OF BUSINESS
The Company operates principally in one segment of business: The Kronos
segment licenses, manufactures and distributes air movement and purification
devices utilizing the Kronos(TM) technology. All other segments have been
disposed of or discontinued. Although there are future plans for expansion into
foreign markets, in the year ended June 30, 2001, the Company operated only in
the U.S.
NOTE 19 - SUBSEQUENT EVENTS
On July 2, 2001, we signed an agreement to utilize the strategic
planning and business plan execution services of The Eagle Rock Group, LLC. The
Eagle Rock Group will work with the Kronos Air Technologies team to fully
develop and capitalize on the Kronos(TM) technology
The Eagle Rock Group will work to augment and enhance our efforts in
the following areas (i) capital raising and allocation, (ii) strategic partner
introduction and evaluation, (iii) distribution channel development, (iv)
product focus and brand development, (v) human resource placement, and (vi)
capital market introduction and awareness.
We issued to The Eagle Rock Group a ten-year warrant granting them the
right to purchase 1,400,000 shares of our common stock at an exercise price of
$0.68 per share. The shares underlying the warrant have piggy-back and demand
registration rights, as well as subscription rights in the event that we issue
any rights to all of our stockholders to subscribe for shares of our common
stock. In addition, the warrant contains redemption rights in the event that we
enter into a transaction that results in a change of control of our company.
During the quarter ending September 30, 2001, the Company will recognize a
consulting expense and an associated liability of $837,200 as a result of the
issuance of the warrants. The Company will not recognize shareholder equity from
this transaction until the warrants are exercised.
On July 7, 2001, we entered into a mutual release and settlement
agreement with Foster & Price and Alex D. Saenz, pursuant to which our company,
Foster & Price and Mr. Saenz mutually and fully released each other from all
related claims and counterclaims and agreed to the dismissal of the litigation
F-29
initiated by us against Foster & Price on January 13, 2000. The settlement
agreement does not contain any admission of liability or fault by any party. The
parties also agreed, among other things, to not institute any future litigation
relating to the term sheet of the previous relationship. As settlement
consideration, we have agreed to deliver to Foster & Price and Mr. Saenz,
collectively, a total of 375,000 shares of our common stock. Foster & Price and
Mr. Saenz have agreed to time restrictions on the sale of these shares. Foster &
Price and Mr. Saenz have agreed to certain confidential provisions and to
indemnify us against claims arising out of any dispute between Foster & Price
and Mr. Saenz relating to any allocation of shares between them as well as
claims brought by persons who are not parties to the settlement agreement.
As a result of the mutual release and settlement, the Company
recognized $213,750 of settlement expenses subsequent to year-end. The amount of
the settlement expense was determined based upon the market value of the 375,000
shares on the date of settlement.
On July 20, 2001, James P. McDermott accepted an appointment as a
director of the Company. His annual compensation will be 50,000 shares of common
stock of the Company. Mr. McDermott is Managing Director of The Eagle Rock
Group.
In September, 2001, the Company determined that a 1999 employment
agreement between the Company and its Chief Executive Officer was not properly
executed under the laws of the State of Nevada (the state of incorporation.) As
a result, the Company has determined that the employment agreement was null and
void from its inception. In October 2001, Jeffrey D. Wilson resigned as the
Company's Chairman of the Board and Chief Executive Officer. Mr. Wilson remains
a director of the Company.
NOTE 20 - RELATED PARTIES
The Company has consulting agreements with certain members of the board
of directors who are acting officers of the Company. The agreements provide for
cash and equity compensation per hour of service provided. At June 30, 2001, the
Company had accrued cash compensation under these agreements of $255,400 and had
granted options to acquire 354,600 shares at an exercise price of $0.96 per
share.
NOTE 21 - QUARTERLY RESULTS (UNAUDITED)
The Company was inactive from the time that it discontinued operations
in 1996 until the time it was reactivated in mid-1999 and from inception through
June 30, 2000 it had no significant revenues from operations. Therefore, the
unaudited results of operations by quarter for the year ended June 30, 1999 are
not disclosed. The following is a summary of unaudited results of continuing
operations for the years ended June 30, 2000 and 2001:
Net (Loss)
from
Fiscal Year Ended Gross continuing Net loss Per
June 30, 2000: Sales Profit operations common share
------------ ----------------- ------------ ---------------
First Quarter $ 0 $ 0 $ (48,841) $ 0.00
Second Quarter 0 0 (48,679) 0.00
Third Quarter, as previously 0 0
reported 0 0 (675,185) (0.03)
Effect of Restatement 519,400 0.02
------------- --------------
Third Quarter Restated 0 0 (155,785) (0.01)
Fourth Quarter, as
previously reported 0 0 (1,505,366) (0.06)
Effect of Restatement 0 0 373,076 0.01
------------- --------------
Fourth Quarter Restated 0 0 (1,132,290) (0.05)
Fiscal Year Ended
June 30, 2001:
First Quarter $ 0 $ 0 $ (533,126) $ (0.02)
Second Quarter 0 0 (939,302) (0.03)
Third Quarter 0 0 (673,967) (0.02)
Fourth Quarter 95,000 32,500 (1,426,163) (0.04)
F-30
NOTE 22 - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 2001, the Company determined that
its investment in EdgeAudio was impaired. The Company recognized $2.3 million as
an impairment loss. Also during the fourth quarter of 2001, the Company
determined that its investment in CDI was impaired. The Company recognized
$273,000 as an impairment loss.
