##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-KSB (Mark One) x
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2004 OR o
    
    Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the Transition Period from ___________________ to __________________ Commission File Number: 000-28047 DIVERSIFIED THERMAL SOLUTIONS, INC. (Name of small business issuer in its charter)
 Nevada
    
    94-3342064(State of jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 4126 Delp Street, Suite 200, Memphis, TN 38118  (Address of principal executive offices)
 Issuers telephone number, including area code (901) 365-7650 Securities registered pursuant to Section 12(b) of the Act:
    
    NoneSecurities registered pursuant to Section 12(g) of the Act:
    
    Common Stock par value, $0.0001
 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 past 90
days. Yes x No o Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
is not contained in this form, 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
this Form 10-KSB or any amendment to this Form 10-KSB. o State Issuers revenues for its most recent fiscal year: $106,892. State the aggregate market value of the voting and non-voting common equity stock held by
non-affiliates computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date within the past 60 days:
$574,681 as of March 21, 2005. APPLICABLE ONLY TO CORPORATE REGISTRANTS State the number of shares outstanding of each of the Issuers classes of common equity, as of
the latest practicable date: 18,664,238 shares of common stock as of March 21, 2005. DOCUMENTS INCORPORATED BY REFERENCE
None. Transitional Small Business Disclosure format (check one): Yes o No x




---



##### Table of Contents



TABLE OF CONTENTS Page No.PART IITEM 1. DESCRIPTION OF BUSINESS
    
    
    1ITEM 2. DESCRIPTION OF PROPERTY
    
    
    3ITEM 3. LEGAL PROCEEDINGS
    
    
    3ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    3PART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, SMALL BUSINESS ISSUER PURCHASES OF
EQUITY SECURITIES
    
    
    3ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    
    4ITEM 7. FINANCIAL STATEMENTS
    
    
    6ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    6ITEM 8A. CONTROLS AND PROCEDURES
    
    
    7PART IIIITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    7ITEM 10. EXECUTIVE COMPENSATION
    
    
    8ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    10ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    11ITEM 13. EXHIBITS
    
    
    11ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    11SIGNATURES, POWER OF ATTORNEY, EXHIBIT INDEX.
    
    
    13EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO




---



##### Table of Contents



PART I. 
 Item 1. DESCRIPTION OF BUSINESS General We were incorporated on May 4, 1987, under the laws of the state of Nevada as Energy Realty
Corporation. On July 31, 1993, we changed our name to Balcor International, Inc. On December 18,
1998, we changed our name to Dimension House, Inc. On October 28, 1999, we changed our name to
Presidents Telecom, Inc. On April 17, 2000, we changed our name to VoIP Telecom, Inc. On July 19,
2002, we changed our name to Diversified Thermal Solutions, Inc. On February 25, 2002, we announced a reverse split of our stock on a 1 for 20 basis. Prior to
the reverse split we had 40,727,975 shares of common stock outstanding, with 21,780,957 of those
shares available in the public float. Following the reverse split, the total number of shares
outstanding was 2,036,399. Prior to March 29, 2002, we delivered international long distance service via flexible,
server-based networks consisting of re-sale arrangements with other long distance providers,
primarily through our wholly-owned subsidiary, Access Communications, Inc. On March 29, 2002, we
sold 100% of the common stock of Access Communications, Inc. to an independent third party. After
the sale of Access Communications, we operated essentially as a shell company for the purpose of
acquiring businesses related to the manufacturing and distribution of materials used in the
refractory industry. On July 1, 2002, we issued 15 million shares of common stock in connection with the
acquisition of all of the outstanding stock of Global Holdings, Inc. On October 16, 2002, Global
Holdings, Inc. changed its name to DT Solutions, Inc. On July 24, 2002, we created another
wholly-owned subsidiary, Refractory & Industrial Supply Group, Inc. RIS Group will act as the
marketing and distribution arm for all refractory products. Refractory Industry Refractory products are heat-resistant materials used for the linings for high-temperature
furnaces and reactors and other processing units. In addition to being resistant to thermal stress
and other physical phenomena induced by heat, refractory products must also withstand physical wear
and corrosion caused by chemical agents and rapid changes in temperature. Refractory products are
more heat resistant than metals and are required for any heating applications above 1000 (Degree)
Fahrenheit. Because refractory products are so resistant to heat, erosion and corrosion, they are
typically used in any process involving heat and corrosion such as in kilns and furnaces. The genesis of the refractory industry can be traced to basalt, a naturally occurring
siliceous refractory product. Basalt is formed under natural geological forces of heat and
pressure. Modern refractory production is largely a replication of this process of forming
naturally occurring or synthetic non-metallic mineral oxides and some non-oxides like carbides or
nitrides under the bonding conditions of high heat and pressure. Technological progress has
resulted in new bonding techniques using chemicals, cements and resins rather than simply heat and
pressure. Refractory products typically have relatively high bulk density, high softening point, and
high crushing strength. Refractory products are typically referred to as:  
    Monolithic- a furnace lining without joints, formed of material which is rammed, cast,
gunned or sintered into place;
    Brick- low grade, low alumina to high grade, high alumina straight and shaped brick;
or 1




---



##### Table of Contents




    Pre-Cast Shapes- special shapes designed to the customers specifications, such as a
doorjamb in a furnace. Many refractory products, in final shape, resemble a typical construction brick. However,
there are many different shapes and forms. Some refractory parts are small and may possess a
complex and delicate geometry; others are massive and may weigh several tons in the form of precast
or fusion cast bricks. Refractory products are used in all heavy industry, including steel, foundry, chemical,
aluminum, petrochemical, pulp and paper, cement, lime, incineration and power/cogeneration.
However, the steel industry represents approximately 60% of the refractory market in the United
States. The well-documented bankruptcies and other financial troubles of the steel industry have
negatively affected the financial performance of many large refractory manufacturers. In addition,
asbestos litigation has caused many refractory manufacturers to file for bankruptcy protection. Strategy We are in the process of developing an integrated operating and acquisition strategy designed
to maximize internal and external growth through a combination of selective acquisitions and
procuring distribution agreements with leading suppliers. During
May 2004, B. Grant Hunter, our President, Chief Executive Officer and director, and
John F. Curry, our Secretary/Treasurer and director, contributed to us 100% of the stock in LW
Precast Corp. that has no operations and no liabilities but owns equipment used to manufacture
monolitics and firebrick products, including one of the industrys most utilized materials, high
alumina/low cement castables and the more unique fused or vitreous silica brick products. We now
have the capability to produce pre-cast, pre-fired refractory shapes. These are shapes that are
cast to the customers specifications and then prefired so that they are placed directly into
service, greatly reducing the customers downtime. We have also entered into agreements with
suppliers that enable us to offer a complete line of refractory specialty items such as castables,
plastics and mortars and high quality basic, extra high alumina, and alumina/chrome brick, as well
as other high-end specialty items at competitive prices. We intend to actively seek out and secure additional strategic distribution agreements on a
selective basis and align Diversified Thermal Solutions with respected refractory manufacturers.
We anticipate that our partners will exhibit certain characteristics such as dominance in a
particular industry, sales of non-competing products that will complement our offerings, an
existing sales force, and the ability to service a particular geographic area of the country. On January 31, 2005, Refractory & Industrial Supply Group, Inc. (RISG), a wholly-owned
subsidiary of the Company, acquired substantially all of the refractory assets and assumed certain
liabilities of Freeport Brick Company, Inc., Kittanning Brick Company, Free-MaDie Company, Freeport
Refractories, Inc., and Freeport Area Enterprises, Inc. (the Freeport Entities) consisting
principally of machinery, equipment, inventories, accounts receivable, certain contracts and
leases, three manufacturing facilities, and intellectual property. The Freeport Entities are
engaged in the business of manufacturing refractory products and tools and dies used in the
refractory industry. Pursuant to the Asset Purchase Agreement dated January 31, 2005 among the
parties named above and the Company, RISG paid the Freeport Entities
approximately $5,000,000. The
purchase price is subject to adjustment within 60 days after the closing based upon the completion
of the final balance sheet. Purchasing We do not anticipate any significant difficulty in obtaining products necessary for our
operations. Competition We compete with a substantial number of other companies. We believe that the major
competitive factors in our business are the quality and durability of finished products, the
quality of customer service 2




