-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PmJoGHDvRnefEt45VK9uu7l4a7EQPaGG+ZLfiqANUbROn3DFeuOkn/EIlEguFSC/ 7nvs506dMUczUkP+ftJqCg== 0000823070-01-500011.txt : 20020412 0000823070-01-500011.hdr.sgml : 20020412 ACCESSION NUMBER: 0000823070-01-500011 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010831 FILED AS OF DATE: 20011127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOFIRE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000823070 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890] IRS NUMBER: 133421355 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-19945 FILM NUMBER: 1799693 BUSINESS ADDRESS: STREET 1: 21 INDUSTRIAL AVE CITY: UPPER SADDLE RIVER STATE: NJ ZIP: 07458 BUSINESS PHONE: 2018181616 FORMER COMPANY: FORMER CONFORMED NAME: NFW CAPITAL GROUP INC DATE OF NAME CHANGE: 19900427 FORMER COMPANY: FORMER CONFORMED NAME: PNF INDUSTRIES INC DATE OF NAME CHANGE: 19950913 FORMER COMPANY: FORMER CONFORMED NAME: PORTAFONE INTERNATIONAL CELLULAR COMMUNICATIONS INC DATE OF NAME CHANGE: 19920128 10KSB 1 r10k01.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended August 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ________ Commission File Number: 0-19945 NoFire Technologies, Inc. ------------------------- (Name of small business issuer in its charter) Delaware 22-3218682 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 21 Industrial Avenue, Upper Saddle River, New Jersey 07458 ----------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (201) 818-1616 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.20 per share Page 1 Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by the Court. YES X NO___ 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___ Check if there is no disclosure of delinquent filers contained in this form in response to Item 405 of Regulation S-B, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for its fiscal year ended August 31,2001 $239,186 Aggregate market value of the voting stock held by non-affiliates as of November 1, 2001 $3,500,835 Number of shares of common stock outstanding as of as of November 1, 2001 19,820,430 Documents incorporated by reference: NONE Transitional small business disclosure format. YES___ NO X Page 2 PART I Item 1. DESCRIPTION OF BUSINESS BACKGROUND OF THE COMPANY; REORGANIZATION NoFire Technologies, Inc. ("NoFire" or the "Company") is a development stage company engaged in the development, manufacture and marketing of fire retardant, intumescent products. The Company was organized under the laws of the State of Delaware on July 13, 1987. Under a Chapter 11 proceeding, the Bankruptcy Court confirmed a Plan of Reorganization for the Company, which became effective on August 11, 1995. Claims of creditors, to the extent allowed under the Plan, were required to be paid over a four year period. (See Note 4 to Financial Statements, page F-10.) BUSINESS OF THE COMPANY The business of the Company is the development, manufacture and marketing of fire retardant products and related consulting services. The Company manufactures a liquid fire retardant for use as a coating material, like paint, on many different kinds of substances to render them fire and heat resistant. The product can be manufactured in various liquid forms, specifically adapted for the particular substrate, application and degree of protection required; or as a coated textile product, typically a woven fiberglass material, coated with the NoFire liquid product. The NoFire liquid product belongs to a class of materials called intumescents, which means that they expand in size when heated. Intumescents, which have been produced since the 1950's, have a high degree of fire retardation and add significant heat protection to a coated surface upon expansion. The major performance characteristics of intumescent products include: useful temperature range; degree of fire and heat protection; adhesion to substrate; degree of toxicity in both the liquid state and during combustion; amount of smoke developed during combustion; ease of application; durability; resistance to weather; and price. Early intumescent products, as well as many current products, have had significant deficiencies with respect to several of these important performance characteristics (primarily the degree of fire and heat protection, useful temperature range, and/or toxicity) that have limited their usefulness. Page 3 The Company has developed intumescent products intended to eliminate or minimize these deficiencies and (i) provide significant protection for a wide range of substrates with relatively thin coats of fire protective material, (ii) be useful over a wide temperature range and (iii) utilize a waterbased, nontoxic formula. The NoFire products are manufactured based on formulas that combine a fluid intumescent with fibers of various sizes and types, which together provide the desired fire retardancy. The NoFire liquid formulas are covered by three United States Patents and corresponding patents and patent applications in over 30 foreign countries. The United States Patents are: No. 4,879,320 - Intumescent Fire-Retardant Coating Material, issued November 7, 1989, No. 4,965,296 - Intumescent Fire-Retardant and Electrically- Conductive Coating Material, issued October 23,1990 and No. 5,723,515 - Intumescent Fire-Retardant Composition for High Temperature and Long Duration Protection, issued March 3, 1998. The Company also has obtained United States Patents on certain applications: No. 5,985,385 - Fire and Heat Protection Wrap for Conduits, Cable Trays, Other Electrical Transmission Lines and Gas and Oil Pipelines, issued November 16, 1999 No. 6,048,805 - Fire, Heat and Backdraft Protection Shield for Firefighters, issued April 11, 2000 No. 6,074,714 - Fire and Heat Protection Wrap for Structural Steel Columns, Beams and Open Web Joists, issued June 13, 2000 No. 6,114,003 - Insulation Blanket Having an Inner Metal Core Air Cell and Adjoining Outer Insulation Layers, issued September 5, 2000 During fiscal 1999 the Company purchased from a non-affiliate the following United States Patent for $7,980: No. 4,956,218 - Fire Protection Blanket, issued September 11, 1990. The Company has submitted three additional patent applications to the United States Patent Office. Although the Company believes its patents are valid and enforceable, in the event of a challenge to their validity or an infringement of such patents, the Company's limited financial resources may restrict its ability to defend or enforce its rights under such patents in legal proceedings. The NoFire products are potentially useful on many different substrates, including wood and wood products, metals (steel, aluminum, and various Page 4 alloys), certain plastics, fabrics and textiles (fiberglass, natural and synthetic fibers). Industries that are presently using these types of product or are evaluating applications for them include maritime, military, nuclear power plants, construction, wood products manufacturing, public and private housing, hotels, railway, aircraft, and airports. In developing these opportunities, the Company has passed numerous tests and obtained various certifications for specific applications. MARKETING/DISTRIBUTION The Company markets its products using several different methods, depending upon the applications, industry, product, or territory being targeted. These methods include: direct marketing; use of independent agents/distributors; and exclusive and nonexclusive licensing arrangements. Because the Company has limited resources, it relies primarily upon independent parties to market and distribute ts products. In fiscal 2001, the Company added distributors for California, Hawaii, the South, Southwest and Middle Atlantic States, as well as Europe, the Middle East and India. COMPETITION There are many types of fire retardant products in general use today for many different applications. In addition to intumescent products, ablative, insulative and cementitious products are used, depending on the particular application, severity of fire retardant