U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 2001 Commission File No. 0-19625 INTERNATIONAL THERMAL PACKAGING, INC. A California Corporation EIN: 95-4029019 6730 San Fernando Road Glendale, CA 91201 (818-637-8572) Securities to be registered under Section 12(g) of the Act: $ 0.001 Par Value Common Shares Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 No X . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] State the aggregate market value of the voting stock held by non affiliates of the Registrant: There is no current market for the Registrant's common stock. The number of shares outstanding of the Registrant's $0.001 par value common stock, its only class of equity securities as of January 31, 2001 was 17,950,634 shares. PART I ITEM 1. DESCRIPTION OF BUSINESS. (1) International Thermal Packaging, Inc. ("ITP") is primarily a research and development company that has concentrated its efforts on the development and exploitation of self-cooling and self-heating technologies for the food and beverage industry. GENERAL DESCRIPTION OF BUSINESS DURING FY 2001 AND SUBSEQUENT EVENTS. During the fiscal year ended January 31, 2001 And subsequently we worked to commercialize our self-cooling technology. Under our agreement with Futech, Futech was responsible for marketing. In July, 2000, we notified Futech that our agreement with them was without any force and effect, because, among other things, Futech had failed to provide consideration or otherwise meet its obligations. We also advised Futech that all rights to technology developed since 1997 fully reverted to us. We have taken over our own marketing operations and continuing development work. We anticipate that self- cooling beverage devices will be in production at some time during the calendar year 2001. We are working to commercialize the self-cooling technologies worldwide. Our basic business plan is to manufacture self-cooling devices to licensees with territorial sales rights, and to license manufacturing and sales rights in some territories. We are currently in discussions about license agreements with several major companies around the world. This strategy is expected to generate profits from manufactured devices, royalties from the technologies through territorial license agreements for sales rights, and additional royalties from manufacturing licensees. In major markets, the license agreements are expected to be with container manufacturers and beverage companies. In smaller markets, the license agreements may be with companies that are suppliers to the can industry or food and beverage industry. The licensing strategy presently being pursued is to license technology rights on a territorial basis, to substantial organizations capable of producing significant royalty streams. Manufacturing rights and sales rights are being licensed separately, although the same licensee may hold both manufacturing and sales rights in a given territory. We plan to retain manufacturing rights for as many territories as practical. Similarly, self-cooling and self-heating rights may be licensed either separately or together. For each license, an initial license fee payment is required, in addition to royalty payments. The initial license fee is non-refundable. Due to the size of the United States market, as compared to foreign countries, there are no present plans to grant exclusive licenses for any United States rights, but rather to grant a number of non-exclusive sales licenses, and possibly some non-exclusive manufacturing licenses. Typical screening criteria for licensees require that they be companies in the food processing or packaging industries with technical and financial resources and market position. Potential licensees must demonstrate a commitment to achieving rapid introduction of the licensed products technology into the marketplace and possess a high degree of expertise and skill in the business of distributing and marketing the licensed products. Furthermore, manufacturing licensees must demonstrate the expertise and capability to manufacture self-cooling and/or self-heating devices in large quantities. The criteria for licensees generally include a verified net worth of $10 million, ties to the food/beverage packaging industry, and existing marketing and/or manufacturing capabilities. One of the objectives of our marketing program is to complete license agreements and negotiations with U.S. and international companies interested in the self-cooling and self-heating technology, and to initiate and complete additional agreements. The anticipated revenue from licensing fees for the current fiscal year is discussed below under finances. The Company's long-term goal is to be the industry leader in the development of self-cooling and self-heating devices and applications, for the food industry, and later for other industries. Furthermore, we intend to pursue an aggressive program of continuing product research and development to ensure that the Company's technology remains on the "leading edge." During the fiscal year ended 1/31/2001, we continued to work on research and development related to a self-cooling beverage device. We continued to work with NREL. In mid-1999, an additional research laboratory was added to the development team. This organization known as Battelle Institute, is a large, not-for-profit consulting firm which is one of the companies that administers NREL for the U.S. Department of Energy. Battelle contracted to design and assist in the design of commercially viable self-cooling beverage devices. We have not been involved in any reorganization, merger or bankruptcy. We do not anticipate any material acquisition of plant, equipment or capacity thereof in the upcoming fiscal year. There are no anticipated material changes in number of employees in various departments such as research and development, production sales or administration. The company anticipates adding one to three employees at the corporate management level, to deal with corporate matters related to the planning and implementation of a public offering of the company's stock and the exploitation of new technology under development. Our financial information is presented in the audited financial statements filed with this report. There has been no change to the internal structure of the company that has an impact on financial reporting of the company's business. We are currently a development stage enterprise with limited operating results to date. The primary source of revenue is expected to be from licensing and sublicensing agreements, pertaining primarily to our self-cooling technology. Ordinarily, we require an initial payment with licensing and sublicensing agreements. Subsequent payments from licensees and sub-licensees are on royalties from product sales. During the fiscal years ended 1/31/2000 and 1/31/2001, we had no operating revenues. Operating capital was raised through sale of stock in a private placement. THE BEVERAGE INDUSTRY MARKET Our self-cooling technology represents an extraordinary technological advancement that creates tremendous opportunities within the worldwide beverage industry. The device promises not only added convenience for the consumer but also provides a basis for developing entirely new market segments and changing certain distribution channels. The major segments of the beverage industry are soft drinks, beer and ale, fruit juice and drinks, bottled water, wine, and spirits. The profitability for each segment in the beverage market depends heavily on the packaging. How easily and profitably the technology can be adapted to the product packaging will reflect our impact on the market. We are exploring all segments of the beverage market since each segment holds unique requirements for implementing the self- chilling technology in existing packages. Since soft drinks and beer dominate the packaged beverage market, these segments currently offer the greatest opportunity for the application of our cooling technology. According to the 1996 Beverage Directory, 52.2 billion dollars retail of beer were consumed in the U. S. in 1996. This figure translates into 22.1 gallons of beer per person. Even more staggering is the fact that more than 13 billion gallons of soft drinks or 53.4 gallons per person were consumed in the U.S. in 1996. We anticipate large and rapidly growing markets in the domestic and international markets for beer and soft drinks in self-cooling containers. Manufacturers and retailers who market canned beer and soda with the self-cooling device can expect growth in their own sales due to the convenience of having "the drink that chills itself." Retailers will also appreciate having to make less capital expenditures on equipment to chill the beverages. A variety of packaging materials and technologies are currently used within the beverage industry. These include cans, returnable and non-returnable glass bottles, plastic bottles, cardboard containers, and bulk containers. The use of cans is growing and now accounts for approximately 45% of soft drink sales and 67% of beer sales in the U.S. market. There are several value added elements in the beverage industry including beverage manufacturing, bottling, distribution, cooling, and service. Currently, the cooling step is performed in conjunction with the service phase and, consequently, the cooling profits accrue to retailers. The consumer will pay the convenience store owner more than a few more cents just for keeping their beverages chilled. We intend to capitalize on the consumer's preference for chilled beverages and position ourself to obtain royalties