---



##### Table of Contents



and price. Our ability to compete effectively in selling our products is primarily dependent
on our ability to deliver high quality finished products with speed and accuracy. Employees On December 31, 2004, we had no employees. Our Chief Executive Officer and Acting Chief
Financial Officer provide their services to the Company on a contract basis. Additional Information We are subject to the reporting and informational requirements of the Securities Exchange Act
of 1934, as amended (the Exchange Act), and in accordance therewith file reports, proxy
statements and other information with the Securities and Exchange Commission (the Commission)
pursuant to the Exchange Act. Such reports, proxy statements and other information filed by the
Company may be examined without charge at, or copies obtained upon payment of prescribed fees from,
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference
Room by calling the Commission at 1-800-SEC-0330. Electronic filings made through the Electronic
Data Gathering, Analysis and Retrieval System are publicly available through the Commissions web
site (http://www.sec.gov). 
 Item 2. DESCRIPTION OF PROPERTY We lease 500 square feet of office space that we use for our corporate headquarters at 4126
Delp Street, Suite 200, Memphis, TN, 38118, from Lynn Whitsett Corporation. We currently are not
charged for the use of this property. We believe that the property is suitable for its current
usage, and that it is adequately insured. As a result of acquisition,
we own 378,050 square feet of space located on 28.4 acres in
Freeport, Pennsylvania, Adrian, Pennsylvania, and Kittanning
Pennsylvania. 
 Item 3. LEGAL PROCEEDINGS On February 14, 2005, The Harbor Bank of Maryland (Harbor Bank) filed a complaint against DT
Solutions, Inc., one of our wholly-owned subsidiaries, B. Grant Hunter (Hunter), our President,
Chief Executive Officer, and director, and John F. Curry (Curry), our Secretary/Treasurer and
director, in the Thirtieth District of the Chancery Court in Memphis, Tennessee alleging breach of
contract and seeking compensatory damages in the amount of $206,737. In November 2003, DT
Solutions, Inc. entered into a loan commitment with Harbor Bank, Hunter and Curry joined as
guarantors, in connection with a potential acquisition by the Company. During 2004, we determined
we would no longer pursue this acquisition because we could not secure financing for the
acquisition. Harbor Bank had performed several obligations under the loan commitment and incurred
certain out of pocket expenses we believe is less than $70,000; however, our potential liability
related to this matter is up to approximately $207,000. 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2004. 
 PART II. 
 Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock has been quoted under the symbol DVTS since July 31, 2002. Our common stock
was traded under the symbol VOIP from February 25, 2002 until July 30, 2002. Prior to that time,
our common stock was traded under the symbol VOTM. The common stock is quoted on the OTC Bulletin
Board. The following is a list of the high and low bid quotations by fiscal quarters for 2004 and
2003: 3




---



##### Table of Contents



Low
    
    
    HighQuarter ended March 31, 2004
    
    $
    0.22
    
    
    $
    0.22Quarter ended June 30, 2004
    
    
    0.41
    
    
    
    0.41Quarter ended September 30, 2004
    
    
    0.36
    
    
    
    0.37Quarter ended December 31, 2004
    
    
    0.25
    
    
    
    0.30Quarter ended March 31, 2003
    
    $
    0.19
    
    
    $
    0.90Quarter ended June 30, 2003
    
    
    0.15
    
    
    
    0.25Quarter ended September 30, 2003
    
    
    0.15
    
    
    
    0.25Quarter ended December 31, 2003
    
    
    0.15
    
    
    
    0.45
 The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions
and may not represent actual transactions. The quotations were obtained from MarketWatch.com. Holders We estimate that there were approximately 100 holders of record of our common stock as of
December 31, 2004. Dividends We have not paid a cash dividend on our common stock during the past two fiscal years. We do
not anticipate paying dividends during the foreseeable future. Equity Compensation Plans The following table sets forth, as of December 31, 2004, certain information with respect to
shares of common stock authorized for issuance under the our equity compensation plans: Number ofsecuritiesNumber of
    
    
    
    
    
    
    
    
    remaining availablesecurities to be
    
    
    
    
    
    
    
    
    for future issuanceissued upon
    
    
    
    
    
    
    
    
    under equityexercise of
    
    
    
    Weighted-average
    
    
    
    compensation plansoutstanding
    
    
    
    exercise price of
    
    
    
    (excludingoptions, warrants
    
    
    
    outstanding
    
    
    
    securitiesand
    
    
    
    options, warrants
    
    
    
    reflected in columnPlan Category
    
    
    rights(1)
    
    
    
    and rights
    
    
    
    (a))(a
    )
    
    
    
    (b
    )
    
    
    
    (c
    )Equity compensation
plans approved by
security holders
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,275,000Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,275,000
 
 Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following information specifies certain forward-looking statements that are not historical
facts. These statements represent our expectations or beliefs, including but not limited to,
statements concerning future acquisitions, future operating results, statements concerning industry
performance, capital expenditures, financings, as well as assumptions related to the foregoing.
Forward-looking statements may be identified by the use of forward-looking terminology such as
may, shall, will, could, expect, estimate, anticipate, predict, should,
continue or similar terms, variations of those terms or the negative of those terms.
Forward-looking statements are based on current expectations and involve various risks and
uncertainties that could cause actual results and outcomes for future periods to differ materially
from any forward-looking statement or view expressed herein. Our financial performance and the
forward-looking statements contained in this report are further qualified by other risks including
those set forth from time to time in documents filed by us with the SEC. 4




