U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-30191
TSET, INC.
------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 87-0440410
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Two Centerpointe Drive, Lake Oswego, OR 97035
--------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(503) 598-1900
------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares
outstanding of each of the issuer's classes of common equity, as of
the latest practicable date: Common stock, par value $0.001, of which
29,707,801 shares were issued and outstanding as of December 31, 2000.
TSET, INC.
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements......................................3
Consolidated Balance Sheets as of December 31,
2000 and June 30, 2000.....................................3
Consolidated Statements of Operations for the three
months ended December 31, 2000 and 1999 and the six
months ended December 31, 2000 and 1999 ...................4
Consolidated Statements of Cash Flows for the three
months ended December 31, 2000 and 1999 and the six
months ended December 31, 2000 and 1999....................5
Consolidated Statements of Stockholders' Equity
(Deficit) for the three months ended December 31,
2000 and for the period from June 30, 1997
to December 31, 2000.......................................6
Notes to Consolidated Financial Statements.................7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............10
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk....14
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.........................................14
ITEM 2. Changes in Securities.....................................14
ITEM 3. Defaults upon Senior Securities...........................15
ITEM 4. Submission of Matters to a Vote of Security Holders.......15
ITEM 5. Other Information.........................................15
ITEM 6. Exhibits and Reports on Form 8-K..........................15
SIGNATURES
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
The following comprise our condensed (unaudited) consolidated financial
statements for the three months and six months ended December 31, 2000 and 1999.
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2000 2000
------------ ------------
Assets
Current Assets
Cash $ 65,760 $ 102,949
Accounts receivable, net 106,776 130,654
Inventories 904,743 623,991
Prepaid expenses 27,967 36,505
------------ ------------
Total Current Assets 1,105,236 894,099
Property and Equipment 220,973 165,696
Less: Accumulated Depreciation (63,835) (51,129)
------------ ------------
Net Property and Equipment 157,138 114,567
Other Assets
Intangibles, net 7,723,982 8,142,609
------------ ------------
Total Other Assets 7,723,982 8,142,609
------------ ------------
Total Assets $ 8,986,356 $ 9,151,275
============ ============
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 405,735 $ 225,521
Accrued expenses 1,327,416 1,288,364
Notes payable, current portion 995,968 1,114,832
------------ ------------
Total Current Liabilities 2,729,119 2,628,717
------------ ------------
Long-Term Liabilities
Notes payable - 176,342
------------ ------------
Total Long-Term Liabilities - 176,342
------------ ------------
Minority Interest 604,900 -
------------ ------------
Shareholders' Equity
Common stock, authorized
500,000,000 shares of $.001 32,263 30,652
par value
Capital in excess of par value 11,183,175 9,615,743
Retained earnings
(accumulated deficit) (5,563,102) (3,300,179)
------------ ------------
Total Shareholders' Equity (deficit) 5,652,336 6,346,216
------------ ------------
Total Liabilities and Shareholders' Equity $ 8,986,356 $ 9,151,275
============ ============
The accompanying notes are an integral part of these statements.
3
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED
DECEMBER 31, 2000 AND 1999
(UNAUDITED)
For the Three months Ended For the Six Months Ended
December 31, December 31,
-------------------------- ------------------------
2000 1999 2000 1999
Sales $ 445,952 $ - $ 834,790 $ -
Cost of sales 244,472 - 486,399 -
Gross Margin 201,480 - 348,391 -
Operating expenses:
Compensation and benefits 598,302 47,700 1,071,612 96,050
Marketing 153,291 - 218,404 -
Research and development 59,965 - 113,697 -
Professional services 289,757 - 350,105 -
Amortization of intangibles 209,313 - 418,626 -
Other general & administrative 297,596 1,000 489,746 1,491
Total operating expense 1,608,224 48,700 2,662,460 97,541
Income or (loss) from Operations (1,406,744) (48,700) (2,314,069) (97,541)
Other Income/(Expense) 5,276 21 5,276 21
Interest Expense (18,089) - (49,230) -
Minority Interests 50,116 - 95,100 -
Net Income(loss)Before Taxes $(1,369,441) $ (48,679) $ (2,262,923) (97,520)
Provision for Income Taxes - - - -
Net Income (loss) $(1,369,441) $ (48,679) $ (2,262,923) (97,520)
Earnings (Loss) Per Share:
Basic $ (0.04) $ (0.00) $ (0.07) (0.00)
Diluted $ (0.04) $ (0.00) $ (0.07) (0.00)
Weighted Average Shares Outstanding
Basic 32,099,081 25,101,730 31,539,757 25,067,413
Diluted 32,099,081 25,101,730 31,539,757 25,067,413
The accompanying notes are an integral part of these statements.