as canners and beverage manufacturers obtain cooling profits. Beverages are presently marketed through many different distribution channels around the world. These channels include restaurants and bars selling from bulk packages, retail food/beverage stores such as supermarkets and liquor stores, convenience stores, discount merchants, vending machines, and caterers and street vendors. The cooling profits are obviously greater for caterers, street vendors, and vending machines where the product is chilled and ready for direct consumption. In contrast, a regular grocery store that has hundreds of six-packs sitting on its shelves at room temperature will not be earning cooling profits. In addition to expanding the channels which normally earn cooling profits and obtaining royalties for doing so, we are seeking to add such profits to distribution channels like supermarkets and retail stores. While our self-cooling unit does add a significant cost to a canned beverage, this incremental increase would be more than offset by the increase in consumer convenience and the elimination of downstream refrigeration costs. It currently costs a $.01/day to keep a can cool in a vending machine. The market dimensions of the beverage industry are staggering. The number one product sold in the world is a Coke! In the U. S., annual per capita consumption of all types of beverages exceeds 56 gallons and has been projected to rise to 60 gallons by the end of the 1990s. Packaged soft drinks and beer account for approximately 70% of all beverage consumption, including water. In 1996, 61.2 billion beverage cans and 31.4 billion beer cans were shipped. In the U. S., sales of packaged beverages continue to increase both on a per capita basis and in absolute terms albeit at a somewhat slower pace than in the past. The U. S. market is generally presumed to have matured far more than worldwide markets and suggests that the potential for future worldwide growth is substantial. While a number of different shapes and sizes of packages have been introduced, the 12 oz. can and bottle are the most prevalent. Multipacking and repackaging done in greater quantities has continued to help the growth of the can. The Can Manufacturers Institute has concluded that multipacks can particularly influence sales in convenience stores which have traditionally been a single can market. In addition to the continued growth in per capita consumption rates, the anticipated increase in recycling pressures suggests that the can segment will experience a substantially greater rate of growth. Aluminum can recycling rates in the U.S. have increased to 60%. The Can Manufacturers Institute is aiming for 75% nationwide recycling by year end 1998. Legislation against non- recyclable cans and bottles continues to be an important issue in beverage packaging. Cans are an attractive form of packaging for a number of other reasons besides recycling: 1) Cans are easier to carry than bottles and are not breakable. 2) Cans are perceived by the consumer to be safe and free from contamination. 3) While bottles and cans earn about the same gross margins, cans are much easier for retailers and wholesalers to handle and store. Because of their stackability and compact shape, cans are more cube efficient. When compared to 12 oz. non-returnable beer bottles, cans are 48% more cube efficient and a full l00% more efficient in comparison to 12 oz. bottles. 4) Cans chill faster, thus smaller inventories can be kept in coolers. 5) Bottlers can run cans at a faster rate than glass bottles which also require more packaging. The introduction of self-cooling containers will have wide ranging implications for the beverage industry. The beverage market will expand in areas where cooling facilities are not currently available. Self-cooling cans will become a major new market segment expanding cans' share of the market in comparison to bottles. Manufacturers and bottlers will be able to contribute a greater percentage of the value added element thereby increasing profit margins. There will also be tremendous shifts in distribution patterns. Fountain distribution, which accounts for more than 30% of drink sales, is likely to experience some significant changes. Fountain sales include restaurants, bars, convenience stores, and entertainment events. Of these areas, self-cooling cans could potentially affect convenience store fountain sales the most. With self-cooling available, travelers and commuters may be inclined to keep self-cooling beverages in their vehicles, thereby eliminating the need for a stop at a convenience store. This added convenience could lead to greater rates of consumption as well. Vending machine sales could also be affected. Currently, one out of every eight soft drinks in the U.S. is sold through a vending machine. Right now, beer does not share the convenience of vending machines. With our self- cooling device the consumer would be able to enjoy a cold beer on the nineteenth hole. In addition, large stadium events such as concerts, football, and baseball games could utilize the self-cooling can. Vendors could carry more products and reduce labor costs by eliminating the need for people to fill rows and rows of beverage cups with beer or ice and soda. THE FOOD INDUSTRY MARKET Our self-heating technology is not as close to commercial production as our self-cooling technology, and is not presently under intensive development. We have chosen to focus our resources on the self-cooling technology. Nevertheless, the self-heating technology offers various opportunities within the worldwide food industries. In addition to added consumer convenience, the heating technology promises broader markets for convenience foods and opportunities for food manufacturers to increase their share of the value added element in the food processing and distribution chain. The food industry is composed of many segments, but the important segments for our technology are those which cater to the consumers' desire for convenience and require some level of heating. The prepared convenience food segment includes shelf-stable, refrigerated, and frozen items. Because of its portability, safety, and ease of use, self- heating adds an entirely new dimension to the convenience food market. Our self-heating technology enables efficient heating of a wide variety of convenience foods due to its variable heating capabilities. By changing the mix of components, devices using the technology can be engineered to warm everything from canned soup to pizza. Hence, prepared and microwaveable foods represent a very large potential market for this technology. One of the most important developments in convenience foods in the last decade was the growth in upscale single- serving dinner entrees. A packaging magazine survey found nearly half of those surveyed consumed meals in single serving containers at least once a week. As an example, the Japanese single-serving noodle market, just one small market niche, is $700 million/year and growing. The newest and probably fastest growing segment of the convenience food segment is shelf-stable products. These foods are precooked then vacuum-sealed in a process similar to canning meat. Shelf-stable foods stay fresh for up to 18 months, freeing up valuable freezer space in grocery and convenience stores. The demand for shelf-stable food containers is projected to grow nearly 50% annually, reaching over 1.2 billion food containers by the mid-1990's and accounting for almost 30% of the microwaveable container The major use of microwaveable containers within this segment will be for specialty entrees, soups, and side dishes, which offer convenience, easy storage, and portability. Another important segment of the convenience food industry is chilled foods. These products are refrigerated, partially or completely prepared dishes that have a limited shelf life. Chilled products are now widely distributed in Europe and are becoming more prevalent in the U.S. The domestic chilled goods market, which is currently European- driven, is also expected to grow as American consumers also demand fresher convenience foods. While the chilled foods market is smaller than other segments, this segment does represent a significant market for our heating device; by combining the device with fresh, refrigerated, prepared food, a product could be offered that would compete directly with carry-out or fast foods. The major issues of this segment are the consumer safety risks involved and the accurate temperature controls required throughout the entire distribution chain before any product can be placed in large scale distribution. Institutional end-uses such as in-store delis, which will not require the long shipping distances or extended shelf-life, might also capture a major portion of the refrigerated market. We can capitalize on this market segment by expanding food options available in vending machines. A college student, for example, could buy a chilled lasagna instead of a sandwich from a vending machine. With self-heating technology in place, the lasagna could be packaged in a self heating container that would not require an outside heating source. The student could simply pull the strip and dine in a matter of minutes! Currently, the demand for microwaveable containers in general exceeds $700 million/yr. and is projected to grow steadily as consumers continue to demand convenience in every respect of meal preparation. Microwaveable containers are currently fashioned out of a number of different substances and vary widely in cost. Carry-out and delivered foods represent a large market potential