F-31
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered.
Securities and Exchange Commission Registration Fee 120
Accounting Fees and Expenses $40,000
Legal Fees and Expenses $45,000
Other $5,000
-----------------
TOTAL $90,120
All amounts except the Securities and Exchange Commission registration
fee are estimated. No portion of the expenses associated with this offering will
be borne by the selling stockholders.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
We will indemnify each director, to the fullest extent permitted by
law, from and against any and all claims of any type arising from or related to
his past or future acts or omissions as a director or officer of our Company and
any of our subsidiaries. In addition, we have agreed to advance all expenses of
each director as they are incurred and in advance of the final disposition of
any claim.
Pursuant to our Bylaws, we are obligated to indemnify each of our
directors and officers to the fullest extent permitted by law with respect to
all liability and loss suffered, and reasonable expenses incurred, by such
person in any action, suit, or proceeding in which such person was or is made or
threatened to be made a party or is otherwise involved by reason of the fact
that such person is or was a director or officer of our Company. Our bylaws
further eliminate personal liability of a director or an officer to our Company
or to any of our stockholders for monetary damages for a breach of fiduciary
duty as a director or an officer except for: (i) acts or omissions which involve
intentional misconduct, fraud, or a knowing violation of law; or (ii) the
payment of distributions in violation of Section 78.300 of Nevada Revised
Statutes. We are also obligated to pay the reasonable expenses of indemnified
directors or officers in defending such proceedings if the indemnified party
agrees to repay all amounts advanced should it be ultimately determined that
such person is not entitled to indemnification.
We also maintain an insurance policy covering directors and officers
under which the insurer agrees to pay, subject to certain exclusions, for any
claim made against the directors and officers of our Company for a wrongful act
for which they may become legally obligated to pay or for which we are required
to indemnify our directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
All of the following shares were issued and options and warrants
granted pursuant to the exemption provided for under Section 4(2) of the
Securities Act of 1933, as amended, as a "transaction not involving a public
offering." No commissions were paid, and no underwriter participated, in
connection with any of these transactions.
In April 1999, we issued 1,000,000 shares of our common stock, valued
at $0.30 per share, at an aggregate value of $300,000, to the nominee of a
director and executive officer of TSET, based on an employment agreement dated
April 16, 1999. The fair market value of a share of our common stock on April
16, 1999, the date of grant, was $1.00 per share. In September 2001, TSET
determined that such employment agreement was null and void from its inception.
As a consequence, the issuance of the 1,000,000 common shares is void as of
April 16, 1999, the effective date of the employment agreement, and these shares
of common stock will be treated as if they never were issued. The issuance of
such shares is not reflected in the financial statements.
In August 1999, we issued 100,000 shares of our common stock, valued at
$0.50 per share (the fair market value for our shares as of such date), at an
aggregate value of $50,000, to twelve persons in exchange for ownership of U.S.
patent no. 4,803,632 (issued February 7, 1989) and related intellectual property
rights relating to a technology and device referred to as the "Intelligent
Utility Meter System".
II-1
In January 2000, we issued 74,094 shares of our common stock, valued at
$0.69 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $51,125 in cash.
In February 2000, we issued 80,435 shares of our common stock, valued
at $0.92 per share (the negotiated purchase price for such shares), to one
person, a stockholder of TSET, in exchange for $74,000 in cash.
In March 2000, we issued 619,645 shares of our common stock, valued at
$1.81 per share (the negotiated purchase price for such shares), at an aggregate
value of $1,119,234, to nine persons in exchange for all of the issued and
outstanding shares of common stock of Atomic Soccer owned by such persons.
In March 2000, we issued 380,355 shares of our common stock, valued at
$1.81 per share (the negotiated purchase price for such shares), at an aggregate
value of $687,016, to one person in exchange for all of the issued and
outstanding shares of common stock of Atomic Soccer owned by such person.