requirements, weight, space restrictions, and cost. Competition for the NoFire products may include all of these types of fire retardants and will depend on the particular application targeted. Typically, each application has a product or fire retardant technique of choice, which is usually the least expensive fire protection that meets the necessary requirements. Among the Company's primary competitors (products) are: W.R. Grace & Co. (Monocote); Carboline Company (Pyrocrete, Pyrolite, Nullifire); U.S. Gypsum (gypsum board); Stanchem Manufacturing (Albiclad); A/D Fireproofing (A/D Firefilm); PPG Industries (PittChar); DuPont (Nextel); Textron, Inc. (Chartek); Minerals Technology, Inc. (Firex); Herbert Co. (Unitherm); and various wood coatings manufactured by Albi, American Vamag, 3M, and DuPont. Such products may have a competitive advantage over the NoFire products because they either have an established share of the market, are well publicized and recognized, and/or are manufactured by companies having far greater resources than the Company. Page 5 SOURCES OF SUPPLY The NoFire liquid products are a blend of numerous liquids and solids, purchased from various third party suppliers. Several of such components are currently available only from a small number of suppliers. In the event that such suppliers were to terminate the manufacture or sale of such components for any reason, then the manufacture of NoFire products could be interrupted. The Company has developed alternative sources of supply for components and intends to continue seeking additional alternatives as the demand for its products warrants. MAJOR CUSTOMERS The Company's two largest customers during the most recent fiscal year represented 23% and 11% of total sales respectively. Sales to those customers are expected to be an important part of future revenues, and relations with them are good. GOVERNMENT REGULATIONS AND APPROVALS; RESEARCH AND DEVELOPMENT For most applications, fire retardant products are required to undergo testing for approvals by government or independent laboratories. These requirements are typically determined either by government agencies, such as the U.S. Nuclear Regulatory Commission, U.S. Coast Guard or U.S. Navy; or nationally recognized organizations, such as the American Society for Testing and Material ("ASTM") or Underwriters Laboratories, Inc. ("UL"); or international organizations such as the International Maritime Organization ("IMO"). Product development is continuing in many different areas, and various NoFire products have been tested and certified by independent laboratories for various applications in the areas of: building materials and construction (ASTM E84-87, UL94, UL723, UL746C, ASTM E152 and UBC 8-2); transportation (NFPA 417, FAR 25.855(c)); utilities (ASTM E814-88 and IEEE 383); nuclear power plants (NRC Generic Letter 86-10 Supplement 1); and high-speed ferries (IMO A.754(18)). In maritime, naval and other government applications, products have been listed in the U.S. Navy's Qualified Product List (QPL), were accepted for listing by the General Service Administration for all U.S. Government applications, received type approval according to the International Maritime Organization's SOLAS codes by the U.S. Coast Guard and four of the world's major ship registries, and were approved by Det Norske Veritas for distribution in the European Community (EC). Structural steel fire barrier tests were passed at Underwriters Laboratories allowing sales for this application. The Company also conducts in-house fire and heat endurance tests exclusively for research and development and feasibility studies. These tests are used to develop applications and solutions to problems, but are not a substitute for tests by independent laboratories or government Page 6 agencies that are generally required before the product can be sold for particular applications. The Company's direct costs for research and development(which has been conducted primarily by its president and chief technical officer, Dr. Gottfried, as a part of his overall duties) have not been material and have not been segregated for accounting purposes. EMPLOYEES As of November 1, 2001, the Company had seven employees, six of whom were full-time employees. Item 2. DESCRIPTION OF PROPERTY The Company occupies 12,700 square feet of space at 21 Industrial Avenue, Upper Saddle River, New Jersey. The facility includes office space, storage space and an area for the mixing and testing of products and is adequate for the Company's current requirements. The Company rents such space at an approximate monthly rental of $9,660 pursuant to a lease expiring August 31, 2002. Item 3. LEGAL PROCEEDINGS As a result of the bankruptcy reorganization proceeding referred to in Item 1, until unsecured creditors whose claims were recognized in the Plan are paid in full, the Bankruptcy Court has continuing jurisdiction relative to (i) the approval and payment of certain claims and expenses and (ii) the disposition of the two patents owned by the Company at the time of the bankruptcy. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None Page 7 PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION The Company's shares are quoted on the "OTC Bulletin Board". Pink Sheets, LLC, formerly The National Quotation Bureau, reported the following high and low bid quotations which reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions. 2000-2001 1999-2000 Quarter Ended High Low High Low ------------- ---- --- ---- --- November 30 $0.4375 $0.3125 $0.73 $0.57 February 29/28 $0.3125 $0.125 $1.125 $0.4375 May 31 $0.35 $0.13 $0.875 $0.4375 August 31 $0.65 $0.16 $0.59375 $0.375 (b) HOLDERS As of November 1, 2001, there were approximately 290 holders of record of the Company's outstanding Common Stock. (c) DIVIDENDS The Company has not paid any cash dividends and intends to retain earnings, if any, during the foreseeable future for use in its operations. Payment of cash dividends in the future will be determined by the Company's Board of Directors based upon the Company's earnings, financial condition, capital requirements and other relevant factors. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company continues product development and application testing. As a result of this activity, certifications have been obtained for specific applications as discussed in Item 1 - Government Regulations and Approvals; Research and Development, and additional patent applications have been filed resulting in the issuance of five patents since August 1995 and three applications awaiting action by the U.S. Patent Office referred to in Item 1 - Business of the Company. Marketing efforts to develop new applications and establish new customers were continued in fiscal 2001. The efforts undertaken by the Company in product approvals and marketing initiatives should assist it in creating greater sales in fiscal 2002 and beyond. Page 8 The greatest obstacles encountered in obtaining major sales contracts are the multitude of tests and approvals required, competition against well established and better capitalized companies, cost, and the slow process of specifying a new product in highly regulated applications. The Company intends to continue its research efforts to adapt its products to meet market requirements. Sales and marketing efforts will concentrate on current products and applications through direct sales and distributor license agreements with the Company providing a major role in training representatives. Continuing efforts are being made to obtain greater domestic and international sales by enlarging the Company's distributor network. The number of manufacturing and quality control employees will increase with increased production. The salaried administrative and marketing staff will be evaluated and may be increased to support sales and marketing initiatives. Additional support for direct sales is expected to be provided by commissioned independent agents or new full time employees on a heavily weighted commission basis. LIQUIDITY AND CAPITAL RESOURCES During fiscal year 