4
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND SIX MONTHS ENDED
DECEMBER 31, 2000 AND 1999
(UNAUDITED)
For the Three months Ended For the Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ (1,369,441) $ (48,679) $(2,262,923) $ (97,520)
Adjustments to reconcile Net Income to net cash
(used in) provided by operations:
Depreciation and amortization 215,479 1,000 431,332 1,000
Minority Interests (50,116) - (95,100) -
Provision for doubtful accounts 1,065 - 1,065 -
Common stock issued as compensation - - 6,560 -
Change In:
Inventories (93,002) - (280,753) -
Accounts receivable 12,431 - 24,175 -
Prepaid expenses and other assets 25,732 - 9,366 (50,000)
Accounts Payable 140,044 - 198,417 -
Accrued Expenses and other liabilities 37,938 48,041 20,363 96,540
Net cash (used in) provided
by Operating Activities (1,079,870) (362) (1,947,498) (49,980)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (39,470) - (56,970) -
Net cash (used in) provided
by Investing Activities (39,470) - (56,970) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 122,340 - 1,562,485 50,000
Minority Interest 450,000 - 700,000 -
Proceeds from short-term borrowings 2,890 - 202,633 -
Repayments of short-term borrowings (24,455) - (497,840) -
Net cash (used in) provided
by Financing Activities 550,775 - 1,967,278 50,000
NET (DECREASE) INCREASE IN CASH (568,565) (362) (37,190) 20
CASH
Beginning of year 634,325 194 102,950 536
End of year $ 65,760 $ 556 65,760 556
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 24,503 - 71,932 -
Income taxes - - - -
Supplemental schedule of non-cash investing
and financing activities:
Purchase of patent rights - - - 50,000
The accompanying notes are an integral part of these statements.
5
TSET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS'EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 30, 2000 AND
THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
Retained Total
Common Stock Capital In Earnings Shareholders'
----------------------- Excess of Par (Accumulated Equity
Shares Amount Value Deficit) (Deficit)
--------- -------- ----------- ------------ ------------
BALANCE at June 30, 23,976,730 $ 23,976 $ 31,743 $ (73,014) $ (17,295)
Net loss for the year ended June 30, 1998 (17,832) (17,832)
BALANCE at June 30, 1998 23,976,730 23,976 31,743 (90,846) (35,127)
Shares of restricted common stock
issued to Pangaea Group, LLC per CEO
management agreement 1,000,000 1,000 299,000 300,000
Shares of restricted common
stock issued for services rendered 25,000 25 9,975 10,000
Shares certificate cancelled (4,000) (4) (4)
Net loss for the year ended June 30, 1999 (351,674) (351,674)
BALANCE at June 30, 1999 24,997,730 24,997 340,718 (442,520) (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 1,037,555 1,038 1,805,212 1,806,250
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 for May 9,2000 to acquire
EdgeAudio.com, Inc. 1,298,701 1,299 2,548,701 2,550,000
Shares issued on May 9, 2000 to acquire
Cancer Detection 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 (2,857,659) (2,857,659)
BALANCE at June 30, 2000 30,651,661 30,652 9,615,743 (3,300,179) 6,346,216
Shares of restricted common stock
authorized on July 20, 2000 for cash 161,538 161 188,839 189,000
Shares issued on August 3, 2000 as compensation 5,000 5 6,555 6,560
Shares authorized in August 2000 to liquidate
certain debt of Atomic Soccer USA, Ltd 362,259 362 375,981 376,343
Shares of restricted common stock
authorized on September 30, 2000 for cash 832,000 832 831,168 832,000
Shares authorized in September, 2000 to liquidate
certain debt of TSET, Inc. 42,800 43 42,757 42,800
Net loss for the quarter ended September 30, 2000 (893,482) (893,482)
BALANCE at September 30, 2000 32,055,258 $ 32,055 $11,061,043 $(4,193,661) $ 6,899,437
Shares of restricted common stock
authorized on December 8, 2000 for cash 168,492 169 99,831 100,000
Shares of restricted common stock
authorized on December 27, 2000 for cash 39,091 39 22,301 22,340
Net loss for the quarter ended December 31, 2000 (1,369,441) (1,369,441)
BALANCE at December 31, 2000 32,262,841 $ 32,263 $11,183,175 $(5,563,102) $ 5,652,336
The accompanying notes are an integral part of these statements.