In March 2000, we issued 37,555 shares of our common stock as part of
the Atomic Soccer acquisition. There was no value received for these shares. We
are seeking their return.
In March 2000, we issued 2,250,000 shares of our common stock, valued
at $1.49 per share (the negotiated purchase price for such shares), at an
aggregate value of $3,346,875, to six persons in exchange for 100% of the issued
and outstanding common stock of Kronos Air Technologies.
In March 2000, we issued 45,045 shares of our common stock, valued at
$2.22 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $100,000 in cash.
In March 2000, we issued 78,325 shares of our common stock, valued at
$2.03 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $159,000 in cash.
In April 2000, we issued 77,670 shares of our common stock, valued at
$1.03 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $80,000 in cash.
In April 2000, we issued 179,641 shares of our common stock, valued at
$1.67 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $300,000 in cash.
In May 2000, we issued 1,298,701 shares of our common stock, valued at
$1.96 per share (the negotiated purchase price for such shares), at an aggregate
value of $2,550,000, to five persons in exchange for 100% of the issued and
outstanding common stock of EdgeAudio.
In May 2000, we issued 180,000 shares of our common stock, valued at
$1.96 per share (the negotiated purchase price for such shares), at an aggregate
value of $353,430, to five persons in exchange for 100% of the issued and
outstanding membership interests of Cancer Detection International. In 2001,
there was a 20,000 common share adjustment ($39,250) to this purchase, resulting
in a net 160,000 shares of our common stock being issued.
In May 2000, we issued 57,971 shares of our common stock, valued at
$1.38 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $80,000 in cash.
In May 2000, we issued 14,815 shares of our common stock, valued at
$3.375 per share (the fair market value for our shares as of such date), at an
aggregate value of $50,000, to a director and executive officer of TSET, based
on an employment agreement dated May 19, 2000.
In June 2000, we issued 52,980 shares of our common stock, valued at
$1.51 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $80,000 in cash.
In June 2000, we issued 122,699 shares of our common stock, valued at
$1.63 per share (the negotiated purchase price for such shares), at an aggregate
value of $200,000, to one person who is a director and executive officer of
TSET.
In July 2000, we issued 161,538 shares of our common stock, valued at
$1.17 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $189,000 in cash.
II-2
In August 2000, we issued 5,000 shares of our common stock, valued at
$1.312 per share (the fair market value for our shares as of such date), at an
aggregate value of $6,560, to an executive officer of TSET, as compensation.
In August 2000, we issued 120,000 shares of our common stock, valued at
$1.00 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $120,000 in cash.
In August 2000, we issued 8,004 shares of our common stock, valued at
$1.42 per share (the negotiated exchange value of such shares), at an aggregate
value of $11,366, to one person in liquidation of indebtedness of Atomic Soccer.
In August 2000, we issued 44,667 shares of our common stock, valued at
$1.24 per share (the negotiated exchange value of such shares), at an aggregate
value of $55,388, to two persons in liquidation of indebtedness of Atomic
Soccer.
In September 2000, we issued 309,588 shares of our common stock, valued
at $1.00 per share (the negotiated exchange value of such shares), at an
aggregate value of $309,588, to two persons in liquidation of indebtedness of
Atomic Soccer.
In September 2000, we issued 45,800 shares of our common stock, valued
at $1.00 per share (the negotiated purchase price for such shares), to one
person, a stockholder of TSET, in exchange for $45,800 in cash.
In September 2000, we issued 559,000 shares of our common stock, valued
at $1.00 per share (the negotiated purchase price for such shares), to one
person, a stockholder of TSET, in exchange for $559,000 in cash.
In September 2000, we issued 150,000 shares of our common stock, valued
at $1.00 per share (the negotiated purchase price for such shares), to one
person, a stockholder of TSET, in exchange for $150,000 in cash.
In December 2000, we issued 168,492 shares of our common stock, valued
at $0.59 per share (the negotiated purchase price for such shares), to one
person, a stockholder of TSET, in exchange for $100,000 in cash.
In December 2000, we issued 39,091 shares of our common stock, valued
at $0.57 per share (the negotiated purchase price of such shares), to two
persons, stockholders of TSET, in exchange for $22,340 in cash.
In January 2001, we issued 687,500 shares of our common stock, valued
at $0.58 per share (the negotiated purchase price for such shares), to one
person, a stockholder of TSET, in exchange for $400,000 in cash.
In January 2001, we issued 7,693 shares of our common stock, valued at
$0.65 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $5,000 in cash.
In January 2001, we issued 50,000 shares of our common stock, valued at
$0.60 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $30,000 in cash.
In January 2001, we issued 10,000 shares of our common stock, valued at
$0.64 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $6,400 in cash.