---



##### Table of Contents



Introduction Since 2002, our business has been focusing on acquiring businesses related to the
manufacturing and distribution of materials used in the refractory business. We entered into a
letter of intent in 2002 to acquire substantially all of the assets, excluding cash and accounts
receivables, of a company in the refractory business. Due to complications involved in this
acquisition, during 2004 we abandoned this planned acquisition attempt. We subsequently entered
into a letter of intent to purchase substantially all of the refractory assets and assumed certain
liabilities of Freeport Brick Company, Inc., Kittanning Brick Company, Free-MaDie Company, Freeport
Refractories, Inc., and Freeport Area Enterprises, Inc. (the Freeport Entities). This group of
businesses is located in Pennsylvania and also operates in the refractory business. This
acquisition was completed on January 31, 2005 at a net cash cost of $3,916,000, which included
$5,000,000 for the assets of the companies offset by the assumption of $1,084,000 in liabilities.
This acquisition was financed by a new $1.5 million term loan and a $2.5 million line of credit
with a financial institution along with two promissory notes from related companies totaling $1
million. We have had only a limited amount of operations prior to this acquisition; however, our
operations are expected to increase significantly during 2005 with this new acquisition. Balance Sheets The primary changes in our balance sheets between December 31, 2003 and 2002 related to our
anticipated acquisition discussed above. As a result of this, our deferred loan and acquisition
costs increased significantly along with our accounts payable, accrued expenses and advances from
related parties which is primarily how we have funded these costs. Cash also decreased as of
result of these costs. Also, at December 31, 2003 a right of offset existed for a certain
customer/vendor, and accordingly, accounts receivable and accounts payable were offset by
approximately $60,000. No such right of offset existed at December 31, 2002. There were no other
significant changes affecting our balance sheet between December 31, 2002 and December 31, 2003. The primary change in our balance sheets between December 31, 2004 and 2003 are:  
    During 2004, two of our stockholders contributed 100% of the outstanding stock in a
company thats only asset was certain equipment with a carrying amount of $59,843. This
company had no liabilities or operations in recent years. This resulted in us having
equipment and accumulated depreciation at December 31, 2004. Our stockholders deficit was
reduced as a result of this contribution.
    Our deferred loan and acquisition costs decreased by $264,136 during 2004. This was a
result of us writing off in 2004 $415,656 in these costs related to our failed acquisition
offset by our new deferred loan and acquisition incurred related to our acquisition
completed in 2005.
    Our accounts payable and accrued expenses decreased in 2004 primarily as a result of
additional advances being obtained from a related company. This related company also
funded our operations in 2004 and accordingly, the amount we owe this related company
increased by $317,922 in 2004. During 2005, we formalized the terms of these advances
into a promissory note in which only interest payments are required until 2010 at which
time both principal and interest payments will be made. Accordingly, we have classified
these advances as long-term at December 31, 2004.
    Overall, our stockholders deficit increased by $458,900 during 2004. The primary
reason for the decrease was our net loss of $554,443 which was offset by the two
stockholders contribution of stock in a company (discussed above) and $36,000 in stock
issued for services. Results of Operations Revenues Our revenues during 2003 were $502,123. Substantially all of our revenue was derived from two
customers, which are related companies controlled by family members of a major stockholder and
director of our Company. Revenues for 2003 increased 163% from the sales during 2002. This
increase can be attributed to a few large transactions as well as six more months of activity.
During 2004, substantially all of our revenues continued to be derived from these two customers;
however our total revenues decreased to 5




---



##### Table of Contents



$106,892. This decrease in revenue is primarily due to our time and resources being directed
towards our acquisition which occurred in 2005. With the acquisition now complete, we anticipate
significant growth in 2005. Gross Profit Our gross profit in 2003 was 7% compared to 20% in 2004. During 2003, all of the products we
sold were purchased domestically. During 2004, certain of the products we purchased were
manufactured overseas. The margins on these overseas purchases were significantly greater than the
products manufactured domestically. Operating and Other Expenses Our operating expenses during 2003 totaled $110,426. Of this amount, $48,359 represented
professional and consulting services. We incurred $24,463 of marketing and advertising expenses to
develop the logos and brands for Diversified Thermal Solutions and RIS Group, and to announce and
market our new products. The remaining expenses were routine office and administrative related.
As expected, our expenses for 2003 were significantly less than 2002. This was due in part to a
large amount of current year costs being capitalized as deferred loan and acquisition costs as
discussed above. Also, during 2002, we incurred a large amount of professional fees associated
with a shift in business focus and we issued stock to certain former employees which resulted in
unusually high salary expense in 2002. During 2004, our operating expenses increased to $149,885. The primary increase was due to
increased professional and consulting expenses related to certain tax work we had performed along
with an increase in the costs incurred in filing our quarterly and annual reports. Also, in 2004,
we incurred $11,969 in depreciation expense as a result of the equipment contributed to us in 2004.
Our marketing and advertising costs in 2004 decreased as expected due to our focus on the
acquisition as opposed to increasing our revenues. As previously discussed, during 2004 we
abandoned our efforts on an acquisition we were pursuing and we expensed $415,656 in previously
recorded deferred loan and acquisition costs. Also, in 2004, we began paying interest on our
advances from a related company which resulted in an increase in our interest expense from $390 in
2003 to $11,541 in 2004. Liquidity and Capital Resources During 2003 and 2004, our losses have been funded by a major shareholder and a related company
that is also a customer. As previously discussed, in 2005 we completed our acquisition and
obtained additional financing, including a line of credit with a financial institution. We
anticipate our operations to improve significantly with our new acquisition and for our new
financing to help with our working capital needs. We recognize our need to make our operations
profitable and we will work towards this in 2005. Our independent auditors have expressed their
concern that our continuing losses, among other things, raise substantial doubt about our ability
to continue as a going concern. Off Balance Sheet Arrangements We have no off-balance sheet arrangements. 
 Item 7. FINANCIAL STATEMENTS Our financial statements are included in pages F-1 through F-12. 
 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants in our last two fiscal years. 6




---



##### Table of Contents



Item 8A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures While we currently have no full time employees and our Chief Executive Officer and Acting
Chief Financial Officer are providing services on a contract basis, we maintain disclosure controls
and procedures, that are designed to ensure that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SECs rules and forms and that
such information is accumulated and communicated to our management, including our Chief Executive
Officer and Acting Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Our Chief Executive Officer and Acting Chief Financial Officer carried out an
evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on the evaluation of these
disclosure controls and procedures, the Chief Executive Officer and Acting Chief Financial Officer
concluded that our disclosure controls and procedures were effective. It should be noted that any
system of controls, however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system are met. In addition, the design of any
control system is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be no assurance that
any design will succeed in achieving its stated goals under all potential future conditions,
regardless of how remote. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting during the fourth
quarter 2004 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 
 PART III 
 Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information about our executive officers and directors
as of March 21, 2005. Name
    
    
    Age
    
    
    PositionB. Grant Hunter
    
    
    41
    
    
    President, Chief Executive Officer, and DirectorMary Eubanks
    
    
    69
    
    
    Acting Chief Financial OfficerJohn F. Curry
    
    
    46
    
    
    Secretary/Treasurer and DirectorEd H. Gatlin
    
    
    64
    
    
    DirectorJerry W. Hunter
    
    
    67
    
    
    Director
 B. Grant Hunterbecame our Chief Executive Officer in 2001. Mr. Hunter is currently Vice
President of Lynn Whitsett Corporation, and has served in that position since 1986. Lynn Whitsett
specializes in the construction of high temperature process vessels. Mr. Hunter is the son of
Jerry W. Hunter, one of our directors. Mary Eubankshas been Acting Chief Financial Officer since April 2004. Since December 1999,
Ms. Eubanks has been the controller of the Lynn Whitsett Corporation. Prior to that, Ms. Eubanks,
a CPA, worked in public accounting. John F. Curryhas been a director since 2002. Mr. Curry has been employed by Knight & Wilson,
Inc. as a Risk Manager since February 2001. Prior to that time, Mr. Curry was self-employed. Ed Gatlinhas been a director since 2001. He is a partner and Chairman of Empire Express,
Inc. 7