6
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 30, 2000 AND 1999
(UNAUDITED)
NOTE 1 - ACCOUNTING MATTERS
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X.
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 period or the six-month period ended December
31, 2000 are not necessarily indicative of the results that
may be experienced for the fiscal year ending June 30, 2001.
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.
The accompanying financial statements should be read in
conjunction with the TSET, Inc. Form 10K for the fiscal
year ended June 30, 2000 filed on October 24, 2000 and the
TSET, Inc. Form 10Q for the quarter ended September 30, 2000
filed on November 20, 2000.
NOTE 2 - INVENTORIES
Inventories are valued at their lower of cost or
market. The FIFO (first-in, first out) method is used to
determine the cost of inventories. Inventories at December
31, 2000 and June 30, 2000 by major classification, are as follows:
December 31 June 30
---------- ---------
Raw materials $ 334,345 $203,921
Work in process 22,519 22,228
Finished goods 522,243 362,222
Freight in 25,636 35,620
--------- ---------
$ 904,743 $623,991
========= =========
NOTE 3 -- INCOME TAXES
The composition of deferred tax assets and the related tax effects
at December 31, 2000, and June 30, 2000 are as follows:
December 31, June 30,
2000 2000
---------- ----------
Benefit from carryforward of net
operating losses $ 863,993 $783,073
Other temporary differences 21,958 80,920
Less valuation allowance (885,961) (863,993)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
7
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 30, 2000 AND 1999
(UNAUDITED)
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:
Six Months Ended December 31,
---------------------------------------------
2000 1999
--------------------- ----------------------
% of % of
Pre-tax Pre-tax
Amount Loss Amount Loss
----------- -------- ----------- ---------
Benefit for income tax at
federal statutory rate $ 769,394 34.0% $ 33,157 34.0%
Non-deductible expenses (144,563) ( 6.4%) (680) ( 0.7%)
Increase in valuation
allowance (624,831) (27.6%) (32,477) (33.3%)
Total $ - 0% $ - 0%
The non-deductible expenses shown above related
primarily to accrued and deferred compensation and to
the accrual of restricted shares of common stock
for compensation using different valuation methods for
financial and tax reporting purposes.
At December 31, 2000, for federal income tax and
alternative minimum tax reporting purposes, the Company
has approximately $3.1 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
severe limitations if significant ownership changes occur
in the Company. Of the $3.1 million of unused net operating
losses noted above, approximately $1.1 million relates to losses
incurred by the Company's subsidiaries, Atomic and EdgeAudio.
In fiscal years prior to June 30, 2000, Atomic and EdgeAudio
did not file their tax returns on a consolidated basis with
the Company. Accordingly, the $1.1 million loss incurred
by Atomic and EdgeAudio is further subject to separate limitations
that restrict the ability of the Company to use such losses.