for self-heating technology. The fast-food industry now exceeds $60 billion in the U. S. and is experiencing rapid growth worldwide. The fast-food industry spends $1.4 billion/year on polystyrene packaging alone. Presently, there is no efficient way to maintain the temperature of carry-out foods to ensure maximum enjoyment by the consumer. Traditionally, these fast foods have been sold in packages that serve very little use in controlling the temperature of hot food. Restaurants delivering food have a more critical concern about temperature maintenance. Pizza delivery, for example, is near a 2 billion dollar business in the U. S. By configuring a self-heating package to maintain relatively low levels of heat over a long period of time, we can offer a low-cost solution to the problem. Stadium events could also use warming devices to keep vendors' food items warm for a longer period of time. An alternative use by the stadium and arena vendors would be to sell refrigerated foods with our heating packs that could be warmed up at any time during the course of the event. This would eliminate large lines for hot beverages and food items during half-time and intermissions. Our heating and cooling devices could be employed in a number of applications from catering to airline food service to school cafeterias. The airline food service industry alone represents a very large profit potential. Less food preparation and handling by flight attendants would be required. Furthermore, traditional heating equipment could be eliminated, thus saving valuable space that could be converted to extra passenger space or used for increased passenger comfort. With respect to school cafeterias, most of the same advantages can be seen. Implementation of the heating and cooling devices would reduce food preparation and handling, personnel requirements would be streamlined. PRIMARY SOURCES OF REVENUE, PAST 3 FISCAL YEARS During FY 1999, FY 2000 and FY 2001, we had no operating revenues. Operating capital was raised through a private placement. STATUS OF PRODUCTS IN PLANNING AND PROTOTYPE STAGES The technology which we are working on to make commercially viable provides for a drop-in unit which is activated by a decrease in the internal pressure inside a can when the can is opened. The presently used beverage can, lid, and filling line do not have to be modified for the device to be employed. This feature is in stark contrast to other processes which require extensive can modification. Another important feature of the ITP device is its environmentally friendly ingredients. All ingredients employed in the ITP device can be recycled or discarded without environmental damage. When the top of the can pops, a process takes place inside the self-cooling device to lower the temperature of the beverage. The process is isolated both from the beverage and the environment. Effectively, water is rapidly evaporated, and the vapor is absorbed. The process creates a cooling effect that causes heat to be transferred from the beverage into the device, where it is isolated from the beverage, leaving the beverage at a desirable temperature. Our self-cooling technology features several critical design criteria. Understandably, the product has to be easy to use. For maximum user convenience, the device needs to be fully incorporated into the can design, not an add-on. The device has to be space efficient for easy handling and transport, and the unit cost should be low enough to make the device attractive to a large segment of the market. All components need to be strictly nontoxic to preclude any possible contamination of the beverage even in the event of catastrophic failure of the can or cooling device. Furthermore, the device should also be fabricated from materials which are readily recyclable and completely environmentally safe. Finally, to be cost effective, the device has to be designed to be compatible with existing containers, so that container modification is not necessary. Our self-cooling can technology is currently in the early prototype stage. Additional engineering is necessary to enable the manufacturing of commercially viable products. Issues regarding the source and availability of raw materials are inapplicable because the Company does not manufacture products. Materials needed for production of devices using our technology are expected to be readily available. PATENTS AND PATENT APPLICATIONS During the fiscal year ended 1/31/2000, we filed patent applications, which reflect new technical developments made from 1997-1999. We expect to file additional patent applications during the coming fiscal year. Our unpatented technical developments over the past 12 months are currently protected as trade secrets and will be incorporated into patent applications as the developments mature into working models. The existing, prospective patent applications and trade secrets relate to devices designed for insertion into unmodified aluminum beverage cans, prior to filling, which will automatically activate when the can is opened. Activation of the device will cool the beverage. This technology is essential to our business. We are primarily a research and development company. We carry no inventory and do not expect sales from inventory. Working capital is used and needed by the Company primarily for day-to-day administrative and operational expenses, promotion and participation in marketing. Our profitability to a large extent, depends on our ability to improve existing technologies and create new technologies. Working capital over the past three fiscal years has come primarily from the sales of stock pursuant to a private placement. MATERIAL CONTRACTS Our primary anticipated source of revenues is through manufacturing profits and royalties from license agreements. We continue to be entitled to our share of revenues from existing sublicenses of Futech (although this is disputed by Futech) and from Tempra Technologies, but we do not presently have any basis for projecting any such revenues. Due to the nature of our business, the term "backlog orders" is inapplicable. No material contracts are subject to cancellation or renegotiation of profits. COMPETITIVE CONDITIONS OF OUR BUSINESS There are technological changes taking place in the development of our products. We are faced with both indirect and direct competition, in the form of other companies that are developing and/or marketing like products. Current competitors in the business of self-cooling technology include, but are not limited to, The Joseph Company (Chilltech), Tempra Technology, possibly three other companies located in Japan, Korea, and England, and a product being evaluated by Coca-Cola, Incorporated. Futech, our former licensee, has also announced plans to develop its own self-cooling technology. There may be additional competitors who are presently unknown to us. We expect that the technologies offered or under development by these competing lack various advantages of our technology. There are several competitors presently shipping self- heating food packages. None has large distribution at this time. The largest known is Heater Meals. Competitive products generally suffer from cumbersome preparation procedures, lengthy heating time and high cost. Some products have other significant drawbacks, such as the generation of white-hot heat or the release of gas. Previous efforts by the competitors identified above to produce self-cooling devices resulted in processes which were unusable for various reasons, or products that were rejected by the beverage industry. Little is known about current competitive product development, because of every company's desire to keep its technical progress highly confidential. Tempra has publicized a two-part, specially built can which is built with self- cooling components. At the present time, there may be competitors who are better financed and operate with greater capital than us, and/or who have technology with technological advantages. There can be no assurance that our current and future competitors will not succeed in developing products and pricing that are more widely accepted in the marketplace or that will render our products noncompetitive. However, we believe that we have the most advanced technology at this time, and that products based on our technology will be the industry leaders and the first to be in mass production. There is no information known to us which suggests otherwise. AMOUNT SPENT DURING EACH OF THE LAST THREE FISCAL YEARS ON RESEARCH AND DEVELOPMENT. Period Amount FY 2001 $ 704,037 FY 2000 365,035 FY 1999 205,131 FUNDS FOR COMPLIANCE WITH ENVIRONMENTAL LAWS We have not spent funds for compliance with federal and state environmental laws, as these laws do not apply to research and development. We employed 9 persons during the fiscal year ended 1/31/2001. All our revenue for the last three fiscal years is attributable to U.S. sources. ITEM 2. PROPERTIES. We own our technology. In addition we own certain office furniture and equipment utilized in our laboratory and our executive offices having an estimated replacement value of approximately $14,700. We believe that our laboratory and office equipment is adequate for our needs at the present and the foreseeable future. We lease our executive office space at 6730 San Fernando Road, Glendale, California 91201 at a monthly cost of $1,750 on a lease, which is renewable annually. We believe that the executive offices and the laboratory facilities now leased by us will be adequate for our business for the near future. ITEM 3. LEGAL PROCEEDINGS. We filed litigation in the State of New Jersey to protect our rights to payment on a loan secured by an interest in a limited liability corporation which owns substantial real estate in that state. There is no other material pending litigation as of the end of FY 2001. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to the shareholders during the fiscal year ending January 31, 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. (a) There is no established public trading market for our common shares We are developing a strategic plan to apply for trading on NASDAQ in the near future. (b) The approximate number of holders of common stock at 1/31/2001 is 1,400. (c) The Company has paid no cash dividends on its common stock in the past two fiscal years. ITEM 6. SELECTED FINANCIAL DATA. Selected financial information is provided for the past 4 fiscal years. The Company was dormant during the 5th. fiscal year, FY 1996. All data is rounded to the nearest $1,000. FY 1998 FY 1999 FY 2000 FY 2001 Net Sales 0 0 0 0 Income (Loss) (88,000) (1,367,000) (2,503,000) (2,818,485) From Continuing Operations Income (Loss)/Share (.01) (.09) (.22) (.17) Total Assets 5,116,000 5,705,000 282,000 153,020 Long Term Obligations 0 0 0 Cash Dividends/Share 0 0 0 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES The Company is a development-stage enterprise and has had mininimal revenue to date. The Company remains dependent on continued sales of common stock to fund its research and development efforts. In the fiscal year ended January 31, 2001 the Company received proceeds for the sale of common stock of $ 3,222,219 net of issuance costs. In the fiscal year ended January 31, 2000 the Company received proceeds for the sale of common stock of $ 2,460,268 net of issuance costs. Additional sources of liquidity in the next fiscal year are expected to be proceeds from license and distribution agreements. Proceeds from license and distribution agreements are expected to be $ 1,000,000 during the fiscal year ended January 31, 2002. Although there is no assurance that funds will be available from any of the above sources, the Company expects that sufficient resources will be obtained to fund ongoing research and development expenses. The Company expects to expend at least $ 850,000 in the fiscal year ended January 31, 2002 for ongoing research and development efforts. These expenditures are required to complete the prototype of the self-cooling beverage can and related products. RESULTS OF OPERATIONS For the fiscal years ended January 31, 2001 and 2000 the Company had operating losses of $ 2,818,485 and $ 2,503,139. There was no revenue recorded during these periods. We expended $ 704,037 for research and development for the year ended 1/31/2001 and $ 365,035 for the year ended 1/31/2000. We had legal and other professional fees of $ 385,425 for the fiscal year ended January 31, 2001 compared to $ 909,339 during the fiscal year ended January 31, 2000. The majority of the legal and professional fees resulted from litigation with Tempra Technology, a former licensee, and the former President of the Company, ongoing patent protection and audit and accounting fees for the audit for the last three fiscal years. The litigation with Tempra and with the former President has been resolved with no material financial consequences to us. Other costs, which contributed to the increased loss from fiscal year 2000 to fiscal year 2001, were increased travel and marketing costs. Travel costs increased from $ 323,987 in fiscal year 2000 to $ 364,272 for the fiscal year 2001. Marketing costs decreased from $ 416,843 in 2000 to $ 267,436. The increased travel costs related to sending company personnel to various labs throughout the country where the research and development is being carried out by independent research and engineering labs. The increased marketing costs relate to the efforts of the company to sell additional stock during the past year to fund ongoing activities. The Company issued additional common stock for cash net of issuance costs in the amount of $ 3,222,219 and $ 2,406,268 during fiscal years 2001 and 2000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached are audited financial statements for the Company For the Years ended January 31, 2001 and 2000. International Thermal Packaging, Inc. Financial Statements and Report of Independent Public Accountant For the Years Ended January 31, 2001 and 2000 INDEPENDENT AUDITORS REPORT To the Board of Directors International Thermal Packaging, Inc.: We have audited the accompanying balance sheets of International Thermal Packaging, Inc. (a Development Stage Enterprise) as of January 31, 2001 and 2000, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the years then ended and from inception (February 7, 1986) to January 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principals 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 International Thermal Packaging, Inc. as of January 31, 2001, and 2000, and the results of its operations and its cash flows for each of the years then ended January 31, 2001 in conformity with generally accepted accounting principals. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is a development-stage enterprise which has suffered recurring losses. The Company also has an accumulated deficit, is financially dependent upon additional funding and has no established commercial product or market channels. These factors raise a substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regards to those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ JAY J. SHAPIRO, C.P.A. a professional corporation Encino, California June 15, 2001 INTERNATIONAL THERMAL PACKAGING, INC. (A Development-Stage Enterprise) BALANCE SHEETS January 31, 2001 and January 31, 2000 ASSETS January 31, 2001 2000 CURRENT ASSETS: Cash and cash equivalents $ (23,581) $ 95,347 Notes receivable, net of allowance for doubtful accounts of $ 775,000 and $ 965,000 at January 31, 2001 and January 31, 2000 - - License fee receivable, net of allowance for doubtful amounts of -0- and $ 1,071,553 at January 31, 2001 and January 31, 2000 - - ---------- --------- Total current assets (23,581) 95,347 ---------- --------- PROPERTY AND EQUIPMENT, at cost - net of accumulated depreciation of $ 12,607 and $ 6,102 at January 31, 2001 and 2000 24,393 14,671 OTHER ASSETS: License fee receivable, net of allowance for doubtful amounts of -0- and $ 3,562,500 at January 31, 2001 and January 31, 2000 - - Patents, net of accumulated amortization of $ 236,800 and $ 214,259 at January 31, 2001 and January 31, 2000 146,408 168,649 Other assets, net of allowance for doubtful amounts of $ 77,137 and $ 57,137 at January 31, 2001 and January 31, 2000 2,500 - Deposit 3,300 3,300 ---------- --------- Total other assets 152,208 172,249 ---------- --------- TOTAL ASSETS $ 153,020 $ 282,267 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accrued payroll taxes interest and penalties $ 635,290 $ 590,290 Accounts payable and accrued expenses 174,383 320,850 -------- ------- Total current liabilities 809,673 911,140 -------- ------- DEFERRED LICENSING REVENUE, net of allowance of -0- and $ 4,634,054 at January 31, 2001 and January 31, 2000 - 365,946 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Capital stock Authorized shares - 50,000,000; Issued and outstanding shares- 17,950,634 and 16,162,552 at January 31, 2001 and January 31, 2000 13,114,908 9,892,689 Deficit accumulated during the development stage (13,771,561) (10,887,508) ---------- --------- Total stockholders' equity (deficit) (656,653) (994,819) ---------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 153,020 $ 282,267 =========== ========== The accompanying notes are an integral part of the financial statements.

International Thermal Packaging, Inc. (A Development-Stage Enterprise) STATEMENTS OF OPERATIONS Years Ended January 31, 2001 and 2000 January 31, 2001 2000 REVENUE $ - $ - OPERATING EXPENSES Research and development 704,037 365,035 General and administrative 1,680,556 1,936,641 Financial consulting 433,892 201,463 --------- --------- 2,818,485 2,503,139 LOSS FROM OPERATIONS (2,818,485) (2,503,139) Interest income 2,741 7,736 Interest expense- Payroll taxes (45,109) (45,070) Provision for reserve for advances (20,000) (1,022,137) ----------- --------- LOSS BEFORE INCOME TAXES (2,880,853) (3,562,610) Income taxes 3,200 1,011 ---------- ---------- NET LOSS $ (2,884,053) (3,563,621) ========== =========== LOSS PER COMMON SHARE Basic $ (0.17) $ (0.22) ========== =========== Diluted $ (0.17) $ (0.22) =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,056,593 16,008,051 ========== ========== The accompanying notes are an integral part of the financial statements. INTERNATIONAL THERMAL PACKAGING, INC. (A Development-Stage Enterprise) STATEMENT OF OPERATIONS From Inception (February 7, 1986) to January 31, 2001 REVENUE $ - OPERATING EXPENSES Research and development 3,953,555 General and administrative 7,375,179 Financial consulting 901,120 --------- 12,229,854 LOSS FROM OPERATIONS (12,229,854) Loss on investment in affiliate under equity method (173,933) Other income 11,764 Other expense (29,552) Interest income 16,408 Interest expense- Payroll taxes (310,946) Provision for reserve for advances (1,042,137) ------------ LOSS BEFORE INCOME TAXES $ (13,758,250) Income taxes 13,311 ---------- NET LOSS (13,771,561) ============== LOSS PER COMMON SHARE Basic $ (0.93) ============== Diluted $ (0.93) ============== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,829,194 ============= The accompanying notes are an integral part of the financial statements.