---



##### Table of Contents



Jerry W. Hunterhas been a director with the Company since 2002. He is the President and
majority stockholder of Lynn Whitsett Corporation. Mr. Hunter is the father of B. Grant Hunter,
our President and Chief Executive Officer. Audit Committee Financial Expert We do not have an audit committee financial expert serving on our audit committee. Because of
our small size and limited resources, we are not able to attract a candidate to serve on our audit
committee that would be an audit committee financial expert. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and
directors and the holders of greater than 10% of our common stock to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange Commission (SEC).
Executive officers and directors are required by SEC regulations to furnish us with copies of these
reports. Based solely on a review of written representations from such officers, directors and
shareholders with respect to the period from January 1, 2002 through December 31, 2002, we are not
aware of any required Section 16(a) reports that were not filed on a timely basis. Code of Ethics Because we do not have any full time employees, we have not adopted a code of ethics. 
 Item 10. EXECUTIVE COMPENSATION As of December 31, 2004, we had no full time employees. The compensation of our Chief
Executive Officer for 2004, 2003, and 2002 is described in the table set forth below. Name and Principal Position
    
    Year
    
    
    Annual SalaryB. Grant Hunter
    
    
    2004
    
    
    $
    02003
    
    
    $
    02002
    
    
    $
    149,449
 Benefit Plans 2003 Equity Incentive Plan We adopted and our stockholders approved our 2003 Equity Incentive Plan in May 2003. The 2003
Equity Incentive Plan will terminate in May 2013. The 2003 Equity Incentive Plan provides for the
grant of nonstatutory stock options, restricted stock awards, stock appreciation rights, phantom
stock rights and other forms of equity compensation, which may be granted to employees, including
officers, non-employee directors and consultants. Share Reserve.An aggregate of 1,275,000 shares of common stock are reserved for issuance
under the 2003 Equity Incentive Plan. The following types of shares issued under the 2003 Equity Incentive Plan may again become
available for the grant of new awards under the 2003 Equity Incentive Plan: restricted stock that
is repurchased or forfeited prior to it becoming fully vested; shares withheld for taxes; shares
used to pay the exercise price of an option in a net exercise; and shares tendered to the company
to pay the exercise price of an option. In addition, shares subject to stock options that have
expired or otherwise terminated without having been exercised in full may again become available
for the grant of new awards under the 2003 Equity Incentive Plan. Shares issued under the 2003
Equity Incentive Plan may be previously unissued shares or reacquired shares bought on the market
or otherwise. Administration.Our Board of Directors administers the 2003 Equity Incentive Plan. The Board 8




---



##### Table of Contents



of Directors may delegate authority to administer the 2003 Equity Incentive Plan to a
committee. Subject to the terms of the 2003 Equity Incentive Plan, our Board of Directors or its
authorized committee, the plan administrator, determines recipients, grant dates, the numbers and
types of equity awards to be granted and the terms and conditions of the equity awards, including
the period of their exercisability and vesting. Subject to the limitations set forth below, the
plan administrator also determines the exercise price of options granted, the purchase price for
rights to purchase restricted stock and, if applicable, phantom stock and the strike price for
stock appreciation rights. The plan administrator may also amend the terms of the plan and
outstanding equity awards. Amendments to the 2003 Equity Incentive Plan are subject to stockholder
approval to the extent required by law, rule or regulation. In addition, the plan administrator
may amend an option to lower its exercise price or exchange an option for an option with a lower
exercise price, another equity award, cash or any other valuable consideration or may take any
other action that is treated as a repricing under generally accepted accounting principles. Nonstatutory Stock Options.Nonstatutory stock options will be granted pursuant to
nonstatutory stock option agreements. The plan administrator determines the exercise price for a
nonstatutory stock option. Options granted under the 2003 Equity Incentive Plan vest at the rate
specified in the option agreement. Generally, the plan administrator determines the term of nonstatutory stock options granted
under the 2003 Equity Incentive Plan. Unless the terms of an optionees nonstatutory stock option
agreement provide otherwise, if an optionees service relationship with us, or any of our
affiliates, ceases due to disability or death, the optionee, or his or her beneficiary, may
exercise any vested options up to 12 months in the event of disability, 18 months in the event of
death and 24 months in the event of retirement, after the date such service relationship ends. If
an optionees relationship with us, or any affiliate of ours, ceases for any reason other than
disability, death or retirement the optionee may exercise any vested options up to three months
from cessation of service, unless the terms of the stock option agreement provide for earlier or
later termination. Acceptable consideration for the purchase of common stock issued upon the exercise of a
nonstatutory stock option will be determined by the plan administrator and may include cash, common
stock previously owned by the optionee, a broker assisted exercise and the net exercise of the
option. Generally, an optionee may not transfer a nonstatutory stock option other than by will or the
laws of descent and distribution unless the nonstatutory stock option agreement provides otherwise.
However, an optionee may designate a beneficiary who may exercise the option following the
optionees death. Restricted Stock Awards.Restricted stock awards are purchased through a restricted stock
award agreement. The purchase price for restricted stock awards must be at least the par value of
the stock. The purchase price for a restricted stock award may be payable in cash or the
recipients past or future services performed or to be performed for us or any of our affiliates.
Rights to acquire shares under a restricted stock award may not be transferred other than by will
or by the laws of descent and distribution. Stock Appreciation Rights.Stock appreciation rights are granted pursuant to stock
appreciation rights agreements. The plan administrator determines the strike price for a stock
appreciation right. A stock appreciation right granted under the 2004 Equity Incentive Plan vests
at the rate specified in the stock appreciation right agreement. The plan administrator determines the term of stock appreciation rights granted under the 2003
Equity Incentive Plan. If an awardees service relationship with us, or any of our affiliates,
ceases due to disability or death, the awardee, or his or her beneficiary, may exercise any vested
stock appreciation right up to three months or such longer or shorter period of time provided in
the stock appreciation rights agreement. Different post-termination exercise periods may be
provided in the stock appreciation rights agreement for specific terminations of service such as
death, disability or retirement. Phantom Stock Awards.Phantom stock awards are granted pursuant to phantom stock award
agreements. A phantom stock award may require the payment of at least par value. Payment of any
purchase price may be made in any form of legal consideration acceptable to the plan administrator.
Rights 9