2000, funds required to continue the Company's product development and marketing efforts were provided by the private sale of common stock with warrants in the amount of $1,100,000. The investors were entitled to 1,641,792 units consisting of one share of common stock and warrants for two and one-half shares of common stock at an exercise price of $0.67 per share expiring five years from date of issue. The sale was to a group of accredited investors who has advised the Company that it has and will continue to file all reports with the SEC that it deems appropriate including Schedules 13D and Forms 3 and 4. Additionally, the Company sold to one member of that same group debentures of $500,000 in fiscal 2000 and $1,000,000 in fiscal 2001. The debentures were convertible into common stock, and during fiscal 2001 the total debentures of $1,500,000, along with accrued interest of $94,640, were converted at the rate of $0.50 per share into 3,189,279 shares of common stock. Also in fiscal 2001, $206,767 was obtained through the sale of a portion of the Company's New Jersey Operating Loss Carry Forward under a program sponsored by that state. Because of limited cash resources, the Company has deferred payment of $1,187,503 from the installments of the Chapter 11 liability to unsecured creditors that were due in September 1996, 1997, 1998 and 1999. Of the delinquent amount, $790,686 is due to officers and directors of the Company. In order to pay those liabilities and meet working capital needs until significant sales levels are achieved, the Company will continue to explore alternative sources of funding including exercise of warrants, bank and other borrowings, issuance of convertible debentures, issuance of common stock to settle debt, and the sale of equity securities in a public or private offering. Page 9 The Company looks forward to substantially increased sales in fiscal 2002 which will provide the Company with additional cash resources. There is no assurance that revenues from sales, and/or financing efforts described above will be sufficient to fund the Company's cash requirements in the future. On September 24, 2001, the Company sold to an accredited investor a note for $150,000. The note bears interest at a rate of 8%, is due no later than January 31, 2002 and is secured by the assignment of the proceeds of an additional sale of the Company's New Jersey Net Operating Loss Carry Forward due in November 2001. In connection with the issuance of the note, five-year warrants were granted for 100,000 shares of common stock at an exercise price of $0.20 per share. RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED AUGUST 31, 2001 AND 2000 The Company remained a development stage company in fiscal year 2001. Sales of $239,185 represented an increase of $96,861 or 68% from the $142,324 in the prior year. The net loss of $1,185,436 for fiscal year 2001 was $905,190 or 43% less than the net loss of $2,090,621 in the prior year. The write-down of excess inventory of $20,000 in fiscal 2000 increased the reserve for excess inventory to an amount considered reasonable at the end of that fiscal year. No such adjustment was considered necessary at the end of fiscal 2001. General and administrative expenses of $1,332,213 in fiscal year 2001 were $682,252 or 34% less than the prior year. The most significant change was a decrease of $337,000 in the amortization of patents and other assets. The value of those assets was established at the conclusion of the Chapter 11 proceedings in 1995 and was amortized over five years ending in fiscal 2000. Other decreases were $123,600 in testing expenses, $59,000 in marketing consultants, $51,400 in officer salaries and bonuses, and $49,800 in travel expenses. The $66,820 increase in interest expense mainly results from the interest accrued on the convertible debentures issued between June 2000 and April 2001, all of which were converted to common stock in June 2001. During fiscal 2001, the Company realized $206,767 through the sale of a portion of its New Jersey Net Operating Loss Carry Forward under a program sponsored by that state. Page 10 Item 7. FINANCIAL STATEMENTS The Company's annual financial statements for the fiscal year ended August 31, 2001, together with the report thereon by the Company's independent auditors, Wiss & Company, LLP, ("Wiss"), are set forth herein commencing on page F-1 of this Form 10-KSB and are incorporated herein by reference. Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. None Page 11 PART III Item 9. DIRECTORS AND EXECUTIVE OFFICERS MANAGEMENT The following table sets forth the names of all directors and officers of the Company and the position in the Company held by them: Name Age Position William A. Retz 61 Director and Chief Executive Officer Sam Oolie 65 Director, Chairman of the Board, Chief Operating Officer and Treasurer Samuel Gottfried 55 Director, President, Chief Technical Officer and Assistant Treasurer Bernard J. Koster 68 Director Gerald H. Litwin 59 Director Alphonso Margino 63 Vice President and Secretary Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and have qualified. Officers are elected by the Board of Directors and serve at the pleasure of the Board of Directors. William A. Retz Rear Admiral Retz USN (Ret) became Chief Executive Officer and a director effective September 1, 2000. Admiral Retz concluded a distinguished thirty-two year career with the US Navy in 1995. From 1996 to 1999 he was Vice President of ARAMARK Corp., a large managed services company, and also was a consultant in his own company. He presently serves as a director of AEPTEC Corp, a wireless computor solutions company; and several non-profit organizations including Leadership Inc., Independence Seaport Museum (Secretary), Surface Navy Association (PR Chair), National Defense Industrial Association (Vice President) and Navy League of the US. Page 12 Sam Oolie Mr. Oolie has served as a Director of the Company since September, 1993, as Chairman of the Board since August 16, 1995, and as Chief Operating Officer since July 26, 1999. He was Chief Executive Officer from August 16, 1995 to July 26, 1999. Since 1985, Mr. Oolie has been Chairman of Oolie Enterprises, a privately owned investment company. Mr. Oolie also serves as a Director of Comverse Technology, Inc., a manufacturer of voice storage and forwarding systems and message management computer services, since May, 1985; and NCT Group, Inc., a company that develops and manufactures electronic noise cancellation devices, since April, 1987. Samuel Gottfried Dr. Gottfried was named a director of the Company and appointed President of its fire retardant products subsidiaries in August 1991. He was appointed Interim Chairman of the Board and Chief Executive Officer on August 14, 1992. On August 16, 1995 he was elected President, Chief Technical Officer and Assistant Treasurer of the Company. Dr. Gottfried holds a doctorate in electrical engineering from New York University and a Ph.D. in electrophysics from the Polytechnic Institute of New York. Bernard J. Koster Mr. Koster has served as a Director of the Company since September, 1993. Mr. Koster is an attorney and accountant and since January 1, 1993 has been of counsel to the law firm of Litwin & Tierman, P.A., formerly Gerald H. Litwin, P.A. and prior to that, Litwin and Holsinger, Hackensack, New Jersey. Gerald H. Litwin Mr. Litwin has served as a Director of the Company since August 16, 1995. During the past five years, Mr. Litwin, an attorney, has been a principal in the law firm of Litwin & Tierman,P.A., previously the principal of Gerald H. Litwin, P.A. and prior to that, a partner in the law firm of Litwin & Holsinger, Hackensack, New Jersey. Mr. Litwin's firms served as the Company's General Counsel, and his current firm continues to provide certain legal services to the Company. Alphonso Margino On June 15, 1998 Mr. Margino was appointed to the board and named to the offices of Vice President and Secretary. He served on the board until November 24, 1998. Previous to June 15, 1998, he was associated with the Company in