INTERNATIONAL THERMAL PACKAGING, INC. (A Development-Stage Enterprise) STATEMENTS OF CASH FLOWS Years Ended January 31, 2001 and 2000 January 31 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,884,053) $ (3,563,621) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 29,046 26,456 (Increase) in other assets (2,500) - Increase in accrued payroll taxes, interest and penalties 45,000 45,000 Decrease in accounts payable and accrued expenses (146,467) 271,295 (Decrease) in deferred licensing revenue (365,946) (4,634,054) Decrease in license fee receivable - 4,647,757 (Decrease) increase in accrued franchise tax - (1,371) ------------ --------- Net cash used in operating activities (3,324,920) (3,208,538) ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (16,227) (2,051) ----------- ----------- Net cash used in investing activities (16,227) (2,051) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Common stock issued 3,222,219 2,460,268 ----------- ----------- Net cash provided by financing activities 3,222,219 2,460,268 ----------- ----------- Net change in cash and cash equivalents (118,928) (750,321) ----------- ---------- CASH AND CASH EQUIVALENTS, beginning of period 95,347 845,668 ---------- ---------- CASH AND CASH EQUIVALENTS, end of period $ (23,581) $ 95,347 ============ ========== SUPPLEMENTAL DISCLOSURE, Cash paid for income taxes $ 3,200 $ 1,011 =========== ========== Cash paid for interest $ 109 $ 70 =========== ========== The accompanying notes are an integral part of the financial statements.

INTERNATIONAL THERMAL PACKAGING, INC. (A Development-Stage Enterprise) STATEMENT OF CASH FLOWS From Inception (February 7, 1986) to January 31, 2001 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (13,771,561) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Stock issued for compensation 1,035,432 Depreciation and amortization 400,170 Loss on sale of property and equipment 28,683 (Increase) in other current assets (2,500) (Increase) in deposit (3,300) (Increase) in patents (383,208) Increase in accrued payroll taxes, interest and penalties 635,290 Increase in accounts payable and accrued expenses 174,383 ---------- Net cash used in operating activities (11,886,611) ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (287,858) Proceeds from the sale of property and equipment 118,725 --------- Net cash used in investing activities (169,133) --------- CASH FLOWS FROM FINANCING ACTIVITIES: Common stock issued 12,092,977 Common stock repurchased (13,501) Payments on obligations under capital leases (47,313) ---------- Net cash provided by financing activities 12,032,163 ---------- Net change in cash and cash equivalents (23,581) CASH AND CASH EQUIVALENTS, beginning of period - ---------- CASH AND CASH EQUIVALENTS, end of period $ (23,581) ========== SUPPLEMENTAL DISCLOSURE Cash paid for income taxes $ 12,511 ========== Cash paid for interest $ 179 ========== The accompanying notes are an integral part of the financial statements.

INTERNATIONAL THERMAL PACKAGING, INC. (A Development-Stage Enterprise) STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended January 31, 2001 and 2000 Accumulated Deficit During Common Stock Paid-in Development Shares Amount Capital Stage Total Balance, 1/31/1999 15,853,549 $ 15,853 $ 7,416,568 $(7,323,887) $(108,534) ---------- ------- --------- ---------- -------- Common stock issued 2,897,886 2,898 2,457,370 - 2,460,268 Common stock cancelled (2,588,883) (2,589) 2,589 - - Net loss - - - (3,563,621) (3,563,621) ---------- ------ --------- ---------- --------- Balance, 1/31/2000 16,162,552 16,162 9,876,527 (10,887,508) $ (984,819) ---------- ------ --------- ---------- ---------- Common stock issued 1,788,082 1,789 3,220,430 - 3,222,219 Net loss - - - (2,884,053) (2,884,053) ---------- ------ --------- ---------- --------- Balance, 1/31/2001 17,950,634 17,951 13,096,957 (13,771,561) (656,653) ========== ======= ========= ============ ========= The accompanying notes are an integral part of the financial statements.

INTERNATIONAL THERMAL PACKAGING, INC. (A Development-Stage Enterprise) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) From Inception (February 7, 1986) to January 31, 2001 Accumulated Deficit During Common Stock Paid-in Development Shares Amount Capital Stage Total Balance, Inception (February 7, 1986) - $ - $ - $ - $ - Common stock issued (see Note 5) 13,718,190 13,718 5,488,790 - 5,502,508 Common stock repurchased (see Note 5) (9,000) (9) - (13,492) (13,501) Net loss, cumulative - - - (5,913,177) (5,913,177) --------- ------ -------- ---------- --------- Balance, 1/31/1998 13,709,190 13,709 5,488,790 (5,926,669) (424,170) ---------- ------- ---------- --------- ------- Common stock issued 2,144,359 2,144 1,927,778 - 1,929,922 ---------- ------ ---------- --------- --------- Net loss - - - (1,397,218) (1,397,218) ---------- ------ ---------- ---------- --------- Balance, 1/31/1999 15,853,549 15,853 7,416,568 (7,323,887) 108,534 ---------- ------ --------- ----------- --------- Common stock issued 2,897,886 2,898 2,457,370 - 2,460,268 Common stock cancelled (2,588,883) (2,589) 2,589 - - Net loss - - - (3,563,621) (3,563,621) ---------- ----- --------- ---------- --------- Balance 1/31/2000 16,162,552 16,162 9,876,527 (10,887,508) (994,819) ---------- ------ --------- ---------- -------- Common stock issued 1,788,082 1,769 3,220,430 - 3,222,219 ---------- ------ ---------- --------- --------- Net loss - - - (2,884,053) (2,884,053) ---------- ------ ---------- ---------- --------- Balance 1/31/2001 17,950,634 17,951 13,096,957 (13,771,561) (656,653) ========== ======= ========== ============ ========= The accompanying notes are an integral part of the financial statements.

International Thermal Packaging, Inc. A Development-Stage Enterprise) Notes to Financial Statements January 31, 2001 and January 31, 2000 1. Organization and Nature of Business International Thermal Packaging, Inc. (the "Company") was incorporated on February 7, 1986 ("Inception"), in the State of California. The Company is in the development stage and operations have consisted primarily of research and development and administrative activities. The Company uses employees and employs independent contractors to manage the Company and sell securities. The Company has developed certain prototypes for demonstration purposes only, which showcase its unique self-cooling processes and technology for potential use in the food and beverage industries. Patent applications are pending on the technology. In October 1992, the Company discontinued operations, abandoning its lease premises and terminating all employees and contracts. From October 1992 through March 1997 the Company conducted no business activities, and was dormant, with the only financial activity being the accruing of interest and penalties on outstanding payroll and franchise taxes and amortization of existing patents. In March 1997, the Company, headed by its founder Mr. Dennis Thomas, once again commenced operations. The Company applied for reinstatement and was granted authority to conduct business in California in August 1997. The Company is in the development stage and has had no significant operating results to date. Management intends to continue to finance development and related activities through the private offering of securities and fees generated from its exclusive worldwide licensing and option agreement; however there is no assurance that working capital will be secured or that licensing agreements will be successfully negotiated. These financial statements have been prepared assuming the Company will continue as a going concern. The Company's ability to continue as a going concern is dependent upon management obtaining the necessary funding to operate the business, and to successfully complete a working prototype, gain necessary government approvals for its products, establishment of successful commercial products, develop marketing channels and ultimate product acceptance in the marketplace. The Company has an accumulated deficit of $ 13,771,561 and no established product or marketing channels. The Company also has negative working capital of $ 833,254 at January 31, 2001. These factors raise a substantial doubt about the Company being able to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. 