---



##### Table of Contents



to acquire shares under a phantom stock agreement may not be transferred other than by will or
by the laws of descent and distribution. Other Equity Awards.The plan administrator may grant other awards based in whole or in part
by reference to our common stock. The plan administrator will set the number of shares under the
award, the purchase price, if any, the timing of exercise and vesting and any repurchase rights
associated with such awards. Unless otherwise specifically provided for in the award agreement,
such awards may not be transferred other than by will or by the laws of descent and distribution. Changes in Control.In the event of specified corporate transactions, all outstanding options
and stock appreciation rights under the incentive plan either will be assumed, continued or
substituted for by any surviving or acquiring entity. If the surviving or acquiring entity elects
not to assume, continue or substitute for such awards, such equity awards will become fully vested
and exercisable and such equity awards will be terminated if not exercised prior to the effective
date of the corporate transaction. Other forms of equity awards such as restricted stock awards
may have their repurchase or forfeiture rights assigned to the surviving or acquiring entity. If
such repurchase or forfeiture rights are not assigned, then such equity awards will become fully
vested. Following specified change in control transactions, the vesting and exercisability of
specified equity awards generally will be accelerated only if the awardees award agreement so
specifies. The standard form of stock option agreement provides for options to become fully vested
and exercisable if an optionee is involuntarily terminated without cause or has a constructive
termination, in either case, within twelve months after the change in control. 
 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth the number and the percentage of shares of our outstanding
common stock that were beneficially owned by our Chief Executive Officer, our directors and named
executive officers and directors as a group, and all persons known to us to be a beneficial
owner, as such term is defined by the rules of the Securities and Exchange Commission, of more
than 5% of the outstanding shares of our common stock as of December 31, 2004. Number of Shares of Common Stock
    
    
    PercentName and Address(1)
    
    Beneficially Owned as of December 31, 2004
    
    
    of ClassB. Grant Hunter(2)
    
    
    10,088,563
    
    
    
    42
    %John F. Curry
    
    
    4,697,197
    
    
    
    27
    %Mary Eubanks
    
    
    159,828
    
    
    
    *Ed Gatlin
    
    
    131,452
    
    
    
    *Jerry W. Hunter(2)
    
    
    2,812,145
    
    
    
    *W. Burley Shedd(3)
    
    
    3,550
    
    
    
    *Named executive officers and
directors as a group (6 individuals)
    
    
    12,502,067
    
    
    
    72
    %
   (1)
    
    The address is 4126 Delp Street, Memphis, TN, 38118.(2)
    
    Includes 2,695,334 shares owned by Lynn Whitsett Corporation with those shares owned by
Messrs. Grant Hunter and Jerry Hunter.(3)
    
    Mr. Shedd resigned as a director of the Company effective December 8, 2004.*
    
    Less than 1% of the outstanding shares of our common stock. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange
Commission and includes voting or investment power with respect to securities. The number of
shares of common stock outstanding used in calculating the percentage for each listed individual
includes 17,467,571 shares of common stock outstanding as of December 31, 2004. There are no
shares of our common stock underlying options or warrants that are currently exercisable or that
are exercisable within 60 days of December 31, 2004. Except for shares held jointly with a
persons spouse or subject to applicable community property laws, or as indicated in the footnotes
to this table, each shareholder identified in the 10




---



##### Table of Contents



table possesses sole voting power and investment power with respect to all shares of common
stock shown as beneficially owned by such shareholder. 
 Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the years ended December 31, 2004 and December 31, 2003, Lynn Whitsett Corporation
(Lynn Whitsett), a corporation majority owned by Mr. Jerry Hunter, one of our directors,
purchased approximately $91,282 and $203,166, respectively, in refractory materials from us. These
purchases accounted for 85% and 40.5% of our 2004 and 2003 revenues from continuing operations,
respectively. Mr. Hunter and his son, B. Grant Hunter, who is our President, Chief Executive
Officer, and director, are stockholders of Industry Services Corp., Inc., a customer whose 2003
refractory materials purchases totaled approximately $227,947, and accounted for 45.4% of our 2003
revenues from continuing operations. During May 2004, Mr. B. Grant Hunter, our President, Chief Executive Officer and director, and
Mr. John F. Curry, our Secretary/Treasurer and director, contributed 100% of the outstanding stock
in LW Precast Corp. (LWP) to the Company. LWPs assets consist entirely of certain equipment
used in the refractory industry and the entity has no revenues, expenses, or liabilities. During 2003 and 2004, Lynn Whitsett has provided advances to us with no stated repayment
terms. Effective July 1, 2004, the advances from Lynn Whitsett began bearing interest at a rate of
1.65% with interest expense for 2004 of approximately $10,000. During January 2005, Lynn Whitsett
loaned us an additional $10,486, thus increasing the outstanding balance of the loan to
approximately $600,000. On January 31, 2005, we formalized terms of the loan with Lynn Whitsett
and increased the annual interest rate to 7.37%. We begin paying interest only on a quarterly
basis commencing June 1, 2005 in the amount of $11,055. Commencing June 1, 2010, we will make
principal and interest payments on a quarterly basis in the amount of $22,948. The note matures on
March 1, 2019. We also lease our principal place of business from Lynn Whitsett. During 2002, 2003, and 2004, Mr. B. Grant Hunter, our President, Chief Executive Officer and
director advanced us $43,398, $29,286, and $100, respectively, with no stated repayment terms.
During 2003, Mr. Jerry Hunter, a director, advanced us $8,000 with no stated repayment terms, and
during 2004, Mr. John F. Curry, our Secretary/Treasurer and director advanced us $200 with no
stated repayment terms. On February 21, 2005, the Company issued Mr. Jerry Hunter, one of our directors, 650,000
shares of restricted stock valued at $104,000 for services rendered related to the financing of the
acquisition of the Freeport Entities as described in The Description of Business. 
 Item 13. EXHIBITS (a) The following exhibits are filed as part of this report: 2.01
    
    

Asset
Purchase Agreement, dated January 31, 2005, by and among the Company,
Refractory & Industrial Supply Group, Inc., Freeport Brick Company,
Inc., Kittanning Brick Company, Free-Madie Company, Freeport
Refractories, Inc., and Freeport Area Enterprises, Inc. (incorporated
by reference from the Companys Form 8-K dated February 24, 2005)31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Acting Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Acting Chief Financial Officer Pursuant to 18.
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 (b) There were no reports filed on Form 8-K during the quarter ended December 31, 2004. 
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The Board of Directors has appointed Coulter & Justus, P.C. as our independent auditors to
audit the financial statements of the Company and to perform other accounting services, if
appropriate, for the year ending December 31, 2005. 11




---



##### Table of Contents



Fees paid to Coulter & Justus for services provided during the years ended December 31, 2004
and 2003, are presented below. Audit Fees include fees associated with the annual audits and our
initial public offering. Audit-Related Fees include fees associated with assurance and related
services related to the performance of the audit. Tax Fees include fees associated with tax
compliance, tax advice, and tax planning. Audit Fees
    
    
    Audit-Related Fees
    
    
    Tax Fees
    
    
    All Other Fees2004
    
    $
    14,300
    
    
    $
    12,980
    
    
    $
    0
    
    
    $
    02003
    
    $
    22,632
    
    
    $
    16,200
    
    
    $
    0
    
    
    $
    0
 12




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. DIVERSIFIED THERMAL SOLUTIONS, INC.Date: March 28, 2005
    By:
    /s/ B. Grant HunterB. Grant HunterChief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    
    Date/s/ John F. Curry