NOTE 4 - SEGMENTS OF BUSINESS
The Company has adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
The Company operates principally in three segments of business:
the sports apparel segment manufactures and distributes sports
apparel to team organizations and retailers. The Kronos segment
licenses, manufactures and distributes air movement and purification
devices utilizing the Kronos(TM) technology. The speaker segment
manufactures and distributes home theater speakers and speaker
systems. Although there are future plans for expansion into foreign
markets, in the six months ended December 31, 2000, the Company
operated only in the U.S. The following tables provide a
comparison of revenues, net profit, total assets, amortization
expense and interest expense for the year ended December 31, 2000:
8
TSET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
Sports
Apparel Kronos Speaker Other Total
---------- ---------- ---------- ----------- -----------
Revenue $ 466,565 $ - $ 368,225 $ - $ 834,790
Interest expense $ 42,357 $ - $ 6,873 $ - $ 49,230
Amortization $ 135,405 $ 135,682 $ 129,867 $ 17,672 $ 418,626
Net loss $ (280,230) $ (869,247) $ (605,365) $(508,081) $(2,262,923)
Total assets $3,249,227 $2,522,020 $2,873,646 $ 341,464 $ 8,986,356
Segment information has not been provided for prior years as
neither the Kronos or speaker segments had commenced operations.
NOTE 5 - EARNINGS PER SHARE
Basic (loss) earnings per share is computed using the
weighted average number of shares both authorized to be
issued and issued and outstanding. Diluted (loss) earnings
per share is computed using the weighted average number of
shares outstanding adjusted for the incremental shares
attributed to outstanding options to purchase common stock.
NOTE 6 - SUBSEQUENT EVENTS
On January 30, 2001, the employment agreements of W. Alan
Thompson, Ingrid T. Fuhriman, and Robert L. Fuhriman II,
executive officers and members of the board of directors of
the Company's wholly-owned subsidiary, Kronos Air
Technologies, Inc. ("KAT"), were terminated. Pending
designation of replacement executive management, the day-to-
day operations of KAT will be managed by the remaining
members of its board of directors, consisting of Jeffrey D.
Wilson (as chairman), Charles D. Strang, Richard F. Tusing,
Daniel R. Dwight, Igor Krichtafovitch, and Richard A.
Papworth (also acting as KAT's chief financial officer).
On February 2, 2001, the Company initiated legal proceedings
in Clackamas County, Oregon against W. Alan Thompson, Ingrid
T. Fuhriman, and Robert L. Fuhriman II (collectively the
"Defendants"). This suit alleges, among other things,
breach of fiduciary duties and breach of contract by the
Defendants, and seeks, among other things, an order from the
court referring the dispute to arbitration in accordance
with the terms of the Defendants' respective employment
agreements, which were terminated by the Company on January
30, 2001, and other appropriate equitable relief.
9
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
The Company is a technology/investment holding company
whose current holdings include Kronos Air Technologies,
Inc., EdgeAudio, Inc., Atomic Soccer USA, Ltd (DBA A-
Soccer), and Cancer Detection International.
Kronos Air Technologies, Inc.
Kronos(TM) Air Technologies, Inc. ("KAT") is an early
stage technology company focused on the development and
commercialization of electron wind generation technology
known as Kronos(TM). Kronos(TM) technology enables simultaneous
air movement and purification via a device that is
versatile, energy and cost efficient, and exhibits multiple
design attributes, which creates a broad range of
applications. Since its inception, KAT has further
developed, proven the concept for, and commenced
commercialization of the Kronos(TM) technology.
The Kronos(TM) technology is a revolutionary technology
with U.S. and International patents pending status. The
technology is the application of high voltage management
across a corona electrode array to create an ion exchange
that moves and purifies air. Kronos(TM) technology has
numerous, valuable characteristics. It enables the movement
of air and gases at high velocities while removing odors,
smoke, and particulates, as well as killing pathogens,
including bacteria. The Kronos(TM) device has no moving parts
or degrading elements and is composed of cost effective,
commercially available components.
The Kronos(TM) device is flexible in size and shape and
can adapt to existing infrastructures ranging from embedded
electronic devices and standalone room devices to integrated
HVAC and industrial applications. The Kronos(TM) technology is
noiseless, vibrationless, lightweight and is capable of
operating under extreme temperatures and creates an
instantaneous, inertialess, uniform laminar airflow.
Because it is inertialess, (i.e., no moving parts or blades)
a Kronos(TM) device can instantly block or reverse the flow of
air between adjacent areas for safety in hazardous
circumstances.