marketing capacities. During the past five years none of the foregoing persons (a) has served as a general partner or an executive officer of any business as to which a bankruptcy petition was filed during his service in such capacity or within two years thereafter; (b) was convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and Page 13 other minor offenses); or (c) has been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, by any court of competent jurisdiction, permanently or temporarily barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activity. The Board of Directors of the Company has established an Executive Committee (Dr. Gottfried, Mr. Oolie and Radm Retz), an Audit Committee (Mr. Koster and Mr. Litwin), and a Compensation Committee (Mr. Koster, Mr. Litwin and Mr. Oolie). Item 10. EXECUTIVE COMPENSATION The Company's Summary Compensation Table is set forth below. Except as discussed in Notes 2 and 3 to such table, the Company had no Option/SAR Grants, Aggregated Option/SAR Exercises or Fiscal Year End Option/SAR's for the years ended August 31, 2001, 2000, and 1999, nor were there any long-term incentive plan awards, stock options or stock appreciation rights. Non-employee Directors are not compensated for Board of Directors meetings or committee meetings attended. SUMMARY COMPENSATION TABLE For the Years Ended August 31, 2001, 2000, and 1999 Name and Year Ended Salary Salary Options All other Principal Position August 31 Paid Deferred(1) SAR's Compensation - ------------------ ---------- ------ ----------- ----- ----------- Sam Oolie 2001 $112,430 $36,251 None None Chairman of the Board, 2000 $153,605 None None None Chief Operating Officer 1999 $80,812 $57,700 None None since July 26, 1999 and Chief Executive Officer until July 26, 1999 William A. Retz 2001 $125,733 $39,462 (2) $10,080(2) Chief Executive Officer from September 1, 2000 Samuel Gottfried 2001 $143,768 $24,616 (3) None President and Chief 2000 $167,578 None None None Technical Officer 1999 $115,255 $30,760 None None Alfonso Margino 2001 $71,987 $5,753 None None Vice President and 2000 $78,005 None None None Secretary since 1999 $58,317 $19,240 (3) None June 15, 1998 Page 14 Note (1) Amounts shown as salary deferred for fiscal year 1999 represent amounts payable to such executives in the future commencing when the Company achieves sales at an annualized rate over $2 million and such payments are authorized by the Board of Directors. Deferred salaries in fiscal 2001 are payable when revenues or financings permit payment as determined by the Board of Directors. Note (2) Warrants granted and compensation paid in the form of common stock are discussed in the following description of RAdm Retz employment agreement. Note (3) On November 24, 1998 the Company's Executive Committee authorized the issuance of a five-year warrant to Mr. Margino for 5,000 shares at an exercise price of $1.50 per share with immediate vesting. On September 5, 2000 a five-year warrant was issued to Dr. Gottfried for 278,000 shares at an exercise price of $0.50 per share. This warrant became fully vested on September 5, 2001. EMPLOYMENT AGREEMENTS On September 1, 2000, an employment agreement became effective with William A. Retz, Rear Admiral, USN (Ret). The agreement is terminable by the Company at any time, with or without defined cause. Compensation consists of a base annual salary of $165,000. On the commencement date of the agreement, 36,000 shares of common stock were released to RAdm Retz with the $10,080 value recorded as additional compensation. Also under the agreement, a warrant for 500,000 shares of common stock was granted with vesting of 100,000 shares on the first five anniversary dates of the commencement date of the agreement. All warrants expire on the earlier of the seventh anniversary of the commencement date of the agreement or the date at which a sale of the Company may occur. Page 15 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of November 1, 2001 the number of shares of Common Stock owned of record or beneficially owned by each of the Company's officers, directors, and stockholders owning at least 5% of the Company's issued and outstanding shares of Common Stock, by all of the Company's officers and directors as a group, and the percentage of the total outstanding shares represented by such shares. Name and Address Shares Beneficially Approximate Beneficial Owner Owned (1) Percent of Class (2) - ---------------- ------------------- --------------------- William A. Retz 136,000 0.68% NoFire Technologies, Inc. 21 Industrial Avenue Upper Saddle River, NJ 07458 Sam Oolie 1,900,000 9.44% NoFire Technologies, Inc. 21 Industrial Avenue Upper Saddle River, NJ 07458 Samuel Gottfried 2,038,000 9.87% NoFire Technologies, Inc. 21 Industrial Avenue Upper Saddle River, NJ 07458 Alphonso Margino 293,000 1.47% NoFire Technologies, Inc. 21 Industrial Avenue Upper Saddle River, NJ 07458 Bernard J. Koster 166,300 0.84% 7 Old Smith Road Tenafly, NJ 07670 Gerald H. Litwin 165,000 0.83% Two University Plaza Hackensack, NJ 07601 Robert Downey (3) 2,937,353 13.40% 755 Park Avenue New York, NY 10021 NF Partners (3) 15,547,653 54.27% 667 Madison Avenue New York, NY 10021 All officers and directors 4,698,300 21.94% as a group (six persons) Page 16 Note (1) Shares Beneficially Owned includes fully vested warrants in the following amounts: Retz 100,000; Oolie 300,000; Gottfried 838,000; Margino 105,000; Koster 82,500; Litwin 165,000; Downey 2,098,109; and NF Partners 8,827,410. Note (2) As of November 1, 2001, there were 19,820,430 shares of Common Stock issued and outstanding. Percentage of Class for all officers and directors as a group is computed on 21,410,930 shares which includes 1,590,500 shares exercisable within 60 days pursuant to warrants owned by all the persons included. Note (3) Mr. Downey and NF Partners are members of a group of accredited investors who purchased their interest in the Company under agreements to purchase units consisting of common stock and warrants for common stock at varying prices beginning in 1998. The final purchase was made in fiscal 2000 and is discussed in the section on Liquidity and Capital Resources. NF Partners purchased all of the debentures convertible into common stock as described in that same section. Forms 13D, which included as exhibits the full text of the agreements, were filed with the SEC for each purchase under the agreements and the purchase of convertible debentures. COMPLIANCE WITH SECTION 16(a) OF THE 1934 ACT Section 16(a) of the 1934 Act requires the Company's directors and executive officers and persons who own more than 10% of a registered class of the Company's equity securities to file with the Commission initial reports of ownership and reports of changes in ownership of the Company's Common Stock. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based on a review of copies of Forms 3, 4 and 5 and amendments thereto furnished to the Company during or with respect to its fiscal year ended August 31, 2001, the Company believes that no director or officer of the Company or beneficial owner of more than 10% of the Company's Common Stock failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during such fiscal year. Page 17 Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As a result of loans made to fund the Company's operations during its trusteeship under a Chapter 11 bankruptcy that ended on August 11, 1995 plus accrued interest to that date, there were balances due at September 1, 1996 of $171,137 to Mr. Oolie, and $10,918 to Mr. Koster. No payments have been made against these balances which are included in the Company's liability for settled claims. On June 18,1997, the Company's Board of Directors authorized the issuance of warrants to Mr. Oolie, Dr. Gottfried, Mr. Margino, Mr. Koster, and Mr. Litwin entitling such holders to purchase respectively 300,000, 160,000, 100,000, 25,000 and 25,000 shares of the Company's Common Stock at a price of $2.00 per share. On January 21, 1999 the board authorized the issuance of warrants to Mr. Koster and Mr. Litwin