John F. Curry
    
    Secretary/Treasurer and Director
    
    March 28, 2005/s/ Mary Eubanks

Mary Eubanks
    
    Acting Chief Financial Officer
    
    March 28, 2005/s/ Ed H. Gatlin

Ed H. Gatlin
    
    Director
    
    March 28, 2005/s/ Jerry W. Hunter

Jerry W. Hunter
    
    Director
    
    March 28, 2005
 13




---



##### Table of Contents



Diversified Thermal Solutions, Inc. Consolidated Financial Statements Years ended December 31, 2004 and 2003 Contents Report of Independent Registered Public Accounting Firm
    
    
    F-1Audited Consolidated Financial StatementsConsolidated Balance Sheets
    
    
    F-2Consolidated Statements of Operations
    
    
    F-3Consolidated Statements of Stockholders Deficit
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
Diversified Thermal Solutions, Inc. We have audited the accompanying consolidated balance sheets of Diversified Thermal Solutions, Inc.
and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders deficit and cash flows for the years then ended. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States of America). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Diversified Thermal Solutions, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the consolidated results of its operations and
its cash flows for the years then ended in conformity with accounting principles generally accepted
in the United States of America. The accompanying consolidated financial statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note 8, the Companys continuing losses, among other
things, raise substantial doubt about its ability to continue as a going concern. Managements
plans in regard to these matters are also described in Note 8. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Coulter
& Justus P.C. Knoxville, Tennessee
February 22, 2005 F-1




---



##### Table of Contents



Diversified Thermal Solutions, Inc. Consolidated Balance Sheets December 312004
    
    
    2003AssetsCurrent assets:Cash
    
    $
    
    
    
    $
    4,168Receivables:Trade
    
    
    
    
    
    
    17,467Related company
    
    
    27,116
    
    
    
    2,338Total receivables
    
    
    27,116
    
    
    
    19,805Unbilled revenue to related company
    
    
    
    
    
    
    926Inventories
    
    
    4,148
    
    
    
    4,148Total current assets
    
    
    31,264
    
    
    
    29,047Equipment, net of accumulated depreciation of
$11,969 in 2004
    
    
    47,874
    
    
    
    Deferred loan and acquisition costs
    
    
    100,568
    
    
    
    364,704Total assets
    
    $
    179,706
    
    
    $
    393,751Liabilities and stockholders deficitCurrent liabilities:Checks outstanding in excess of bank balance
    
    $
    1,049
    
    
    $
    Accounts payable and accrued expenses
    
    
    283,947
    
    
    
    358,363Advances from related parties:Shareholders
    
    
    80,984
    
    
    
    80,684Related company
    
    
    
    
    
    
    271,592Total advances from related parties
    
    
    80,984
    
    
    
    352,276Total current liabilities
    
    
    365,980
    
    
    
    710,639Advances from related company
    
    
    589,514
    
    
    
    Total liabilities
    
    
    955,494
    
    
    
    710,639Stockholders deficit:Common stock, par value $0.0001:Authorized100,000,000 shares
Issued and outstanding17,467,571 in
2004 and 20,242,571 in 2003
    
    
    1,747
    
    
    
    2,024Additional paid-in capital
    
    
    10,966,587
    
    
    
    10,870,767Accumulated deficit
    
    
    (11,744,122
    )
    
    
    (11,189,679
    )Net stockholders deficit
    
    
    (775,788
    )
    
    
    (316,888
    )Total liabilities and stockholders deficit
    
    $
    179,706
    
    
    $
    393,751
 See accompanying Notes to Consolidated Financial Statements. F-2




---



##### Table of Contents



Diversified Thermal Solutions, Inc. Consolidated Statements of Operations Year ended December 312004
    
    
    2003Revenues:Related companies
    
    $
    91,282
    
    
    $
    431,113Other
    
    
    15,610
    
    
    
    71,010Total revenues
    
    
    106,892
    
    
    
    502,123Costs of goods sold
    
    
    85,092
    
    
    
    467,661Gross profit
    
    
    21,800
    
    
    
    34,462Operating expenses:Professional and consulting services
    
    
    111,885
    
    
    
    48,359Depreciation
    
    
    11,969
    
    
    
    Contract labor
    
    
    4,008
    
    
    
    10,920Marketing and advertising
    
    
    875
    
    
    
    24,463Office and administration
    
    
    20,309
    
    
    
    26,684Total operating expenses
    
    
    149,046
    
    
    
    110,426Operating loss
    
    
    (127,246
    )
    
    
    (75,964
    )Other expenses:Write-off of deferred loan and acquisition costs
    
    
    (415,656
    )
    
    
    Interest
    
    
    (11,541
    )
    
    
    (390
    )Total other expenses
    
    
    (427,197
    )
    
    
    (390
    )Net loss
    
    $
    (554,443
    )
    
    $
    (76,354
    )Basic loss per share
    
    $
    (0.03
    )
    
    $
    
 See accompanying Notes to Consolidated Financial Statements. F-3




---



##### Table of Contents



Diversified Thermal Solutions, Inc. Consolidated Statements of Stockholders Deficit Number ofShares
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    TotalIssued and
    
    
    Common
    
    
    Paid-in
    
    
    Accumulated
    
    
    StockholdersOutstanding
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    DeficitBalance at January 1, 2003
    
    
    20,242,571
    
    
    $
    2,024
    
    
    $
    10,870,767
    
    
    $
    (11,113,325
    )
    
    $
    (240,534
    )Net loss for 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,354
    )
    
    
    (76,354
    )Balance at December 31, 2003
    
    
    20,242,571
    
    
    
    2,024
    
    
    
    10,870,767
    
    
    
    (11,189,679
    )
    
    
    (316,888
    )Stock issued for services
    
    
    225,000
    
    
    
    23
    
    
    
    35,977
    
    
    
    
    
    
    
    36,000Equipment contributed
from stockholders
    
    
    
    
    
    
    
    
    
    
    59,843
    
    
    
    
    
    
    
    59,843Common stock repurchased
    
    
    (3,000,000
    )
    
    
    (300
    )
    
    
    
    
    
    
    
    
    
    
    (300
    )Net loss for 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (554,443
    )
    
    
    (554,443
    )Balance at December 31, 2004
    
    
    17,467,571
    
    
    $
    1,747
    
    
    $
    10,966,587
    
    
    $
    (11,744,122
    )
    
    $
    (775,788
    )
 See accompanying Notes to Consolidated Financial Statements. F-4




---



##### Table of Contents



Diversified Thermal Solutions, Inc. Consolidated Statements of Cash Flows Year ended December 312004
    
    
    2003Operating activitiesNet loss
    
    $
    (554,443
    )
    
    $
    (76,354
    )Adjustments to reconcile net loss to
net cash used in operating activities:Depreciation
    
    
    11,969
    
    
    
    Write-off of deferred loan and acquisition costs
    
    
    415,656
    
    
    
    Stock issued for services
    
    
    36,000
    
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    (7,311
    )
    
    
    51,464Unbilled revenue to related company
    
    
    926
    
    
    
    10,901Inventories
    
    
    
    
    
    
    (4,148
    )Refundable income taxes
    
    
    
    
    