During the quarter ended December 31, 2000 KAT
delivered the first of two prototype Kronos(TM) devices to
Polus International, Inc., an entity specializing in
business development opportunities in Poland and elsewhere
in northern and eastern Europe. The second prototype is
scheduled for delivery by the end of February. These
prototypes are being used for testing and evaluation for
hospital and medical clinic applications in northern and
eastern Europe.
A prototype Kronos(TM) device have been provided to a
leading hospitality provider for evaluation, testing and
feedback on deployment of the device in the hospitality
market. In addition, KAT has obtained preliminary design
drawings for standalone Kronos(TM) devices, which would be
suitable for a number of commercial, and consumer
applications.
KAT is finalizing its work on the delivery of KronosT(TM)
devices to Bath Iron Works (BIW), a division of General
Dynamics, for use in the crew quarters of a naval destroyer
as replacements for bunk fans. Additionally, KAT was asked
and has recently submitted a bid to a leading military
contractor to develop and deploy Kronos(TM) devices in the HVAC
system of a naval aircraft carrier. During December 2000,
KAT completed and submitted a proposal for a Small Business
Innovation Research (SBIR) grant. This grant is sponsored
by the U.S. Navy and is potentially worth $1 million in
research support.
During the quarter, KAT filed for three additional
patents to enhance intellectual property protection on its
Kronos(TM) technology. In early February 2001, KAT engaged the
Washington D.C. law firm, Fulbright and Jaworski, to
comprehensively review KAT intellectual property rights and
issues and assist in the development of a global
intellectual property rights protection and implementation
strategy. KAT is also in the process of addressing issues
leading to submission of the Kronos(TM) device for Federal
Communications Commission("FCC") and Underwriters'
Laboratories ("UL") approvals.
10
Completion of a updating of KAT's operational plan was
achieved during the quarter ended December 31, 2000. KAT's
market strategy has been expanded to extract the maximum
value possible from the Kronos(TM) technology for its
shareholders. The strategy is to first partition the
various market applications for the Kronos(TM) technology into
six key segments. KAT is then developing a targeted
strategy for addressing each market segment that will
include a combination of building internal capabilities,
establishing strategic alliances, and licensing. The
initial six key segments are: (1) air filtration and
purification (residential, hospitality, health care, and
commercial facilities); (2) air filtration for unique spaces
(cleanrooms, 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).
On January 30, 2001, the employment agreements of W.
Alan Thompson, Ingrid T. Fuhriman, and Robert L. Fuhriman
II, executive officers and members of the board of directors
of the Company's wholly-owned subsidiary, Kronos Air
Technologies, Inc. ("KAT"), were terminated. Pending
designation of replacement executive management, the day-to-
day operations of KAT will be managed by the remaining
members of its board of directors, consisting of Jeffrey D.
Wilson (as chairman), Charles D. Strang, Richard T. Tusing,
Daniel R. Dwight, Igor Krichtafovitch, and Richard A.
Papworth (also acting as KAT's chief financial officer).
Despite these activities, KAT generated no revenues for
the quarter ended December 31, 2000.
EdgeAudio, Inc.
EdgeAudio manufactures and sells home theater speaker
systems. Sales of the Speaker Systems and certain
accessories are made directly to consumers via the Internet
from EdgeAudio's web site at www.edgeaudio.com. During the
quarter ended December 31, 2000, EdgeAudio established on-
line partner accounts with Amazon.com, eCost.com and
Getplugged.com, which relationships accounted for nearly 18%
of its quarterly revenue.
Contributing to its efforts to raise brand awareness,
EdgeAudio was featured on the cover of Sound & Vision
magazine and was given write-ups in articles in both that
magazine as well as Home Theater magazine. Marketing
efforts included a major email campaign in December and
print advertising. EdgeAudio was asked to be included in a
50,000 piece direct mail campaign that is being paid for by
new on-line partner eCost.com.
During the quarter, EdgeAudio rolled out it's
proprietary order processing and customer support software
called "Edgeware" and completed a staff and management
reorganization in order to, among other things, enhance
customer service support, and the president of EdgeAudio was
terminated; in addition, one member of EdgeAudio's board of
directors resigned. EdgeAudio also prepared for its
participation in the Consumer electronics show held in Las
Vegas in January. EdgeAudio was invited to share a booth
with DiAuralr licensor Ray Kimber's company, Kimber Kables.