2. Summary of Significant Accounting policies a. Income Taxes For financial reporting purposes, the Company provides for income taxes under the liability method and recognizes the minimum California franchise tax of $800 on an annual basis. b. Research and Development Costs related to conceptual formulation, design and the development of prototypes are considered research and development and are expensed as incurred. c. Cash and Cash Equivalents Management defines cash and cash equivalents as cash in banks and highly liquid instruments with maturities of 90 days or less. d. Property and Equipment Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the related assets, ranging from 3 to 10 years. As of January 31, 2001 and 2000 the Company's fixed assets were comprised of the following: 2001 2000 Computers $ 22,573 $ 12,019 Office Equipment 10,795 8,754 Office Furniture 3,632 - ------ ------- Total Cost 37,000 20,773 Less accumulated depreciation 12,607 6,102 ------- ------- Net fixed assets $ 24,393 $ 14,671 ======= ======= e. Patents Patent costs are amortized using the straight-line method over the life of the patents, not to exceed 17 years. Due to the current financial position of the Company there is no assurance as to full recovery of the patent costs. f. Revenue Recognition Initial License fees received are deferred and amortized over the life of the respective Agreements not to exceed 20 years. In the year ended January 31, 2001 and 2000, all amounts provided for under the FUTECH agreement have been fully reserved. See note 5(b) for additional information related to the FUTECH Corp. License Agreement. g. Per Share Information The per share information included in the accompanying statements of operations considers the effects of all shares of common stock issued (net of rescissions and cancellations) since inception on February 7, 1986. The impact of the common stock equivalents (Note 9) was excluded from the computation of diluted net loss per share, as the effect would be anti-dilutive. h. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of the revenues and expense during the reported period. Actual results could differ from those estimates. i. Long Lived Assets The Company reviews for impairment of all long-lived assets and certain identifiable intangibles whenever events or a change in circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. j. Fair Value of Financial Instruments Cash and cash equivalents, short-term investments, accounts receivable, and accounts payable are carried at amounts that approximate a reasonable estimate of their fair value using available market information and appropriate valuation methodologies. k. Effects of New Accounting Pronouncements Statement on Financial Accounting Standards Number 133 "Accounting for Derivative Investments and Hedging Activities", as amended by Statement on Financial Accounting Standards Number 137 and 138 will have no financial impact on the Company's financial statements. l. Other Comprehensive Income The Company has no Other Comprehensive Income. 3. Income Taxes There was no statuary Federal tax expense for the fiscal years ended January 31, 2001 and 2000 since the Company had net losses for each of these two years. At January 31, 2001 and 2000, the Company has net operating loss carryforwards for federal income tax and financial reporting purposes of approximately $ 11,862,000 and $ 10,101,000, and for state income tax reporting purposes $ 7,438,000 and $ 8,121,000. The net operating loss carryforwards expire in various years from fiscal 2007 through 2020. The statutory rate for Federal income tax will be reduced to zero by utilization of loss carryforwards. The primary difference between the net operating loss for federal tax and financial reporting purposes relates to the Company's election under Section 195 of the Internal Revenue Code to defer the deduction of certain costs until operating revenues commence; such costs will be amortized on a straight-line basis over five years once operations commence. Effective fiscal year 1992, the recognition of Section 195 costs will begin prior to any utilization of net operating loss carryforwards. The deductibility of net operating loss carryforwards had been temporarily suspended in California during fiscal 1994 and reinstated in 1996. 4. Capital Transactions Since inception, the primary source of working capital has been provided by common stock issuances to the public. Shares have been issued to management and others as a source of compensation. Commissions paid for sales of stock have reduced the cash received from such issuances. From time to time, shares have been issued to individuals and companies for services rendered. 5. Commitments and Contingencies a. Sales of Securities i. From incorporation through January 31, 1993, the Company had a series of original offerings and sold approximately 6,486,968 shares of its common stock to unrelated investors in reliance upon certain exemptions provided by the Securities Act of 1933, as amended, and the securities laws of the various states wherein the purchasers of such shares reside. The exemptions relied upon by the Company may not have been available for these sales. If such exemptions were not available, the purchasers would have the right under both federal and state securities laws to rescind the purchase and seek the recovery of the purchase price paid for the stock together with statutory interest thereon from the date of sale. The Company had retained securities counsel to evaluate these matters and such counsel believes compulsory recession to be remote. The Company thus has taken no action regarding this and no communications were ever received from the SEC. ii. During the fiscal year ended January 31, 2001 the Company offered and sold approximately 1,788,082 shares of common stock at between $ 1.00 and $ 2.50 per share, to unrelated investors in reliance upon certain exemptions provided by the Securities Act of 1933, as amended, and the securities laws of the various states wherein the purchasers of such shares reside, through a Private Placement Memorandum ("PPM") dated August 1, 1998. The Company received approximately $ 3,222,219 from the sale of these shares, net of issuance costs. During the fiscal year ended January 31, 2000 the Company offered and sold approximately 2,897,886 shares of common stock at between $ 1.00 and $ 2.50 per share, to unrelated investors in reliance upon certain exemptions provided by the Securities Act of 1933, as amended, and the securities laws of the various states wherein the purchasers of such shares reside, through a Private Placement Memorandum ("PPM") dated August 1, 1998. The Company received approximately $ 2,460,268 from the sale of these shares, net of issuance costs Discrepancies exist between disclosures contained in the PPM and these financial statements including but not limited to; use of proceeds, offering costs and commissions, note receivable - real estate, executive compensation limits, comprehensive insurance coverage, number of employees, payroll tax liabilities and the now ineffective FUTECH agreement. The Company previously had retained counsel to evaluate these discrepancies. Counsel believes compulsory rescission to be remote. The financial statements contain no adjustments that may result from the rescission of the sale of any of these securities. iii. Effective February 15, 1999 the Company cancelled 2,588,883 previously issued shares for lack of consideration, and in some cases, other irregularties. The Board of Directors met on the above date and ratified this cancellation. iv. A summary of common stock transactions since inception is as follows: Shares Price Cash Compensation Range Per Received and other Share Net Expense (D) Balance at inception February 7, 1986) - $ - $ - $ - ---------- --------- -------- Common stock issued: Unrelated investors 3,837,553(B) $.25-$1.75 2,142,495 - Management and others 3,272,500(A) $.001-$.33 3,272 324,375 --------- -------- ------- Balance, January 31, 1989 7,110,053 2,145,767 324,375 ---------- --------- -------- Common stock issued: Unrelated Investors 590,190 $.50-$1.75 621,715 - Management and others 1,270,000 $.001-$.34 1,270 429,583 ---------- --------- ------- 1,860,190 622,985 429,583 ---------- ---------- -------- Balance, January 31, 1990 8,970,243 2,768,752 753,958 ---------- ---------- ---------- Common stock issued: Unrelated Investors 1,795,714 $.23-$1.75 1,377,737 - Management and others 1,995,200(C) $.001-$.10 1,995 199,520 --------- --------- ------- 3,790,914 1,379,732 199,520 ---------- --------- ------- Balance, January 31, 1991 12,761,157 4,148,484 953,478 ---------- ---------- -------- Common stock issued: Unrelated investors, net of repurchases 263,511 $.80-$1.75 332,084 - Management and others 684,522(E) $.00-$0.10 - 68,453 --------- --------- --------- 948,033 332,084 68,453 ---------- ---------- --------- Balance, January 31, 1992 13,709,190 $4,480,568 $1,021,931 ---------- ---------- ---------- Common stock issued: Unrelated investors 2,144,359 $1.00 1,929,922 - --------- --------- ---------- Balance, January 31, 1999 15,853,549 $6,410,490 $1,021,931 ---------- ---------- ---------- Common stock Issued: Unrelated Investors 2,589,586 $ 1.00 1,766,593 - Unrelated Investors 308,300 $ 2.50 693,675 - Common stock Cancelled (2,588,883) - - ----------- ---------- -------- Balance, January 31, 2000 16,162,552 $8,870,758 $1,021,931 ----------- --------- ---------- Common stock issued: Unrelated investors 607,082 $ 1.00 534,474 - Unrelated investors 55,000 $ 2.00 99,000 - Unrelated investors 1,126,000 $ 2.50 2,588,744 - --------- --------- -------- Balance, January 31, 2001 17,950,634 $12,092,976 $1,021,931 ========== =========== ========= (A) Includes issuances of 1,600,000 common shares to founders. (B) Includes an issuance of 700,000 shares at a gross sales price of $.55 per share. (C) Includes issuances of 1,780,000 common shares to management. (D) Expense charged to operations is based upon the excess fair market value over the purchase price received by the Company. (E) Shares issued to Jantar for settlement and license agreement.