    
    8,068Checks outstanding in excess of cash
    
    
    1,049
    
    
    
    Accounts payable and accrued expenses
    
    
    (5,254
    )
    
    
    (60,573
    )Net cash used in operating activities
    
    
    (101,408
    )
    
    
    (70,642
    )Investing activitiesCash paid for deferred loan and acquisition costs
    
    
    (220,682
    )
    
    
    (47,407
    )Financing activitiesNet advances from related parties
    
    
    317,922
    
    
    
    108,029Net decrease in cash
    
    
    (4,168
    )
    
    
    (10,020
    )Cash at beginning of year
    
    
    4,168
    
    
    
    14,188Cash at end of year
    
    $
    
    
    
    $
    4,168Supplemental disclosure of noncash activitiesDeferred loan and acquisition costs not paid at year
end and included in accounts payable and accrued
expenses
    
    
    55,740
    
    
    
    124,902Equipment contributed by stockholders
    
    
    59,843
    
    
    
    Common stock repurchased but not paid at year end and
included in advances from shareholders
    
    
    300
    
    
    
    
 See accompanying Notes to Consolidated Financial Statements. F-5




---



##### Table of Contents



Diversified Thermal Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2004 1. Significant Accounting Policies Principles of Consolidation and Description of Business The accompanying consolidated financial statements include the accounts of Diversified Thermal
Solutions, Inc. and its wholly-owned subsidiaries, collectively referred to as the Company. All
intercompany balances and transactions have been eliminated. The Companys current operations consist primarily of distributing refractory supplies. Management
anticipates growing the Company by acquiring other businesses related to the manufacturing and
distribution of materials used in the refractory business. Revenue Recognition The Company recognizes revenues at the time of shipment. Shipping and handling costs are
classified as a component of costs of goods sold. Major Customers and Vendor Concentrations The Companys revenues were derived from two customers in 2004 and three customers in 2003. One of
the customers in 2004 and two of the customers in 2003 were related companies controlled by family
members of a major stockholder and Company board member. The related company represented 85% of
total revenues in 2004 and all of the Companys accounts receivable at December 31, 2004. In 2003,
the two related companies represented 45.4% and 40.5% of total revenues. Two customers accounted
for all of the Companys accounts receivable at December 31, 2003. The Company performs ongoing credit evaluations of its customers financial condition but does not
require collateral on accounts receivable. The Company charges accounts to bad debt expense as
they are determined to be uncollectible based, in part, on a review of aging and collections.
Credit losses have historically not been significant. The Company currently purchases the majority of the refractory supplies they sell from two vendors.
These two vendors represented 45% and 24% of the Companys total cost of goods sold in 2004 and
60% and 19% of the Companys total cost of goods sold in 2003. Advertising Costs Advertising costs are expensed as incurred. Estimates The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly, actual results could differ from those
estimates. F-6




---



##### Table of Contents



Diversified Thermal Solutions, Inc. Notes to Consolidated Financial Statements (continued) 1. Significant Accounting Policies (continued) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in,
first-out method. Equipment Equipment is carried at cost. Repairs and maintenance are charged to expense as incurred.
Depreciation was computed using the double declining balance method over the estimated useful lives
of the assets. Offsetting of Accounts The Company offsets accounts receivables and accounts payables whenever a right of setoff exists.
Such a right of offset existed for a certain customer/vendor and accounts receivable and accounts
payable were offset by $1,104 and $59,658 at December 31, 2004 and 2003, respectively. Fair Value of Financial Instruments The fair value of the Companys financial instruments approximates their carrying value based upon
the type and nature of the financial instruments. 2. Income Taxes For tax purposes, the Company has net operating loss (NOL) carryovers which are available to
offset future taxable income. These NOL carryovers expire as follows: Year
    
    Year of
    
    
    NOLGenerated
    
    Expiration
    
    
    Amount1997
    
    
    2012
    
    
    $
    1031998
    
    
    2018
    
    
    
    1571999
    
    
    2019
    
    
    
    26,5942000
    
    
    2020
    
    
    
    3,3222001
    
    
    2021
    
    
    
    3792002
    
    
    2022
    
    
    
    141,6432003
    
    
    2023
    
    
    
    75,9052004
    
    
    2024
    
    
    
    554,364$
    802,467
 The amount of future taxable income which may be offset by the NOL carryovers prior to 2002 is
limited due the change of ownership which occurred in July 2002 and is estimated to be
approximately $80,000 annually. F-7




---



##### Table of Contents



Diversified Thermal Solutions, Inc. Notes to Consolidated Financial Statements (continued) 2. Income Taxes (continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The significant components of the Companys deferred tax assets are as follows as of
December 31: 2004
    
    
    2003Deferred tax assetsNOL carryovers
    
    $
    307,264
    
    
    $
    94,999Less valuation allowance for
deferred tax assets
    
    
    (307,264
    )
    
    
    (94,999
    )Net deferred tax asset
    
    $
    
    
    
    $
    
 The valuation allowance was increased by $212,265 in 2004 and $29,065 in 2003 due to changes in
deferred tax assets for which realization was not assured. 3. Company Equity Matters During 2003, the Companys stockholders approved the 2003 Diversified Thermal Solutions, Inc.
Equity Incentive Plan(the Plan) in an effort to promote the interests of the Company and its
stockholders. Under the terms of the Plan, current and prospective officers and employees, and
directors of and consultants to the Company or its subsidiaries or affiliates are eligible to be
granted awards. During 2004, the Company issued under the Plan 225,000 shares of common stock
valued at $36,000 to certain consultants of the Company. Two of these consultants received 100,000
shares each. One consultant is a Company board member and the other consultant is an officer of
the Company. This amount has been recorded as professional and consulting services expenses in the
accompanying consolidated statement of operations. Also under the terms of the Plan, the Company
is authorized to grant stock options, including both incentive stock options and non-qualified
stock options and is also authorized to grant stock appreciation rights, either with or without a
related option. As of December 31, 2004, no stock options or stock appreciation rights have been
issued under the Plan. At December 31, 2004, the Company has reserved 1,275,000 shares of
authorized common stock for future issuance under the Plan. During May 2004, the two majority stockholders of the Company contributed 100% of the outstanding
stock in LW Precast Corp. (LWP) to the Company. LWPs assets consist entirely of certain
equipment used in the refractory industry and the entity has no revenues, expenses, or liabilities.
Due to the related party nature of this transaction, in accordance with Financial Accounting
Standards Board Statement No. 141, Business Combinations, these assets were recorded by the Company
at their carrying amount of $59,843. During December 2004, the Company repurchased and retired 3,000,000 shares of its common stock for
$300 from the two majority stockholders. F-8