In keeping with its plan for a new product introductions
each quarter, EdgeAudio introduced its 8" inch subwoofer as
an alternative to the 12" subwoofer that complimented its
original product line.
Atomic Soccer USA, Ltd
Atomic, with headquarters in Madison, Wisconsin, makes
and distributes soccer uniforms under the "A-Soccer"
label, and basketball, volleyball, lacrosse, and hockey
uniforms under the "BAHR" label. During the quarter ended
December 31, 2000, TSET, Inc. executive vice-president Erik
W. Black took over the responsibilities of chairman of the
board of Atomic from Jeffrey D. Wilson, TSET, Inc. chairman
and chief executive officer. A management change took place
during the quarter as Atomic's president resigned to pursue
other opportunities. Tim Beglinger, who was serving as
vice-president of operations, was promoted to President.
Atomic launched a new website, www.asoccer.com, during the
quarter which will facilitate communication with Atomic's
sales representative
11
groups and with its end customers. In order to enhance its
market exposure, Atomic added a new sales rep group in the
Midwest to seek to exploit the Chicago metro area, the state
of Illinois and the St. Louis market.
During the quarter, Atomic began to transition the
trade name change for its soccer products from the Atomic
Soccer label to the "A" Soccer label. This change was
necessitated by a potential brand name conflict with
Austrian ski and ski equipment manufacturer and retailer
"Atomic Ski".
Cancer Detection International
CDI engages in the business of performing state-of-the-
art blood laboratory analysis for the very early detection
of cancer. CDI utilizes specialized processing and handling
of blood serums to be laboratory assayed in order to
identify the presence and the level of anti-malignin
antibodies in the patient. The blood analysis utilized by
CDI has recently been approved by the FDA and is covered by
Medicare and most other insurances. As of December 31, 2000,
the Company has not begun to implement the CDI business
plan.
Despite the activities of its subsidiaries, the Company
generated no significant revenues. Although the recently
acquired subsidiary, Atomic, has generated limited revenues
during the past several years, EdgeAudio has only recently
begun revenue generating activities. KAT has primarily been
engaged in research and development activities, establishing
sources of supply, training personnel and developing
markets. As a result, the Company's ability to achieve
profitability will depend on its ability to successfully
develop applications for certain of its products, obtain
regulatory approvals, and develop the capacity to
manufacture and extensively market its products.
The Company can make no assurance that its subsidiaries
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,
the Company 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 its sales
force and its presence on the internet.
Results of Operations
- ---------------------
This discussion summarizes the significant factors
affecting the consolidated operating results and financial
condition of the Company during the quarter ended December
31, 2000 and should be read in conjunction with the consolidated
financial statements and notes thereto included in this report
as well as those included in the Company's recently filed Form 10K.
The discussion herein with respect to the consolidated
statements of operations does not contain comparable information
with the same periods in the prior year and no analysis of the
same is being given herein since it is not properly susceptible
to narrative comparison by virtue of the facts that (a) as
indicated in Item 1 of Form 10-K, the company was basically
inactive from the time that it discontinued operations in
1996 until the time that it was reactivated mid-1999 and (b)
from inception through June 30, 2000 it had no significant
revenues from operations.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months and six months ended December 31, 2000
Revenue and cost of sales
Revenues are generated through sales sports apparel at
A-Soccer and home theater speaker systems and accessories at
EdgeAudio. Sales for the quarter ended December 31, 2000
were $445,952 while cost of sales were $244,472 resulting in
a gross profit for the quarter of $201,480 and a gross
margin of 45.2%. Gross margins
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at EdgeAudio and A-Soccer were 48.0% and 35.4%,
respectively, and the mix in sales was 77.4% EdgeAudio and
22.6% A-Soccer creating a higher overall gross margin.