entitling them each to purchase 20,000 shares of the Company's Common Stock at a price of $1.25 per share. On September 5, 2000 two five-year warrants were granted to Dr. Gottfried entitling him to purchase 222,000 shares and 278,000 shares respectively of the Company's common stock at a price of $0.50 per share. He immediately assigned the warrant for 222,000 shares to an unrelated third party and retained the warrant for 278,000 shares. On December 20, 2000 warrants were granted to Mr. Koster and Mr. Litwin entitling them each to purchase 20,000 shares of the Company's Common Stock at a price of $0.50 per share. All of the retained warrants are included in the warrants outstanding as noted in Item 11, Note 1. Mr. Litwin is the principal of the law firm of Litwin & Tierman, P.A., formerly Gerald H. Litwin, P.A., and prior to that, Litwin & Holsinger. He served as the Company's general counsel until November 4, 1996, and continues to provide certain legal services to the Company. The Company is obligated to that firm in the amount of $642,406 which includes fees for legal services rendered during the pendency of the Company's bankruptcy reorganization proceedings. Interest has been accrued on unpaid balances since fiscal 1997. Expenses of fiscal 2000 were $59,572 for legal services and $97,919 for interest charges, and in fiscal 2001, $37,706 in fees and $113,687 in interest charges. In addition, Litwin & Holsinger filed a claim as an unsecured creditor in the bankruptcy proceedings in the gross amount of $140,403 in respect of pre-petition legal services rendered and has received one distribution in the amount of $15,584 in respect thereof. Page 18 Item 13. EXHIBITS AND REPORTS ON FORM 8-K A. THE FOLLOWING FINANCIAL STATEMENTS OF THE COMPANY ARE BEING FILED PURSUANT TO ITEM 7 AS PART OF THIS ANNUAL REPORT ON FORM 10-KSB 1. FINANCIAL STATEMENTS Index to Financial Statements F-1 Independent Auditors' Report F-2 Financial Statements: Balance Sheet as of August 31, 2001 F-3 Statements of Operations for the Years Ended August 31, 2001 and 2000 and the period July 13, 1987 (date of inception) through August 31, 2001 F-4 Statements of Changes in Stockholders' Equity (Deficiency) for the Years Ended August 31, 1989 through August 31, 2001 F-5 to F-6 Statements of Cash Flows for the Years Ended August 31, 2001 and 2000 and the period July 13, 1987 (date of inception) through August 31, 2001 F-7 Notes to Financial Statements F-8 to F-15 2. EXHIBITS None 3. REPORTS ON FORM 8-K None Page 19 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NOFIRE TECHNOLOGIES, INC. Date: November 8, 2001 By: /s/ Sam Oolie ------------------------ Sam Oolie, Chairman of the Board, Chief Operating Officer and Treasurer Date: November 8, 2001 By: /s/ William A. Retz ------------------------ William A. Retz, Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE DATE /s/ Samuel Gottfried - ---------------------------- November 8, 2001 Samuel Gottfried, Director /s/ William A. Retz - ----------------------------- November 8, 2001 William A. Retz, Director /s/ Bernard J. Koster - ----------------------------- November 8, 2001 Bernard J. Koster, Director /s/ Gerald H. Litwin - ----------------------------- November 8, 2001 Gerald H. Litwin, Director /s/ Sam Oolie - ----------------------------- November 8, 2001 Sam Oolie, Director Page 20 INDEX TO FINANCIAL STATEMENTS Page ------ Report of Independent Auditors F-2 Financial Statements: Balance sheet at August 31, 2001 F-3 Statements of operations for the years ended August 31, 2001 and 2000 and the period July 13, 1987 (date of inception) through August 31, 2001 F-4 Statements of changes in stockholders' equity (deficiency) for the years ended August 31, 1989 through August 31, 2001 F-5 to F-6 Statements of cash flows for the years ended August 31, 2001 and 2000 and the period July 13, 1987 (date of inception) through August 31, 2001 F-7 Notes to financial statements F-8 to F-15 F-1 INDEPENDENT AUDITORS' REPORT Board of Directors NoFire Technologies, Inc. We have audited the accompanying balance sheet of NoFire Technologies, Inc. (A Development Stage Company) as of August 31, 2001 and the related statements of operations, changes in stockholders' equity (deficiency) and cash flows for the two years in the period ended August 31, 2001, as listed in the accompanying index. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NoFire Technologies, Inc. at August 31, 2001, and the results of its operations and its cash flows for aforementioned periods 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 discussed in Note 2 to the financial statements, the Company has incurred substantial losses from operations since inception and at August 31, 2001 had a stockholders' deficiency of $2,401,248 and a working capital deficiency of $2,455,003. These factors 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 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Wiss & Company, LLP WISS & COMPANY, LLP Livingston, New Jersey October 12, 2001 F-2 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) BALANCE SHEET AUGUST 31, 2001 ASSETS CURRENT ASSETS: Cash $ 44,412 Accounts Receivable - trade 22,453 Inventories 153,095 Prepaid expenses and other current assets 51,264 ----------- Total Current Assets $ 271,224 EQUIPMENT, LESS ACCUMULATED DEPRECIATION OF $29,569 11,143 OTHER ASSETS: Patents, less accumulated amortization of $1,509,798 23,233 Security deposits 19,379 ---------- 42,612 ---------- $ 324,979 ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Current portion of settled liabilities $ 1,187,503 Accounts payable and accrued expenses 768,485 Loans and advances payable to stockholders 10,250 Deferred salaries 759,989 ---------- Total Current Liabilities $2,726,227 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIENCY): Common stock $.20 par value: Authorized - 50,000,000 shares Issued and outstanding - 19,820,430 3,964,086 Capital in excess of par value 3,206,855 Deficit accumulated in the development stage (9,572,189) ---------- Total Stockholders' Equity (Deficiency) (2,401,248) ---------- $ 324,979 ========== See accompanying notes to financial statements F-3 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) STATEMENTS OF OPERATIONS July 13, 1987 (Date of Inception) Year Ended August 31, Through 2001 2000 August 31, 2001 ---------- ---------- ---------- NET SALES $ 239,185 $ 142,324 $ 1,053,098 ---------- ---------- ---------- COSTS AND EXPENSES: Cost of sales 106,221 72,678 556,193 Write-down of excess inventory - 20,000 55,000 General and administrative 1,332,213 2,014,465 12,672,454 ---------- ---------- ---------- 1,438,434 2,107,143 13,283,647 ---------- ---------- ---------- LOSS FROM OPERATIONS (1,199,249) (1,964,819) (12,230,549) ---------- ---------- ---------- OTHER EXPENSES (INCOME): Interest expense 199,776 132,956 1,306,355 Interest income (6,822) (7,149) (23,683) Reorganization items - - 365,426 Litigation settlement - - 198,996 ---------- ---------- ---------- 192,954 125,807 1,847,094 ---------- ---------- ---------- LOSS BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM (1,392,203) (2,090,626) (14,077,643) DISCONTINUED OPERATIONS - - (1,435,392) ---------- ---------- ---------- LOSS BEFORE EXTRAORDINARY ITEM (1,392,203) (2,090,626) (15,513,035) EXTRAORDINARY ITEM - Gains on debt discharge - - 507,952 ---------- ---------- ---------- LOSS BEFORE INCOME TAXES (1,392,203) (2,090,626) (15,005,083) DEFERRED INCOME TAX BENEFIT 206,767 - 206,767 ---------- ---------- ---------- NET LOSS $(1,185,436) $(2,090,626) $(14,798,316) ========== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,294,084 15,567,052 ========== ========== BASIC AND DILUTED LOSS PER COMMON SHARE: $ (.07) $ (.13) ========== ========== See accompanying notes to financial statements F-4 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Deficit Common Stock Accumulated ------------------------ Capital During the Number of in Excess Development Shares Amount of Par Value Stage ---------- ---------- ---------- ------------ BALANCES, SEPTEMBER 1, 1988 - $ - $ - $ - YEAR