b. Option and License Agreement Effective March 1998, the Company entered into a new exclusive option and license agreement ("Agreement") with FUTECH Corp. ("Licensee",) a California corporation, for worldwide rights to the Company's patents and technology for a twenty-year term. According to the Agreement the Licensee had timely exercised the original option of the Agreement. The March 1998 new agreement superceded the old Agreement between the Company and FUTECH Corp., which was effective July 1997. Consideration for this Agreement was five million dollars payable as follows: * $100,000 (which has been credited against license and technical assistance fees) * $150,000 due upon exercise of option (already paid) * $1,187,500 no later than October 1, 1999 * $1,187,500 no later than October 1, 2000 * $1,187,500 no later than October 1, 2001 * $1,187,500 no later than October 1, 2002 The five million dollars license fee was non-refundable. However, if the Agreement was deemed to be invalid, unenforceable or otherwise inoperable by any court or administrative body, in FUTECH's sole discretion the Agreement could be terminated and the Company was to be obligated to return that portion of the License and Technical Assistance Fee which, at the time of the termination, has been paid to the Company in cash, as opposed to credits in accordance with the Agreement. As of January 31, 2001 no such cash had been received. In addition to the license fee above, Licensee was required to pay royalties of 1 cent ($.01) per unit for cooling beverages containers and 4.75% of the selling price for heating products or 50% of the total royalty received by FUTECH, depending on the sublicensee. The royalty rate was to be adjusted annually for inflation according to the US Government Los Angeles Consumer Price Index (CPI) up to five decimal place for the preceding calendar year. The CPI increase was not to exceed 150% over the term of the Agreement. As of January 31, 2000, the Licensee advanced $ 365,946 in the form of credits to the Company which is reflected as a reduction of the Licensee Fee Receivable. A majority of the advances were payments made on behalf of ITP for research and development. FUTECH made payments directly to research laboratories for the Company and ITP would record research and development expense and reduce the License Fee Receivable. The Company came to the conclusion in the quarter ended January 31, 2000 that since FUTECH has not provided for the necessary consideration for the license, nor has Licensee made any scheduled royalty payments, the License Agreement is null and void. As a result, all License Fee Revenue and Receivable amounts under the Agreement were reserved for in the financial statements for the quarter ended January 31, 2000. In the quarter ended January 31, 2001 the Company came to the conclusion that the Company would not be receiving any further services from FUTECH and therefore all License Fee Revenue and Receivable amounts have been written off and all amounts reserved for in the January 31, 2000 financial statements have been reversed. c. Operating Leases The Company rents office space in Glendale, California under a month to month lease requiring monthly payments of $ 1,750. Total rent expense for all operating leases for the years ended January 31, 2001 and 2000 were $ 21,624 and $ 20,680. d. Payroll Taxes The Company failed to make federal and state payroll tax deposits totaling $ 212,651 through October 1992. Penalties and interest totaling $ 422,639 and $ 377,639 were accrued through January 31, 2001 and 2000, respectively, and are reflected in the total outstanding liability of $ 635,290 and $ 590,290. The Company has had discussions with Internal Revenue Service and State of California to pay off the outstanding balances, which total $ 635,290 at January 31, 2001. The Company has not paid any of these outstanding amounts as of the date of this report. 6. Related-Party Transaction Certain management and directors of the Company had assigned all patent rights to the Company in exchange for three percent of all license and related royalty fee consideration received by the Company. Currently only one of these agreements is still in effect. It is with Dennis Thomas, President of the Company. For the years ended January 31, 2001 and 2000, no royalties were accrued. Previously accrued royalties were $15,575 at January 31, 1998 and officer advances for the year ended January 31, 1999 in the amount of $15,575 were used to offset a portion of the balance of accrued royalties. Additionally, the Company advanced certain officers a total of $ 20,000 and $ 46,137 during the fiscal years ended January 31, 2001 and 2000, respectively. It is uncertain whether the Company intends to pursue collection of these advances, and the amounts may subsequently be reclassified as compensation expenses. These amounts are included in Officers Advances on the accompanying balance sheet, and are fully reserved for in the quarter ended January 31, 2001 and 2000. 7. Concentration of Credit Risk Previously approximately 100% of the Company's potential sources of revenue from license fees and royalties were from its Licensee FUTECH Corp. Additionally, approximately 100% of the Company's receivables were from FUTECH as well. Management had determined that there was no potential for loss due to the credit risk as of January 31, 1999. However in the quarter ended and as of January 31,2000 all licensee fee receivable and deferred revenue amounts have been fully reserved for. See note 5(b) for additional information related to the FUTECH Corp. License Agreement. Additionally, at various times throughout the year, the Company maintained cash balances with financial institutions in excess of FDIC limits. 8. Notes Receivable In February 1999, the Company loaned $ 725,000 to CRT Company, a New Jersey corporation. The note required interest at 10% per annum and matured on April 30, 1999. The Company received an assignment of a partnership interest held by CRT as security for the note. The Partnership, Delran Associates, L.L.C., holds as its primary asset, undeveloped land appraised at $ 4,000,000, located in New Jersey. Delran has a contract to sell part of the land to Trafalgar Associates for residential development. During fiscal year ended January 31, 2000 the Partnership was expected to either receive sufficient payments from Trafalgar Associates or obtain refinancing and repay the loan in one payment to include all principal and accrued interest. Because of the delinquency of the note, and due to the uncertainty of the timing of the refinance and/or sale, and the fact that CRT held a minority interest in the Partnership, the Company has engaged New Jersey legal counsel, which has filed legal action on the Company's behalf. This note was fully reserved for in the quarter ended January 31, 2000, although the Company intends to continue to vigorously pursue this action. There have been no changes too the amount reserved since January 31, 2000. In April 1999, ITP advanced $ 50,000 to CH Technologies for its purchase of a Canadian license from FUTECH Corp., the Company's former worldwide Licensee. CH Technologies executed a note for this amount, and the note matures when ITP delivers a working prototype to FUTECH. Due to the current state of the FUTECH Agreement, this amount has been fully reserved for in the quarter ended of January 31, 2000. There have been no changes too the amount reserved since January 31, 2000. The Company advanced $ 190,000 in October and November 1999 to Richard Barkley. Barkley received these as advance payments for purchase of a water company, Oxy-Tech. This company was to be acquired as a demonstration company for ITP's self-chilling technology. A dispute arose as to the purchase price for Oxy-Tech and the Company refused to advance further funds. The Company has not made a decision as to whether they will take any action with regards to the advances and, as a result, the full amount has been reserved as uncollectible at January 31, 2000. In the quarter ended January 31, 2001 the Company came to the conclusion that due to the dispute that arose, the Company would not recover any of the funds advanced to Richard Barkley and does not intend to take any action against Richard Barkley. Therefore the receivable was written off and the amount reserved for this receivable was reversed. 