In January 2001, we issued 40,000 shares of our common stock, valued at
$1.25 per share (the fair market value for our shares as of such date), at an
aggregate value of $50,000, to one person in exchange for legal services
rendered to Kronos Air Technologies.
In January 2001, we issued 4,915 shares of our common stock, valued at
$1.25 per share (the fair market value for our shares as of such date), at an
aggregate value of $6,144, to five persons, directors, executive officers, and
employees of Kronos Air Technologies, as compensation.
In March 2001, we issued 186,302 shares of our common stock, valued at
$0.72 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $135,000 in cash.
In April 2001, we issued 97,020 shares of our common stock, valued at
$1.00 per share (the negotiated exchange value for such shares), at an aggregate
value of $97,020, to two persons, in liquidation of indebtedness of Atomic
Soccer.
II-3
In April 2001, we issued 38,038 shares of our common stock, valued at
$0.46 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $17,530 in cash.
In April 2001, we issued 2,000 shares of our common stock, valued at
$0.885 per share (the fair market value for our shares as of such date), at an
aggregate value of $1,770, to one person, an employee of Kronos Air
Technologies, as compensation.
In April 2001, pursuant to a stock option agreement, we granted
five-year options to acquire 450,000 shares of our common stock, at an exercise
price of $0.885 per share (the fair market value for our shares as of the date
of grant), at an aggregate value $398,250, to nine persons who are directors,
executive officers, and key employees of TSET and Kronos Air Technologies, as
compensation for services. All such options immediately vested.
In April 2001, pursuant to a stock option agreement, we granted
ten-year options to acquire 350,000 shares of our common stock, at an exercise
price of $0.885 per share (the fair market value for our shares as of the date
of grant), at an aggregate value of $309,750, to one person who is a director
and executive officer of TSET, in consideration of the waiver of certain
contract rights. 125,000 of such options are immediately vested, and 225,000 of
such options vest upon achievement of certain milestones. In September 2001,
these options were determined to be null and void as of the date of grant and
the issuance of such options is not reflected in the financial statements.
In April 2001, pursuant to a stock option agreement, we granted
ten-year options to acquire 398,475 shares of our common stock, at an exercise
price of $0.885 per share (the fair market value for our shares as of the date
of grant), at an aggregate value of $352,650, to one person who is a director
and executive officer of TSET, in consideration of the waiver of certain
contract rights. All such options immediately vested.
In April 2001, we granted five-year options to acquire shares of our
common stock, at an exercise price of $1.12 per share (the fair market value for
our shares as of the date of grant), to one person who is an officer of Kronos
Air Technologies, as partial compensation for services pursuant to an accrual
formula set forth in a consulting agreement. As of September 14, 2001, such
accrued options entitled this person to acquire 148,000 shares of our common
stock, at an aggregate value of $165,760. All such options are immediately
vested.
In May 2001, we issued 891,891 shares of our common stock, valued at
$0.34 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $300,000 in cash.
In May 2001, we issued 52,778 shares of our common stock, valued at
$0.36 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $19,000 in cash.
In May 2001, pursuant to a stock option agreement, we granted ten-year
options to acquire 250,000 shares of our common stock, at an exercise price of
$0.710 per share (the fair market value for our shares as of the date of grant),
at an aggregate value of $177,500, to two persons who are directors of TSET, as
compensation for services as directors. All such options immediately vested.
In May 2001, we granted five-year options to acquire shares of our
common stock, at an exercise price of $0.96 per share (the fair market value for
our shares as of the date of grant), to two persons who are directors of TSET,
as partial compensation for services pursuant to an accrual formula set forth in
a consulting agreement. As of October 10, 2001, such accrued options entitled
these two persons to acquire 498,400 shares of our common stock, at an aggregate
value of $478,464. All such options immediately vested.
In June 2001, we issued 50,000 shares of our common stock, valued at
$0.95 per share (the fair market value for our shares as of such date) at an
aggregate value of $47,500, to a former director of TSET, as compensation for
his service as a director.
In June 2001, we issued 640,000 shares of our common stock, valued at
$0.72 per share (the fair market value for our shares as of such date), at an
aggregate value of $460,800, to one person as compensation under a Common Stock
Purchase Agreement dated as of June 19, 2001.
In July 2001, we issued 238,806 shares of our common stock, valued at
$0.33 per share (the negotiated purchase price for such shares), to one person,
a stockholder of TSET, in exchange for $80,000 in cash.
II-4
In July 2001, we issued 375,000 shares of our common stock, valued at
$0.57 per share (the fair market value of our shares as of such date), at an
aggregate value of $213,750, to one person in settlement of litigation pursuant
to a Mutual Release and Settlement Agreement dated as of July 7, 2001. These
shares were delivered to the escrow agent on May 31, 2002.