ENDED AUGUST 31, 1989: Issuance of common stock 3,000 1,500 - - Net loss - - - (45,844) ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 1989 3,000 1,500 - (45,844) YEAR ENDED AUGUST 31, 1990: Issuance of common stock 50 1,000 - - Net loss - - - (278,916) ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 1990 3,050 2,500 - (324,760) YEAR ENDED AUGUST 31, 1991: Adjustment due to reverse acquisition (3,050) (2,500) 2,500 - Acquisition accounted for as a reverse purchase 3,071,659 307 (307) (517,893) Net loss - - - (592,276) ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 1991 3,071,659 307 2,193 (1,434,929) YEAR ENDED AUGUST 31, 1992: Issuance of common stock 394,736 39 2,252,860 - Net loss - - - (1,414,562) ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 1992 3,466,395 346 2,255,053 (2,849,491) YEAR ENDED AUGUST 31, 1993 Net loss - - - (1,357,669) ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 1993 3,466,395 346 2,255,053 (4,207,160) YEAR ENDED AUGUST 31, 1994 Net loss - - - (699,650) ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 1994 3,466,395 346 2,255,053 (4,906,810) YEAR ENDED AUGUST 31, 1995 Shares canceled in connection with the consummation of the reorganization plan (3,466,395) (346) (2,255,053) - Net loss - - - (837,210) Effect of adoption of fresh-start reporting - - (2,814,258) 5,744,020 Shares issued in connection with debt discharge at $.25 per share 187,000 37,400 9,350 - Shares issued in connection with reorganization plan at $.25 per share 8,000,000 1,600,000 400,000 - ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 1995 8,187,000 1,637,400 (2,404,908) -
See accompanying notes to financial statements F-5 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) (Concluded)
Deficit Common Stock Accumulated ------------------------ Capital During the Number of in Excess Development Shares Amount of Par Value Stage ---------- ---------- ---------- ------------ YEAR ENDED AUGUST 31, 1996 Issuance of common stock under private placement at $1 per share 300,000 $ 60,000 $ 240,000 $ - Issuance of common stock in exchange for services at $1 per share 62,500 12,500 50,000 - Net loss - - - (1,634,802) ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 1996 8,549,500 1,709,900 (2,114,908) (1,634,802) YEAR ENDED AUGUST 31, 1997: Issuance of common stock under private placement at a range of $.75 to $1 per share 1,117,700 223,540 869,160 - Net loss - - - (1,599,841) ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 1997 9,667,200 1,933,440 (1,245,748) (3,234,643) YEAR ENDED AUGUST 31, 1998: Issuance of common stock under private placement at $.90 per share, net of expenses of $76,745 1,388,884 277,777 895,474 - Issuance of common stock under private placement at $1 per share 550,000 110,000 440,000 - Issuance of common stock in exchange for services at a range of $.50 to $1 per share 119,200 23,840 45,360 - Shares issued in connection with debt discharge at a range of $.89 to $1 per share 220,350 44,070 162,509 - Net loss - - - (1,519,842) ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 1998 11,945,634 2,389,127 297,595 (4,754,485) YEAR ENDED AUGUST 31, 1999 Issuance of common stock under private placements at a range of $.50 to $.72 per share, net of expenses of $19,793 2,071,115 414,223 845,986 - Shares issued in connection with debt discharge at a range of $.95 to $.99 per share 19,225 3,845 14,636 - Net loss - - - (1,541,642) ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 1999 14,035,974 $ 2,807,195 $ 1,158,217 $(6,296,127) YEAR ENDED AUGUST 31, 2000 Issuance of common stock under private placements at $.67 per share, net of expenses of $72,557 1,641,792 328,358 699,085 - Issuance of common stock in exchange for conversion of convertible debentures at a rate of $.625 per share 917,385 183,477 389,889 - Net loss - - - (2,090,626) ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 2000 16,595,151 $ 3,319,030 $ 2,247,191 $(8,386,753) YEAR ENDED AUGUST 31, 2001 Issuance of common stock in exchange for services at a rate of $.28 per share 36,000 7,200 2,880 - Issuance of common stock in exchange for conversion of convertible debentures at a rate of $.50 per share 3,189,279 637,856 956,784 - Net loss - - - (1,185,436) ---------- ---------- ---------- ------------ BALANCES, AUGUST 31, 2001 19,820,430 $ 3,964,086 $ 3,206,855 $(9,572,189) ========== ========== ========== ============
See accompanying notes to financial statements F-6 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS
July 13, 1987 (Date of Inception) Year Ended August 31, Through 2001 2000 August 31, 2001 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,185,436) $(2,090,626) $(14,798,316) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 8,929 345,595 1,826,018 Extraordinary gain on debt discharge - - (507,952) Amortization of interest expense for settled liabilities - - 634,522 Revaluation of assets and liabilities to fair value - - 482,934 Litigation settlement - - 198,996 Common stock issued in exchange for services 10,080 - 141,780 Write-down of excess inventory - 20,000 55,000 Changes in operating assets and liabilities (net of effects from reverse purchase acquisition): Accounts receivable - trade 1,259 (23,712) (22,453) Inventories (50,401) (31,691) (208,095) Prepaid expenses 3,258 (11,125) (51,264) Accounts payable and accrued expenses 67,266 285,688 3,247,476 Security deposits - 457 (19,379) Deferred salaries 109,763 - 759,989 Obligation from discontinued operations - - 51,118 ---------- ---------- ---------- Net cash flows from operating activities (1,035,282) (1,505,414) (8,209,626) ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment - (7,928) (40,712) Increase in patent costs - (25,050) (164,320) Acquisition accounted for as a reverse purchase - - (517,893) ---------- ---------- ---------- Net cash flows from investing activities - (32,978) (722,925) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt - - 721,000 Principal payments on long-term debt - - (75,000) Principal payments on settled liabilities (23,913) (207,533) (2,875,345) Proceeds from issuance of common stock, net of related expenses - 1,027,443 8,474,943 Proceeds from issuance of long-term debt - - 785,113 Payments on advances from stockholder - (16,000) (60,750) Loans and advances received from stockholders - - 79,053 Interest accrued on loans from stockholder - - (8,053) Proceeds from issuance of 8% convertible debentures 1,000,000 500,000 1,936,002 ---------- ---------- ---------- Net cash flows from financing activities 976,087 1,303,910 8,976,963 ---------- ---------- ---------- NET CHANGE IN CASH (59,195) (234,482) 44,412 CASH AT BEGINNING OF YEAR 103,607 338,089 - ---------- ---------- ---------- CASH AT END OF YEAR $ 44,412 $ 103,607 $ 44,412 ========== ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 2,895 $ 8,852 $ 74,121 ========== ========== ========== Income taxes paid (benefit) $ (206,767) $ - $ (206,767) ========== ========== ========== Common stock issued in exchange for settlement of debt $ 1,594,640 $ 573,366 $ 2,439,816 ========== ========== ========== Common stock issued in exchange for subscriptions receivable $ - $ - $ 95,000 ========== ========== ========== Common stock issued in exchange for services $ - $ - $ 131,700 ========== ========== ==========