---



##### Table of Contents



Diversified Thermal Solutions, Inc. Notes to Consolidated Financial Statements (continued) 3. Company Equity Matters (continued) Subsequent to year end and in conjunction with the Companys business acquisition discussed in Note
5, the Company issued 426,667 shares of stock valued at $106,667 to an outside consultant for
services. This same consultant also purchased an additional 120,000 shares of stock from the
Company for $30,000. The Company also issued 650,000 shares of restricted stock valued at
$104,000 to a board member and stockholder for services related to the acquisition financing. 4. Contingent Liabilities During 2002, the Company entered into a letter of intent to acquire substantially all of the
assets, with the exception of cash and receivables, of a company that manufactures specialized
brick used in the refractory business. During 2004, management of the Company determined they
would no longer pursue this acquisition. Accordingly, the Company wrote off $415,656 in loan and
acquisition costs that were previously capitalized related to this acquisition. Subsequent to year end, a financial institution involved in the financing of this acquisition filed
a lawsuit against the Company and its two majority stockholders seeking $206,737 for out of pocket
expenses and bank fees related to this failed acquisition. The Company has recorded a liability of
$68,737 for the out of pocket expenses incurred by the financial institution. However, should the
lawsuit go to trial, the Company could be liable for up to $206,737. 5. Business Acquisition and Related Financing On January 31, 2005, Refractory & Industrial Supply Group, Inc. (RISG), a wholly-owned subsidiary
of the Company, acquired substantially all of the refractory assets and assumed certain liabilities
of Freeport Brick Company, Inc., Kittanning Brick Company, Free-MaDie Company, Freeport
Refractories, Inc., and Freeport Area Enterprises, Inc. (the Freeport Entities) consisting
principally of machinery, equipment, inventories, accounts receivable, certain contracts and
leases, three manufacturing facilities, and intellectual property. The Freeport Entities are
engaged in the business of manufacturing refractory products and tools and dies used in the
refractory industry. Pursuant to the Asset Purchase Agreement (the Agreement) dated January 31,
2005 among the parties named above and the Company, RISG paid the Freeport Entities, collectively,
$3,916,000 in cash and assumed liabilities of $1,084,000 for a total purchase price of $5,000,000.
The purchase price, which was based on preliminary account balances, is subject to adjustment
within 60 days after the closing based upon the completion of the final balance sheet. The Company
is currently still in the process of performing its allocation of purchase price. During 2004, the Company entered into a letter of intent related to this acquisition. Accordingly,
the Company has capitalized $100,568 in acquisition and loan costs. At closing, the Company
incurred an additional $418,758 of loan and acquisition costs. These amounts will be allocated
between direct costs of the acquisition and debt issue costs of this acquisition. F-9




---



##### Table of Contents



Diversified Thermal Solutions, Inc. Notes to Consolidated Financial Statements (continued) 5. Business Acquisition and Related Financing (continued) The Company financed the above asset purchase with a revolving line of credit with a financial
institution (the Bank) not to exceed $2,500,000, a term loan of $1,500,000 with the Bank and two
promissory notes in the amounts of $250,000 and $750,000 with two related companies controlled by
family members of a major stockholder and Company board member (the related companies). Each of
these agreements was executed on January 31, 2005. The Bank revolving line of credit allows the Company to borrow up to 70% of eligible accounts
receivable and 40% of raw materials and finished goods inventories. As of the closing date of the
Agreement, January 31, 2005, the maximum amount available was $2,211,067. Interest on the line of
credit is based on the Banks base rate, as defined, plus 2% (7.25% at January 31, 2005). The line
of credit requires monthly payments of all outstanding interest and outstanding principal and
interest is due February 1, 2010. As of February 22, 2005, borrowings against line of credit
totaled $1,896,273 which was used in financing the asset purchase and related costs. The Bank term loan bears interest at an annual rate of 7.15% and matures on February 1, 2010. This
loan requires monthly principal and interest payments of $29,878 beginning March 1, 2005. The above Bank loans are collateralized by substantially all of the Companys assets, the related
companies and two separate companies controlled by the majority stockholders family, along with an
assignment of a life insurance policy on a Company stockholder. Both the line of credit and the
term loan agreements include certain financial covenants and restrictions. All other debt of the
Company is subordinate to that of the Bank, and prepayment of such subordinate debt is restricted
as defined in the loan agreements. Each of the promissory notes with the related companies bears interest at an annual rate of 7.37%.
Payments of interest only will begin on June 1, 2005 and continue on a quarterly basis through May
31, 2010. Beginning on June 1, 2010, the Company will make principal and interest payments on a
quarterly basis in the amount of $38,248. Both notes mature on March 1, 2019, with any remaining
principal and interest due in full on this date. Also, subsequent to year end, the Company agreed to guarantee the indebtedness from the Bank of the
related companies. Upon default of the related companies, the Company would be obligated to pay
any outstanding principal and accrued interest to the Bank on their behalf. In addition, if the
related companies default on their loans from the Bank, the Companys outstanding loans with the
Bank will also be considered in default. At January 31, 2005, when the guarantee originated, the
debt guaranteed for the related companies was $2,494,000 under term loans and up to $5,500,000
under revolving line of credit terms. These term loans and revolving lines of credit expire
February 1, 2010. These loans are also cross-collateralized by substantially all of the assets of
the related companies and the Company. F-10




---



##### Table of Contents



Diversified Thermal Solutions, Inc. Notes to Consolidated Financial Statements (continued) 6. Loss Per Share Data Basic earnings (loss) per share assumes no dilution and is computed by dividing income (loss)
available to common stockholders by the weighted average number of common stock outstanding during
each period. Diluted earnings per share reflect, in periods in which they have a dilutive effect,
the effect of common shares issuable upon the exercise of stock options or warrants, using the
treasury stock method of computing such effects and contingent shares. As the Company has no
outstanding stock options or warrants, there are no diluted earnings (loss) per share. The following table sets forth the computation of basic loss per share for the years ended December
31: 2004
    
    
    2003Average shares outstanding
    
    
    20,114,446
    
    
    
    20,242,571Net loss per share
    
    $
    (0.03
    )
    
    $
    
 7. Other Related Party Transactions The Company has received advances from a related company that is also a customer, from a major
stockholder and director, and from a stockholder and director in order to meet its current
obligations. Effective July 1, 2004, the advances from the related company became interest bearing
at an annual rate of 1.65%. There were no stated repayment terms during 2004. Interest expense to
this related company totaled approximately $10,000 in 2004. During January 2005, the Company had additional advances from the related company of $10,486,
increasing the outstanding balance to $600,000. On January 31, 2005, the Company and the related
company formalized the terms of their arrangement, increasing the annual interest rate to 7.37%.
The Company will begin paying interest only on a quarterly basis beginning June 1, 2005 in the
amount of $11,055. Beginning on June 1, 2010, the Company will make principal and interest
payments on a quarterly basis in the amount of $22,948. This note matures on March 1, 2019, with
any remaining principal and interest due in full on this date. As a result of the subsequent
formalized terms, the advances from related company have been classified as long-term at December
31, 2004 in the accompanying consolidated balance sheet. F-11




---



##### Table of Contents



Diversified Thermal Solutions, Inc. Notes to Consolidated Financial Statements (continued) 8. Going Concern The accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business. The Companys continuing losses and cash requirements, among other things, may indicate
the Company will be unable to continue as a going concern for a reasonable period of time.
Management recognizes the Company must achieve profitable operations and generate additional funds
in order to continue as a going concern. The Company anticipates the future operations and related
financing of the asset acquisition discussed in Note 5 will provide the Company future positive
cash flows necessary to continue as a going concern. F-12