In July 2001, we issued 250 shares of our common stock, valued at $0.45
per share (the fair market value of our shares as of such date), at an aggregate
value of $113, to one person, an employee of Kronos Air Technologies, as
compensation.
In August 2001, we granted a ten-year warrant to acquire 1,400,000
shares of our common stock, at an exercise price of $0.68 per share (the fair
market value for our shares as of the date of grant), at an aggregate value of
$686,000, to one person as compensation pursuant to a warrant agreement dated
August 7, 2001, for services to be provided in connection with a consulting
agreement dated July 2, 2001. Pursuant to such consulting agreement, a principal
of the recipient of the warrant currently serves as a director of TSET. Such
warrant vested immediately.
On October 1, 2001, we authorized the issuance of 360,000 shares of our
common stock pursuant to a consulting agreement, valued at $0.28 per share (the
fair-market value of our shares as of such date), at an aggregate value of
$100,800, to Fusion Capital, LLC, in exchange for consulting services.
On October 1, 2001, we authorized the issuance of 1,000,000 shares of
our common stock pursuant to a pledge, valued at $0.448 per share, at an
aggregate value of $447,982, to Fusion Capital, LLC, in exchange for $447,982 in
cash.
On October 1, 2001, we issued 2,250 shares of our common stock, valued
at $0.452 per share (the fair-market value of our shares on April 9, 2001 and
1,250 of our shares on September 7, 2001), at an aggregate value of $4,147.50,
to an employee of TSET, as compensation.
From November 30, 2001 through April 15, 2002, we issued 4,059,752
shares of our common stock, at an average value of $0.184 per share, at an
aggregate value of $746,625, to Fusion Capital, LLC, pursuant to a common stock
purchase agreement between TSET and Fusion Capital, in exchange for $746,625 in
cash.
In May 2002, we completed a private placement of our common stock
pursuant to which we sold 2,551,412 shares of our common stock at $0.17 per
share to eight accredited investors for consideration of $435,100 in cash and
841,459 shares of our common stock at $0.17 per share to five members of our
management team for consideration of commitments to convert $143,048 of debt.
On June 12, 2002, we issued 500,000 shares of our common stock, valued
at $0.21 per share (the fair-market value of our shares as of such date) at an
aggregate value of $105,000 to two person pursuant to a Settlement agreement,
dated June 7, 2002, with Aperion Audio.
II-5
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed as part of this registration
statement:
EXHIBIT
NO. DESCRIPTION LOCATION
- -------------- ------------------------------------------------------- -----------------------------------------------
2.1 Articles of Merger for Technology Selection, Inc. with Incorporated by reference to Exhibit 2.1 to the
the Nevada Secretary of State Registrant's Registration Statement on Form S-1
filed on August 7, 2001 (the "REGISTRATION
STATEMENT")
3.1 Articles of Incorporation Incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 filed on
August 7, 2001
3.2 Bylaws Incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-1 filed on
August 7, 2001
5.1 Opinion re: Legality Provided herewith
10.1 Employment Agreement, dated April 16, 1999, by and Incorporated by reference to Exhibit 10.1 to
between TSET, Inc. and Jeffrey D. Wilson the Registration Statement on Form S-1 filed on
August 7, 2001
10.2 Deal Outline, dated December 9, 1999, by and between Incorporated by reference to Exhibit 10.2 to
TSET, Inc. and Atomic Soccer, USA, Ltd. the Registration Statement on Form S-1 filed on
August 7, 2001
10.3 Letter of Intent, dated December 27, 1999, by and between Incorporated by reference to Exhibit 10.3 to
TSET, Inc. and Electron Wind Technologies, Inc. the Registration Statement on Form S-1 filed on
August 7, 2001
10.4 Agreement, dated February 5, 2000, by and between Incorporated by reference to Exhibit 10.4 to
DiAural, LLC and EdgeAudio, LLC the Registration Statement on Form S-1 filed on
August 7, 2001
10.5 Stock Purchase Agreement, dated March 6, 2000, by and Incorporated by reference to Exhibit 10.5 to
among TSET, Inc., Atomic Soccer USA, Ltd., Todd P. the Registration Statement on Form S-1 filed on
Ragsdale, James Eric Anderson, Jewel Anderson, Timothy August 7, 2001
Beglinger and Atomic Millennium Partners, LLC
10.6 Acquisition Agreement, dated March 13, 2000, by and among Incorporated by reference to Exhibit 10.6 to
TSET, Inc., High Voltage Integrated, LLC, Ingrid the Registration Statement on Form S-1 filed on
Fuhriman, Igor Krichtafovitch, Robert L. Fuhriman and August 7, 2001
Alan Thompson
10.7 Letter of Intent, dated April 18, 2000, by and between Incorporated by reference to Exhibit 10.7 to
TSET, Inc. and EdgeAudio.com, Inc. the Registration Statement on Form S-1 filed on
August 7, 2001
10.8 Lease Agreement, dated May 3, 2000, by and between Kronos Incorporated by reference to Exhibit 10.8 to
Air Technologies, Inc. and TIAA Realty, Inc. the Registration Statement on Form S-1 filed on
August 7, 2001
10.9 Agreement and Plan of Reorganization, dated May 4, 2000, Incorporated by reference to Exhibit 10.9 to
by and among TSET, Inc., EdgeAudio.com, Inc., LYNK the Registration Statement on Form S-1 filed on
Enterprises, Inc., Robert Lightman, J. David Hogan, Eric August 7, 2001
Alexander and Eterna Internacional, S.A. de C.V.