Sales for the six months ended December 31, 2000 were
$834,790 while cost of sales were $486,399 resulting in a
gross profit of $348,391 and a gross margin of 41.7%. Gross
margins at EdgeAudio and A-Soccer were 48.1% and 36.7%,
respectively, and the mix in sales was 44.1% EdgeAudio and
55.9% A-Soccer.
Operating expenses
Operating expenses for the quarter ended December 31,
2000 amounted to $1,608,224 of which compensation and
benefits were 37%, marketing was 10%, research and
development was 4%, professional services were 18%,
intangibles amortization was 13% and other general and
administrative expenses accounted for 19%. Primarily as a
result of the above, the net loss for the quarter ended
December 31, 2000 was $(1,369,441) thereby increasing the
Company's accumulated deficit to $(5,563,102) at December
31, 2000. Operating expenses for the six months ended
December 31, 2000 amounted to $2,262,923 of which
compensation and benefits were 40%, marketing was 8%,
research and development was 4%, professional services were
13%, intangibles amortization was 16% and other general and
administrative expenses accounted for 18%.
CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2000
Total assets of the Company at December 31, 2000 were
$8,986,356 of which $904,743 of inventory, $2,487,509 of
patents/intellectual property, and $5,236,473 of goodwill
accounted for approximately 10%, 28% and 58%, respectively.
Total current assets at December 31 and June 30 amounted to
$1,105,236 and $894,099, respectively, while total current
liabilities for those same periods amounted to $2,729,119 and
$2,628,717, respectively, creating a working capital deficit
of $(1,623,885) and $(1,734,618) at each respective period end.
This working capital deficit is mainly attributable to Atomic current
notes payable incurred to finance operating deficits during
its development stage and early operating stage and accrued
stock and other compensation. Total liabilities as at December
31 and June 30, 2000 were $2,729,119 and $2,805,059, respectively,
representing a reduction of $75,940 or 2.7%. Shareholders equity
(including the above accumulated deficit) as at December 31 and June
30, 2000 was $5,652,336 and $6,346,216, respectively,
representing a decrease of $(693,880) or (10.9)%.
Liquidity and Capital Resources
- -------------------------------
Net working capital at December 31, 2000 of
$(1,623,885) represented an improvement over net working
capital at June 30, 2000 of $10,733 or 6.4%. The current
ratio improved from 34% at June 30, 2000 to 41% at December
31, 2000. The Company's return on average equity was
(22.8)% during the six months ended December 31, 2000. Net
cash flow used on operating activities was $1,079,870 for
the quarter ended December 31, 2000 and $1,947,498 for the
six months ended December 31, 2000.
The Company was able to satisfy its cash requirements
for the quarter ended December 31, 2000 though the issuance
and sale of its common stock and the issuance. It will
continue to satisfy cash needs in this manner in the near
term. On November 29, 2000, the Company's private placement
memorandum ("PPM") expired without the minimum required
investment. The Company elected not to continue the PPM because
of, among other reasons, the condition of the capital
markets. The Company is engaged in alternative fund raising
activities and is attempting to gain access to additional
capital markets that could provide financial resources. Funding
from one or more of those sources will provide working capital
until the Company can provide such from its ongoing operations.
There is no assurance that these fund raising efforts will be
successful.
Important Factors Relating To Forward-Looking Statements
- --------------------------------------------------------
This document contains numerous forward-looking
statements about the Company's business and future. The United
States Private Securities Litigation
13
Reform Act of 1995 provides a "safe harbor" for certain
forward-looking statements. Our forward-looking statements
are expressed in good faith and we believe that there is a
reasonable basis for us to make them. However, readers are
cautioned not to place undue reliance an such statements
about our: 1) plans; 2) objectives; 3) goals; 4) strategies;
5) expectations for the future; 6) future performance and
events; 7) underlying assumptions for all of the above; and
8) other statements that are not statements of historical fact.