See accompanying notes to financial statements F-7 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of the Business - The Company manufactures and markets intumescent fire retardant products. The Company, which has realized limited sales while it continues to develop a market for its products, has been operating as a development stage enterprise since inception. Estimates and Uncertainties - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results, as determined at a later date, could differ from those estimates. Financial Instruments - Financial instruments include cash, accounts receivable, other assets, accounts payable, accrued expenses, settled liabilities, and due to stockholders. The amounts reported for financial instruments are considered to be reasonable approximations of their fair values. The fair value estimates presented herein were based on market or other information available to management. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts. Inventories - Inventories are stated at the lower of cost (first-in, first-out method) or market. Equipment - Equipment is recorded at cost and is depreciated primarily using the straight-line method over the estimated useful lives of 5 to 7 years for furniture and fixtures, manufacturing equipment and data processing equipment. Depreciation expense was $2,323 and $1,795 for the years ended August 31, 2001 and 2000, respectively. Intangible Assets - Patents are amortized on a straight-line basis over 5 years. Amortization expense totaled $6,606 and $343,800 for the years ended August 31, 2001 and 2000, respectively. Income Taxes - Deferred income taxes arise from temporary differences between financial and tax reporting, principally for deferred compensation and net operating loss carryforwards. Risk Concentrations - The following summarizes the risk concentration of the Company as of August 31, 2001: Cash Concentrations - The Company maintains a cash balance with a financial institution which at some times exceeded federally insured limits. Accounts Receivable - The Company grants unsecured credit to virtually all of its customers with two customers comprising a concentrated risk. Management continually evaluates the credit risk associated with accounts receivable and believes that the risk is limited. F-8 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Advertising Costs - The Company expenses costs for trade shows, marketing and promotional activities as incurred. Expenses were $52,000 and $113,000 for the years ended August 31, 2001 and August 31, 2000, respectively. Stock-Based Compensation - Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation," ("FAS 123") encourages, but does not require companies to record compensation cost, for stock-based employee compensation plans, at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for warrants is recognized as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Earnings Per Share - Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" requires the disclosure of both diluted and basic earnings per share. Basic earnings per share is based upon the weighted average of all common shares outstanding. The computation of diluted loss per share does not assume the conversion, exercise or contingent issuance of securities which would have an antidilutive effect on loss per share. Recent Accounting Pronouncements - In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 provides new guidance on the accounting for a business combination at the date a business combination is completed. Specifically, it requires use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating use of the pooling-of-interests method. SFAS No. 142 establishes new guidance on how to account for goodwill and intangible assets after a business combination is completed. Among other things, it requires that goodwill and certain other intangible assets will no longer be amortized and will be tested for impairment at least annually and written down only when impaired. This statement will apply to existing goodwill and intangible assets, beginning with fiscal years starting after December 15, 2001. Early adoption of the statement will be permitted for companies with fiscal year beginning after March 15, 2001, for which first quarter financial statements have not been issued. The Company is currently evaluating these statements but does not expect that they will have a material impact on the Company's financial position, results of operations, or cash flows. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." The Company adopted SAB 101 as of September 1, 2000. The adoption of SAB 101 did not have an effect on the results of operations or financial position of the Company. NOTE 2 - BASIS OF PRESENTATION AND MANAGEMENT'S ACTIONS TO OVERCOME OPERATING AND LIQUIDITY PROBLEMS: The Company's financial statements have been presented on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has reported substantial losses since inception. The Company's viability F-9 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS as a going concern is dependent upon its ability to achieve profitable operations through increased sales, obtaining additional financing or receiving additional capital. On August 11, 1995, the Company emerged from Chapter 11 of the United States Bankruptcy Code pursuant to a plan of reorganization (the "Plan"). As of August 11, 1995, in accordance with AICPA Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" (SOP 90-7), the Company adopted "fresh start reporting" and implemented the effects of such adoption in its balance sheet as of August 31, 1995. Under the principles of fresh start reporting, the Company's total assets were recorded at their estimated reorganization value, with the reorganization value allocated to identifiable assets on the basis of their estimated fair value. The Company's reorganization value of $1,750,000 included its patents for its intumescent fire retardant products which were valued at $1,500,000. As discussed in Note 4, the Company has a liability for settled claims payable to creditors and has incurred accrued expenses in connection with its reorganization. Certain settled claims due on September 27, 1996 through 1999 remain unpaid. Without additional financing/capital or the achievement of profitable operations, funds for repayment of these obligations would not be available. Management believes that actions it has undertaken to revise the Company's operating and marketing structure will provide it with the opportunity to generate the revenues needed to realize profitable operations and/or obtain the necessary financing and/or capital for the payment of outstanding obligations. NOTE 3 - INVENTORIES: Inventories at August 31, 2001 consisted of the following: Raw material $ 35,827 Finished goods 117,268 -------- $153,095 ======== At August 31, 2001, the Company had advanced approximately $39,000 to a vendor towards the future purchase of inventory. The advance has been included as a component of prepaid expenses and other current assets. NOTE 4 - SETTLED CLAIMS: Settled claims consist of claims payable to creditors for which payment has been deferred beyond the Plan's effective date pursuant to the terms and conditions of the Plan, as agreed upon between the Company and its creditors. At August 31, 2001, settled liabilities payable totaled $1,187,503. The claims settled were payable by the Company through September 27, 1999 and during the year ended August 31, 2001, the Company repaid approximately $24,000 towards settled claims. F-10 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS The Company is currently delinquent on its scheduled payments to certain creditors due September 27, 1996 through 1999 in the gross amount of approximately $1,187,503. The Company does not have funds available for repayment and without additional sales, capital or financing, payments cannot be made. NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following: Legal fees and interest thereon $642,406 Payroll and payroll taxes 10,192 Accounts payable 103,936 Other 11,951 -------- $768,485 ======== NOTE 6 - CONVERTIBLE DEBENTURES: During the years ended August 31, 2001 and 2000 the Company issued, to an accredited investor, convertible debentures, bearing interest at prime plus 1/2%, of $1,000,000 and $500,000, respectively. In June 2001, these convertible debentures totaling $1,500,000 plus accrued interest of $94,640 were converted into 3,189,279 shares of the Company's common stock at the rate of $0.50 per share. NOTE 7 - SETTLED CLAIMS PAYABLE TO RELATED PARTIES: At August 31, 2001, settled claims payable includes amounts due to current officers and members of the Board of Directors of the Company totaling approximately $791,000, all of which are delinquent (Note 4). NOTE 8 - COMMITMENTS AND CONTINGENCIES: Lease - The Company's lease of its facility