II-6
EXHIBIT
NO. DESCRIPTION LOCATION
- -------------- ------------------------------------------------------- -----------------------------------------------
10.10 Letter Agreement, dated May 4, 2000, by and between TSET, Incorporated by reference to Exhibit 10.10 to
Inc. and Cancer Detection International, LLC the Registration Statement on Form S-1 filed on
August 7, 2001
10.11 Employment Agreement, dated May 19, 2000, by and between Incorporated by reference to Exhibit 10.11 to
TSET, Inc. and Richard A. Papworth the Registration Statement on Form S-1 filed on
August 7, 2001
10.12 Finders Agreement, dated August 21, 2000, by and among Incorporated by reference to Exhibit 10.12 to
TSET, Inc., Richard F. Tusing and Daniel R. Dwight the Registration Statement on Form S-1 filed on
August 7, 2001
10.13 Contract Services Agreement, dated June 27, 2000, by and Incorporated by reference to Exhibit 10.13 to
between Chinook Technologies, Inc. and Kronos Air the Registration Statement on Form S-1 filed on
Technologies, Inc. August 7, 2001
10.14 Letter of Intent, dated July 17, 2000, by and between Incorporated by reference to Exhibit 10.14 to
Kronos Air Technologies, Inc. and Polus Technologies, Inc. the Registration Statement on Form S-1 filed on
August 7, 2001
10.15 Consulting Agreement, dated August 1, 2000, by and among Incorporated by reference to Exhibit 10.15 to
TSET, Inc., Richard F. Tusing and Daniel R. Dwight the Registration Statement on Form S-1 filed on
August 7, 2001
10.16 Preferred Stock Purchase Agreement, dated September 12, Incorporated by reference to Exhibit 10.16 to
2000, by and between EdgeAudio.com, Inc. and Bryan the Registration Statement on Form S-1 filed on
Holbrook August 7, 2001
10.17 Shareholders Agreement, dated September 12, 2000, by and Incorporated by reference to Exhibit 10.17 to
among TSET, Inc., Bryan Holbrook and EdgeAudio.com, Inc. the Registration Statement on Form S-1 filed on
August 7, 2001
10.18 Amendment to Agreement and Plan of Reorganization dated Incorporated by reference to Exhibit 10.18 to
September 12, 2000, by and among TSET, Inc., the Registration Statement on Form S-1 filed on
EdgeAudio.com, Inc., LYNK Enterprises, Inc., Robert August 7, 2001
Lightman, J. David Hogan, Eric Alexander and Eterna
Internacional, S.A. de C.V.