The Company makes these forward-looking statements
based on its analysis of internal and external historical
trends and future expectations. However, such statements involve
risks and uncertainties that could cause our actual results
to materially differ from our forward-looking statements and
there can be no assurance that we will achieve the results set
forth in these forward-looking statements. In addition to other
factors, the following are important factors that could cause our
actual results to materially differ from our forward-looking
statements: 1) the results of our product testing; 2) the time
and costs involved in obtaining regulatory approvals for our
systems and products; 3) develop or acquire new technologies; 4)
competitive factors; 5) the availability of financing on terms
and conditions acceptable to us; 6) the availability of personnel
with requisite skills; and 7) the terms of any new collaborative,
licensing and other arrangements that we may establish.
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk
The Company does not own any market risk sensitive
instruments and does not operate in any foreign countries
that would make is susceptible to foreign currency risk.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings -
On January 13, 2000, the Company initiated legal
proceedings in Clackamas County, Oregon against Foster &
Price Ltd., an Isle of Man corporation (the "Defendant"),
seeking, among other things, a judicial declaration that
a certain Term Sheet signed by the Company and the Defendant was
lawfully terminated by the Company due to the Defendant's
failure to perform certain terms thereunder and is null and
void, and that the Company and the Defendant have no further
contractual obligations between them. The Defendant claimed
entitlement to the issuance of 10,000,000 shares of the
Company's common stock, notwithstanding the Defendant's nonperformance
of certain important obligations under the Term Sheet. Discussions
between the Company and the Defendant failed to produce a
mutually satisfactory resolution of the matter, whereupon
the Company initiated the litigation. This litigation is
currently in the discovery phase. The Company believes
that the Defendant's demands are without merit and intends
to vigorously seek judicial declaration in its favor.
On February 2, 2001, the Company initiated legal proceedings
in Clackamas County, Oregon against W. Alan Thompson, Ingrid
T. Fuhriman, and Robert L. Fuhriman II (collectively the
"Defendants"), formerly executive officers and members of
the board of directors of the Company's wholly-owned
subsidiary, Kronos Air Technologies, Inc. This suit
alleges, among other things, breach of fiduciary duties and
breach of contract by the Defendants, and seeks, among other
things, an order from the court referring the dispute to
arbitration in accordance with the terms of the Defendants'
respective employment agreements, which were terminated by
the Company on January 30, 2001, and other appropriate
equitable relief.
ITEM 2. Changes in Securities
During the quarter ended December 31, 2000, the Company
authorized the following equity securities, some of which
were issued, none of which were registered as of the date of
their issuance:
14
On December 8, 2000, the Company authorized the
issuance of 168,492 common shares valued at $0.59 per share
to one entity, an accredited investor, in exchange for cash.
The above shares will be issued 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 on the transaction.
On December 27, 2000, the Company authorized the
issuance of 39,091 common shares valued at $0.55 per share
to two persons, both of which are accredited investors, in
exchange for cash. The above shares will be issued 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 on
the transaction.
ITEM 3. Defaults upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders
- - None
On Friday, December 15, 2000, the Company held its
Annual Meeting of Stockholders. Charles D. Strang, Richard
F. Tusing and Daniel R. Dwight were elected directors of the
Company at the meeting. The term of office as a director of
Jeffrey D. Wilson continued after the meeting.
1. Election of three directors, Charles D. Strang, Richard
F. Tusing and Daniel R. Dwight, for the ensuing year and
until their successors are duly elected and qualified.
For: 15,915,723
Against: 5,100
Abstain: 9,500
2. Ratification of Grant Thornton LLP as independent
auditors for the year ended June 30, 2000.
For: 15,915,723
Against: 5,100
Abstain: 9,500
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None were issued during the quarter ended December 31, 2000.
15
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on this 14th day of February 2001.
TSET, INC.
By /s/ Jeffrey D. Wilson
-----------------------------------
Jeffrey D. Wilson, Chairman of
the Board of Directors and
Chief Executive Officer
In accordance with the Exchange Act, this report has
been signed below on February 14 by the following persons
on behalf of the registrant and in the capacities indicated.
/s/ Jeffrey D. Wilson Chief Executive Officer
- ------------------------------------ and Chairman of the
Jeffrey D. Wilson Board of Directors
/s/ Richard A. Papworth Chief Financial Officer
- ------------------------------------
Richard A. Papworth
/s/ Erik W. Black Executive Vice President
- ------------------------------------
Erik W. Black
16