expires on August 31, 2002 with total lease commitments for the year then ended approximating $116,000. Rent expense, inclusive of taxes and insurance, was approximately $111,000 and $113,000 for the years ended August 31, 2001 and 2000, respectively. Consulting Agreements - On December 20, 1999, the Company entered into a consulting agreement whereby it would issue shares of the Company's common stock at a rate of 3,000 per month as compensation for assisting the Company in the sale of its products to the United States military and other agencies of the United States Government. The stock issued was held in escrow and is earned once certain defined sales levels are realized. In September 2001, the Company hired this consultant as Chief Executive Officer and effectively terminated the consulting agreement. Shares to be issued under the consulting agreement totaling 36,000 were then issued. F-11 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Employment Contract - Effective September 1, 2000, the Company entered into an employment agreement with its Chief Executive Officer. Compensation consists of an annual base salary of $165,000 and an incentive bonus of a maximum of $15,000 based on sales for the twelve months ended September 30, 2001. Additionally, the Company granted a seven-year warrant for the purchase of 500,000 shares of common stock, at an exercise price of $0.5625 per share, with vesting of 100,000 shares on the first five anniversary dates of the commencement date of the agreement. NOTE 9 - SOURCES OF SUPPLY: Several components of the Company's products are available from a small number of suppliers. In the event that these suppliers were to terminate the manufacture or sale of such components for any reason, then the manufacture of the Company's products could be interrupted. NOTE 10 - INCOME TAXES: No provision for current and deferred income taxes is required for the years ended August 31, 2001 and 2000. The following is a reconciliation of income tax benefit computed at the 34% statutory rate to the provision for income taxes: 2001 2000 --------- --------- Tax at statutory rate $ 403,000 $ 711,000 Permanent and other items (1,000) (2,000) State income tax, net of federal income tax benefit 42,000 69,000 Valuation allowance (444,000) (778,000) --------- --------- $ - $ - ========= ========= As a result of the issuance of common stock pursuant to the Plan, the Company experienced a greater than 50% change of ownership as defined in Internal Revenue Code Section 382 ("Section 382"). Consequently, the Company's ability to utilize net operating losses generated prior to the effective date of the Plan is limited during the carryforward periods. The Company has determined that the annual limitation under Section 382 on its ability to utilize net operating loss carryforwards, totaling approximately $4,000,000, to be approximately $150,000 per year expiring in 2010. Subsequent to the date of the Plan, the Company has generated approximately $6,428,000 in net operating losses. F-12 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS The significant components of the Company's net deferred tax asset are summarized as follows: August 31, ------------------------ 2001 2000 ---------- --------- Net operating loss carryforwards $2,912,000 $2,993,000 Deferred compensation 304,000 260,000 ---------- ---------- 3,216,000 3,253,000 Valuation allowance 3,216,000 3,253,000 ---------- ---------- $ - $ _ ========== ========== A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The Company has determined, based on the Company's prior history of recurring losses, that a full valuation allowance is appropriate at August 31, 2001 and 2000. At August 31, 2001, the Company has federal and state net operating loss carryforwards for financial reporting and income tax purposes of approximately $7,636,000 and $5,274,000, respectively, which can be used to offset current and future taxable income through the year 2021. During fiscal 2001, the Company sold a portion of its state net operating loss carryforwards realizing approximately $207,000. The Company has been informed that it is eligible to sell another portion of it state NOL during fiscal 2002. NOTE 11 - MAJOR CUSTOMERS: Sales to two customers represented 23% and 11% of net sales for the year ended August 31, 2001. Sales to two customers represented 44% and 26% of net sales for the year ended August 31, 2000. NOTE 12 - WARRANTS: For the years ended August 31, 2001 and 2000, a summary of the status of warrants was as follows: 2001 2000 ------------------- -------------------- Weighted Weighted Number Average Number Average of Exercise of Exercise Shares Price Shares Price ---------- -------- ---------- -------- Outstanding, beginning of year 18,261,753 $1.05 16,319,773 $1.26 Granted 1,080,000 0.54 4,188,980 0.68 Forfeited - - (2,247,000) 1.82 ---------- ----- ---------- ----- Outstanding, end of year 19,341,753 $1.02 18,261,753 $1.05 ========== ===== ========== ===== Exercisable, end of year 18,536,253 $1.04 18,219,253 $1.05 ========== ===== ========== ===== F-13 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS The following table summarizes warrant data as of August 31, 2001: Weighted Average Exercise Number Remaining Number Price Outstanding Life in Years Exercisable -------- ----------- ------------- ----------- $0.40 40,000 4.3 40,000 0.50 2,940,000 2.6 2,662,000 0.5625 700,000 5.7 200,000 0.67 4,104,480 3.4 4,104,480 0.72 2,777,780 2.8 2,777,780 0.75 22,500 3.3 22,500 1.00 4,668,718 2.1 4,668,718 1.25 52,000 2.5 52,000 1.50 178,500 1.6 178,500 2.00 3,435,275 0.3 3,407,775 3.00 422,500 2.0 422,500 ---------- ------ ---------- 19,341,753 2.4 18,536,253 ========== ====== ========== The weighted average grant date fair value of warrants granted during the year ended August 31, 2001 was $0.42. No warrants had been exercised by holders as of August 31, 2001. During the year ended August 31, 2001, the exercise dates for warrants for 335,000 shares granted from August 1995 to August 1996 were extended to December 31, 2001. During the year ended August 31, 2000, the exercise date for warrants for 1,412,200 shares granted from August 1995 to February 1998 was extended to August 16, 2004. In addition, warrants for 74,000 shares were repriced whereby the exercise price was reduced to $1.00 per share. At August 31, 2001, no loss or gain exists relating to this repricing based on the market price of the Company's common stock. Proforma results of operations, had FAS 123 been used to account for stock-based compensation cost, would have resulted in additional compensation expense due to the vesting of warrants for 302,000 shares granted during the year ended August 31, 2001. Compensation expense, based on the Black-Scholes option pricing formula, for these warrants, is $112,000, resulting in a pro forma loss of $1,297,000, or a loss per share of $0.07. The fair value of the warrants were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted- average assumptions, respectively: risk-free interest rates of 4.0%, dividend yield of 0.0%, volatility factors of the expected market price of the Company's Common Stock of 253% and an expected life equaling the warrants' exercise periods. 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. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's warrants have F-14 NOFIRE TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS characteristics significantly different from those of normal publicly traded stock, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock warrants. NOTE 13 - SUBSEQUENT EVENTS: In September 2001, the Company issued, to an accredited investor, a $150,000 note, bearing interest at 8% and payable as follows: within ten days of the receipt by the Company of the proceeds from the sale of the Company's state net operating loss carryforwards or January 31, 2002, whichever occurs earlier. The Company also granted, to the accredited investor, a warrant for the purchase of 100,000 shares of common stock at an exercise price of $0.20 per share. F-15 -----END PRIVACY-ENHANCED MESSAGE-----