10.19 Agreement Regarding Sale of Preferred Stock, dated Incorporated by reference to Exhibit 10.19 to
November 1, 2000, by and between EdgeAudio.com, Inc. and the Registration Statement on Form S-1 filed on
Bryan Holbrook August 7, 2001
10.20 Amendment to Subcontract, dated December 14, 2000, Incorporated by reference to Exhibit 10.20 to the
by and between Bath Iron Works and High Voltage Registration Statement on Form S-1 filed on
Integrated August 7, 2001
10.21 Consulting Agreement, dated January 1, 2001, by and Incorporated by reference to Exhibit 10.21 to
between TSET, Inc. and Dwight, Tusing & Associates the Registration Statement on Form S-1 filed on
August 7, 2001
10.22 Employment Agreement, dated March 18, 2001, by and Incorporated by reference to Exhibit 10.22 to
between TSET, Inc. and Alex Chriss the Registration Statement on Form S-1 filed on
August 7, 2001
10.23 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.23 to
between TSET, Inc. and Jeffrey D. Wilson the Registration Statement on Form S-1 filed on
August 7, 2001
10.24 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.24 to
between TSET, Inc. and Jeffrey D. Wilson the Registration Statement on Form S-1 filed on
August 7, 2001
10.25 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.25 to
between TSET, Inc. and Daniel R. Dwight the Registration Statement on Form S-1 filed on
August 7, 2001
II-7
EXHIBIT
NO. DESCRIPTION DESCRIPTION
- -------------- ------------------------------------------------------- -----------------------------------------------
10.26 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.26 to
between TSET, Inc. and Richard F. Tusing the Registration Statement on Form S-1 filed on
August 7, 2001
10.27 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.27 to
between TSET, Inc. and Charles D. Strang the Registration Statement on Form S-1 filed on
August 7, 2001
10.28 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.28 to
between TSET, Inc. and Richard A. Papworth the Registration Statement on Form S-1 filed on
August 7, 2001
10.29 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.29 to
between TSET, Inc. and Richard A. Papworth the Registration Statement on Form S-1 filed on
August 7, 2001
10.30 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.30 to
between TSET, Inc. and Erik W. Black the Registration Statement on Form S-1 filed on
August 7, 2001
10.31 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.31 to
between TSET, Inc. and J. Alexander Chriss the Registration Statement on Form S-1 filed on
August 7, 2001
10.32 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.32 to
between TSET, Inc. and Charles H. Wellington the Registration Statement on Form S-1 filed on
August 7, 2001
10.33 Stock Option Agreement, dated April 9, 2001, by and Incorporated by reference to Exhibit 10.33 to
between TSET, Inc. and Igor Krichtafovitch the Registration Statement on Form S-1 filed on
August 7, 2001
10.34 Letter Agreement, dated April 10, 2001, by and between Incorporated by reference to Exhibit 10.34 to
TSET, Inc. and Richard A. Papworth the Registration Statement on Form S-1 filed on
August 7, 2001
10.35 Letter Agreement, dated April 12, 2001, by and between Incorporated by reference to Exhibit 10.35 to
TSET, Inc. and Daniel R. Dwight and Richard F. Tusing the Registration Statement on Form S-1 filed on
August 7, 2001
10.36 Finders Agreement, dated April 20, 2001, by and between Incorporated by reference to Exhibit 10.36 to
TSET, Inc. and Bernard Aronson, d/b/a Bolivar the Registration Statement on Form S-1 filed on
International Inc. August 7, 2001
10.37 Indemnification Agreement, dated May 1, 2001, by and Incorporated by reference to Exhibit 10.37 to
between TSET, Inc. and Jeffrey D. Wilson the Registration Statement on Form S-1 filed on
August 7, 2001
10.38 Indemnification Agreement, dated May 1, 2001, by and Incorporated by reference to Exhibit 10.38 to
between TSET, Inc. and Daniel R. Dwight the Registration Statement on Form S-1 filed on
August 7, 2001
10.39 Indemnification Agreement, dated May 1, 2001, by and Incorporated by reference to Exhibit 10.39 to
between TSET, Inc. and Richard F. Tusing the Registration Statement on Form S-1 filed on
August 7, 2001
10.40 Indemnification Agreement, dated May 1, 2001, by and Incorporated by reference to Exhibit 10.40 to
between TSET, Inc. and Charles D. Strang the Registration Statement on Form S-1 filed on
August 7, 2001
10.41 Indemnification Agreement, dated May 1, 2001, by and Incorporated by reference to Exhibit 10.41 to
between TSET, Inc. and Richard A. Papworth the Registration Statement on Form S-1 filed on
August 7, 2001
10.42 Indemnification Agreement, dated May 1, 2001, by and Incorporated by reference to Exhibit 10.42 to
between TSET, Inc. and Erik W. Black the Registration Statement on Form S-1 filed on
August 7, 2001
II-8
EXHIBIT
NO. DESCRIPTION DESCRIPTION
- -------------- ------------------------------------------------------- -----------------------------------------------
10.43 Stock Option Agreement, dated May 3, 2001, by and between Incorporated by reference to Exhibit 10.43 to
TSET, Inc. and Jeffrey D. Wilson the Registration Statement on Form S-1 filed on
August 7, 2001
10.44 Common Stock Purchase Agreement, dated June 19, 2001, by Incorporated by reference to Exhibit 10.44 to
and between TSET, Inc. and Fusion Capital Fund II, LLC the Registration Statement on Form S-1 filed on
August 7, 2001
10.45 Registration Rights Agreement, dated June 19, 2001, by Incorporated by reference to Exhibit 10.45 to