9. Stock Options a. On July 15, 1998 the board of directors approved the Company's Stock Option Plan with authorization to grant options to purchase up to 2,750,000 shares of the Company's common stock. Of the total options granted 2,250,000 shares were granted to employees of the Company. Following is a list of the options granted to the employees: Employee Number of Shares Dennis Brown 1,000,000 Dennis Thomas 1,000,000 Hans Schiedner 250,000 --------- Total 2,250,000 ========= The board also granted stock options to Lance Kerr, the Company's outside attorney, for 500,000 shares. All of these options entitle the holders to purchase one share of common sock at a price of $0.70 per share beginning on July 15, 1999, one year after grant date. The Options are valid for a period of five years and expire on July 15, 2003. b. The Company determined in February 2000 that 2,350,000 options granted to Dennis Thomas, President and Dennis Brown, Chief Financial Officer had been cancelled by prior management without giving either Brown or Thomas the opportunity to exercise these options. The options granted on May 23, 1990 at $ 0.10 per share were to have expired on May 23, 1995. The Board of Directors in their meeting on April 19, 2000 reinstated retroactively these options giving Thomas and Brown until May 1, 2004 to exercise them. There is no financial statement effect to the reinstatement of these options since the Company had a loss in each of the prior two fiscal years and any earnings per share adjustment would be antidilutive. c. On November 13, 2000, the board of directors agreed to grant stock options to former directors of the Company to purchase up to 400,000 shares of the Company's common stock. These former directors had previously rendered services to the Company subject to the understanding that compensation for their services would be fairly and reasonably negotiated at a future date. On November 13, 2000, the board of directors agreed to fully compensate these former directors for their services by granting them options to purchase common stock of the Company. Following is a list of the options granted to the former directors: Former Number Directors of Shares Richard Kahle100,000 Joseph Caprio100,000 Holbert Burns100,000 William Gray 100,000 Total 400,000 Caprio and Burns have agreed to accept these options as full compensation for their services. All of these options entitle the holders to purchase one share of common stock at a price of $1.75 per share. The options are not exercisable until at least six months after grant date. The options may not be exercised until one of the following events has occurred: mmon stock of the Company has been publicly trading for at least five trading days, and has traded at a price of at least $5.00 per share. The Company has received income from operations of at least $2.5 million per quarter for four consecutive quarters. These options expire three years from date of grant. No compensation expense has been recorded for the options granted. There is no financial statement effect for the options granted since the Company had a loss in each of the prior two fiscal years and any earnings per share adjustment would be antidilutive. 10. General and Administrative Expenses The components of general and administrative expenses for the two fiscal years ended January 31, 2001 and 2000 were as follows: 2001 2000 Depreciation and amortization $ 29,046 $ 26,456 Marketing and trade shows 415,438 454,264 Officers' compensation 448,469 233,000 Office expenses 274,672 179,613 Professional fees 514,425 719,339 Travel expense 364,272 323,969 Deferred license fees (365,946) 0 ------- ------- Total $ 1,680,556 $1,936,641 ========== ========= 11. Subsequent Events a. Subsequent to January 31, 2001 and through the period ended June 15, 2001, the Company offered up to 2,358,536 and sold approximately 508,560 shares of its common stock at up to $ 5.00 per share, to unrelated investors in reliance upon certain exemptions provided by the Securities Act of 1933, as amended, and the securities laws of the various states wherein the purchasers of such shares reside, through a Private Placement Memorandum ("PPM,") dated February 15, 2000. The Company received approximately $ 1,380,000 from the sale of these shares, net of issuance costs. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES There is no disagreement with any prior accountant. We engaged our current accountants in 1998. PART III ITEM 10. OFFICERS AND DIRECTORS OF THE COMPANY. The current officers and directors of our company are: Name Age Position Dennis L. Thomas 57 Director, President, CEO and Chairman of the Board Dennis L. Brown 56 Director, Chief Financial Officer and Treasurer Background information concerning the Officers and Directors is as follows: Dennis L. Thomas, the President and Chief Executive Officer of our company, was a founder of the Company and has been employed by the Company from 1986 to 1992, and from 1997 to the present. From 1993 to 1996, Mr. Thomas was a self- employed business consultant. Before founding the Company, Mr. Thomas was the President of Commercial Laundry Sales from 1976 to 1984. Before working for Commercial Laundry Sales, Mr. Thomas was a sales Engineer with Wascomat of America from 1970 to 1976. Before his tenure there he was a development engineer for the Chrysler Corporation from 1963 to 1969. Mr. Thomas attended the Detroit College of Business for two years. While working for Chrysler Corporation, Mr. Thomas attended the Chrysler Engineering School. Mr. Thomas was runner up in California for Inc. Magazines 1990 Entrepreneur of the year award, having been nominated by Merrill Lynch of New York. Dennis L. Brown, the Chief Financial Officer and Treasurer of our company, was employed by us from 1989 to 1992, and from 1997 to the present. From 1993 to 1996, Mr. Brown was employed by YAFA, Inc., as its Chief Financial Officer. Mr. Brown received his B.S. in Business from Indiana University and his M.B.A. from Cleveland State University. From February of 1988, until joining the Registrant, Mr. Brown was employed by Theim Industries as its Vice President of Finance. From April 1970 to February of 1988, he was employed by Gould, Inc. as a controller. ITEM 11. EXECUTIVE COMPENSATION. The following table sets forth certain information concerning the remuneration paid by our company for the fiscal year ended January 31, 2001. Only the following persons may be considered to have received annual remuneration of more than $60,000.00. FY 2001 Annual Long Term Compensation Compensation Options Name and Principal Position Dennis L. Thomas President and Chief Executive Officer $ 139,659 2,000,000 shares(A) Dennis L. Brown Chief Financial Officer and Treasurer $ 141,489 350,000 shares(A) (A) Options granted to purchase the number of shares shown at the price of $ .10 per share at any time prior to May 1, 2 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. On January 31, 2000, the ownership by the Company's management of its common stock, its only voting security, was as follows: (1) (2) (3) (4) Title of Name and address of Amount and nature Percent of Class of Beneficial owner of Beneficial owner Class(A) Stock $0.001 par Dennis L. Thomas 1,940,337 (B) 20.1 value 6730 San Fernando Rd. 635,000 (C) 2.5 common Glendale, CA 91201 $0.001 par Dennis L. Brown 7,000 (D) 1.8 value 6730 San Fernando Rd. common Glendale, CA 91201 Officers and Directors owned 2,590,337 shares of record and beneficially. (A) Percentages calculated without regard to options. (B) In addition Dennis L. Thomas has an option to purchase 2,000,000 shares for $.10 per share expiring on May 1, 2004. (C) These shares are owned by former wives of Dennis L. Thomas. Mr. Thomas has the right to vote said shares and thus may be considered to be the beneficial owner. (D) In addition Dennis L. Brown has an option to purchase 350,000 shares for $.10 per share expiring on May 1, 2004. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In the past fiscal year, there have been no transactions or proposed transactions that exceeds $ 60,000 with any officer, director, holder of 5% or more of stock, or any family member of any of this group. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. There have been no 8-K filings during the past year. Under Item 8 are audited financial statements for the Company as of January 31, 2001. Exhibits: 23.1 Consent of Jay Shapiro, C.P.A. CONSENT OF INDEPENDENT ACCOUNTANT [letterhead] JAY J. SHAPIRO, C.P.A. A Professional Corporation 16501 Ventura Boulevard Suite 650 Encino, California 91436 Tel: (818) 990-4204 Fax: (828) 990-4944 August 8, 2002 We consent to the inclusion in Form 10-K of International Thermal Packaging, Inc. of our report dated August 16, 2000, on the January 31, 2001, and January 31, 2000, financial statements of International Thermal Packaging, Inc. /s/ Jay J. Shapiro Jay J. Shapiro, C.P.A. a professional corporation SIGNATURE In accordance with Section 12 of the Securities Exchange Act of 1934, we caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL THERMAL PACKAGING, INC. Dated: 8/12/2002 By: /s/ Dennis L. Thomas Dennis L. Thomas, President, Director and Chief Executive Officer Dated: 8/12/2002 By: /s/ Dennis Brown Dennis Brown, Chief Financial Officer and Director

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