and between TSET, Inc. and Fusion Capital Fund II, LLC the Registration Statement on Form S-1 filed on
August 7, 2001
10.46 Mutual Release and Settlement Agreement, dated July 7, Incorporated by reference to Exhibit 10.46 to
2001, by and between TSET, Inc. and Foster & Price Ltd. the Registration Statement on Form S-1 filed on
August 7, 2001
10.47 Letter Agreement, dated July 9, 2001, by and between Incorporated by reference to Exhibit 10.47 to
TSET, Inc. and The Eagle Rock Group, LLC the Registration Statement on Form S-1 filed on
August 7, 2001
10.48 Finders Agreement, dated July 17, 2001, by and between Incorporated by reference to Exhibit 10.48 to
TSET, Inc. and John S. Bowles the Registration Statement on Form S-1 filed on
August 7, 2001
10.49 Warrant Agreement, dated July 16, 2001, by and between Incorporated by reference to Exhibit 10.49 to
TSET, Inc. and The Eagle Rock Group, LLC the Registration Statement on Form S-1 filed on
August 7, 2001
10.50 Agreement and Release, dated October 10, 2001, by and Incorporated by reference to Exhibit 10.50 to
between TSET, Inc. and Jeffrey D. Wilson the Registrant's Form 10-K for the year ended
June 30, 2001 filed on October 15, 2001
10.51 Promissory Note dated October 10, 2001 payable to Mr. Incorporated by reference to Exhibit 10.51 to
Jeffrey D. Wilson the Registrant's Form 10-K for the year ended
June 30, 2001 filed on October 15, 2001
10.52 Consulting Agreement, dated October 10, 2001, by and Incorporated by reference to Exhibit 10.52 to
between TSET, Inc. and Jeffrey D. Wilson the Registrant's Form 10-K for the year ended
June 30, 2001 filed on October 15, 2001
10.53 Employment Agreement, dated April 1, 2002, by and between Provided herewith
TSET, Inc. and Daniel R. Dwight
10.54 Stock Option Agreement, dated April 1, 2002, by and Provided herewith
between TSET, Inc. and Daniel R. Dwight
10.55 Agreement, dated March 1, 2002, by and between TSET, Inc. Provided herewith
and The Eagle Rock Group, LLC
11.1 Statement re: Computation of Earnings Not applicable
12.1 Statement re: Computation of Ratios Not applicable
15.1 Letter re: Unaudited Interim Financial Information Not applicable
16.1 Letter re: Change in Certifying Accountant Not applicable
21.1 Subsidiaries of the Registrant Not applicable
23.1 Consent of Kirkpatrick & Lockhart LLP Provided herewith (contained in Exhibit 5.1)
23.2 Consent of Grant Thornton LLP Provided herewith
23.3 Consent of Randy Simpson, C.P.A., P.C. Provided herewith
24.1 Power of Attorney Included on signature page
27.1 Financial Data Schedule Not applicable
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ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933, as amended;
(ii) to reflect in the prospectus anY facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) to include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, as amended, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any financial
statements required by Rule 3-19 of this chapter at the start of any delayed
offering or throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Securities Act of
1933, as amended, need not be furnished, PROVIDED, that the registrant includes
in the prospectus, by means of a post-effective amendment, financial statements
required pursuant to this paragraph (a)(4) and other information necessary to
ensure that all other information in the prospectus is at least as current as
the date of those financial statements. Notwithstanding the foregoing, with
respect to registration statements on Form F-3, a post-effective amendment need
not be filed to include financial statements and information required by Section
10(a)(3) of the Securities Act of 1933, as amended, or Rule 3-19 of this chapter
if such financial statements and information are contained in periodic reports
filed with or furnished to the Securities and Exchange Commission by the
registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934, as amended, that are incorporated by reference in the Form F-3.
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement to be signed on our
behalf by the undersigned, thereunto duly authorized, in Lake Oswego, Oregon on
June 25, 2002.
TSET, INC.
By:
-------------------------------------
Daniel R. Dwight
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Daniel R. Dwight, his true and lawful
attorney-in-fact and agent, with full power of substitution and revocation, for
him and in his name, place and stead, in any and all capacities (until revoked
in writing), to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully for all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or is substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Daniel R. Dwight
- ------------------------------------
Daniel R. Dwight Director and President and Chief Executive Officer June 25, 2002
/s/ Richard A. Papworth
- ------------------------------------
Richard A. Papworth Director and Chief Financial Officer June 25, 2002
/s/ Richard F. Tusing
- ------------------------------------
Richard F. Tusing Director June 25, 2002
/s/ James P. McDermott
- ------------------------------------
James P. McDermott Director June 25, 2002
/s/ Charles D. Strang
- ------------------------------------
Charles D. Strang Director June 25, 2002
/s/ Jeffrey D. Wilson
- ------------------------------------
Jeffrey D. Wilson Director June 25, 2002
/s/ Erik W. Black
- ------------------------------------ Director June 25, 2002
Erik W. Black
II-11