SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 33-46104-FW
THERMOENERGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Arkansas 71-00659511
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification Number)
323 Center Street, Suite 1300
Little Rock, Arkansas 72201
(Address of principal executive offices including Zip Code)
Registrant's telephone number, including area code:
(501) 376-6477
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Exchange on Which Registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Each Class
None
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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 any amendment to this Form 10-K. [X].
As of March 28, 2000, there were 3,802,289 shares of common stock
outstanding. The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of March 28, 2000 is explained in Item 5.
PART I
ITEM 1 BUSINESS
Overview
The Company is the exclusive worldwide licensee (except for STORS in Japan)
for three clean water process technologies and one process equipment technology
developed by Battelle Memorial Institute ("BMI"). The Company is also the
exclusive owner of a new patent pending clean energy technology. The four
Battelle licensed technologies address wastewater problems for municipal and
broad-based industrial markets. These technologies include three chemical
process technologies known as the Sludge-To-Oil Reactor System ("STORS") (TM),
Nitrogen Removal ("NitRem") and Ammonia Recovery Process ("ARP") (TM). The
fourth technology, a Dual-Shell Pressure Balanced vessel reactor system, ( the
"DSR") (TM), is the unique reactor equipment in which the STORS and NitRem
chemistries are conducted ( STORS, NitRem, ARP and DSR are collectively referred
to as the "Water Technologies"). These technologies represent the state of the
art in the processing and treating of municipal, government and industrial
wastewater. The Company's clean energy technology , known as the ThermoEnergy
Integrated Power System ("TIPS") converts any biomass into electricity without
producing any air emissions. TIPS represents the state of the art in converting
fossil fuels to energy, and is aimed at competing with conventional energy
conversion technologies.
History
The Company was incorporated in Arkansas on January 19, 1988, under the
name Innotek Corporation, at the direction of the Innotek Board of Directors and
the majority shareholders of American Fuel and Power Corporation ("AFP"), the
original licensee of two of the Company's current technologies. In 1986 AFP
executed the initial licensee agreement with Battelle Memorial Institute
("Battelle"), the inventor and licensor of STORS to market STORS to the
water/wastewater industry. Since AFP's primary business was motor fuel additives
and industrial lubricants, AFP eventually determined it was unable to devote the
necessary attention and resources to the development of STORS and subsequently
transferred the technology license to the Company, under an agreement requiring
that 70% (approximately 1,543,750 shares) of the Company's initial outstanding
common stock be issued and subsequently distributed to AFP shareholders. The
Company subsequently executed a new licensee agreement with Battelle which
superseded the previous license agreement between Battelle and AFP. The Company
subsequently acquired NitRem, DSR and ARP from Battelle. On December 12, 1996
the Company changed its name from Innotek Corporation to ThermoEnergy
Corporation (TM) (See "Certain Relationships and Related Transactions").
The Company registered 125,000 shares of common stock with the Securities
and Exchange Commission on June 24, 1992. The Company subsequently sold 93,129
shares of stock, issued 6,438 shares in satisfaction of notes payable with
related accrued interest, and terminated the offering effective January 5, 1994.
STORS Technology
STORS is a thermochemical process that can convert any biomass, on site,
into a burnable fuel oil similar to No. 4 diesel fuel. Management believes that
the conversion of biomass (sludge) produced by municipal wastewater treatment
facilities world wide represents the single largest market for the STORS
technology. Costs for treating municipal sludge and wastewater just in the
United States is currently approaching $30 billion annually. Based upon
preliminary demonstration data, management believes STORS will not only allow
municipal operators to meet or exceed current federal and state air and water
quality standards, but when combined with ARP or NitRem, will allow municipal
wastewater treatment operators to achieve zero discharge from a regulatory
standpoint. Management also believes that the STORS technology will
significantly reduce wastewater and sludge treatment facility operating,
maintenance and front-end capital costs.
NitRem Technology
NitRem is a hydrothermal process, similar in operation to the STORS
technology, that converts the nitrogenous compounds present in most industrial
discharge streams, such as nitrate, nitrites, amines and ammonia, into nitrogen
gas (N2). Nitrogen gas is a benign compound displacing 80% of the earth's air
supply. The NitRem technology has application in such industries as chemical
processing, petroleum refining, petro-chemical, pharmaceutical, textile, food
processing, pulp and paper manufacturing, as well as various heavy manufacturing
industries. The NitRem technology can also be combined with the STORS technology
to process and treat municipal sewage sludge.
Both the STORS and NitRem process chemistries are conducted in the patented
reactor-within-a-reactor equipment, otherwise known as the DSR. Management
believes that the unique design of the DSR provides STORS and NitRem with an
advantage over competing technologies. (See "General Operations" ).
ARP Technology
ARP is a patent-pending process designed to recover ammonia from dilute
waste streams. The removed and concentrated ammonia can thereafter be converted
to nitrogen (N2) or recovered as a salt, such as ammonium sulfate (NH2)2SO4),
packaged and sold worldwide as a commercial grade fertilizer. ARP's primary
market is municipal wastewater treatment and treating wastewater discharge from
concentrated animal farming operations, such as for the dairy, beef, poultry or
pork industry.
TIPS Technology
TIPS converts any biomass, especially fossil fuels, such as coal, gas and
oil, into electricity without producing any emissions while simultaneously
sequestering the mercury and capturing the carbon dioxide ( CO2) by-products for
beneficial reuse. TIPS integrates the combustion of any biomass or fossil fuel
and the efficient production of electricity with the recovery of CO2 in liquid
form and the elimination of both acid gas and particulate emissions.
TIPS is a novel approach to power production thermodynamics, mass transfer
and heat transfer. TIPS can use air, oxygen, and oxygen enriched air as the
oxidant, and any biomass of fossil fuel which can be pumped or injected, and
then combusted in a boiler. By changing the combustion and heat transfer process
parameters, TIPS recovers the latent heat vaporization from produced water,
scrubs out the acids and particulate matter, while its condenses and recovers
liquid CO2 as an integral part of the over-all process. Liquid CO2 represents a
form of stored energy. This stored energy can then be used to generate power for
peak demand periods. Additionally, the United States Department of Energy has
various programs identifying other end uses for liquid CO2. The success of DOE's
programs depends on the development of a low cost, long-term source of liquid
CO2. Management believes that TIPS may potentially be that source. The TIPS
technology can be used to economically retrofit existing fossil fuel power
plants or used in the construction of new power generation facilities.
Management believes that TIPS has the potential to replace the current
conventional coal, gas or heavy oil combustion power generation facilites which
contribute significantly to global air quality problem, acid rain and global
warming.
Environmental Matters
Environmental reform efforts have influenced a series of state and federal
legislation establishing strict but realistic, environmental standards designed
to protect both water and air quality. The impact of this legislation on waste
water discharged by municipal and industrial sources and air pollution produced
by coal power generating plants and heavy industry has been significant. Plagued
by under- capacity and obsolete facilities, publicly owned waste water treatment
facilities ("Publicly Owned Treatment Works" or "POTW's") are in need of
significant improvements to meet federal and state discharge requirements from
legislation such as the Ocean Dumping Ban Act of 1988, the Land Ban Acts, the
amended Clean Air Act and rules promulgated thereunder. This legislation,
coupled with improvements in chemical detection instrumentation and expanded
reporting requirements, have placed rigorous demands on "conventional" waste
water treatment and sludge disposal methods and coal power generation currently
utilized by municipalities and industry. In addition, interstate compacts, such
as the Long Island Sound Agreement and the Chesapeake Bay Agreement, targeted
specific waste streams that cause severe ecological damage, ultimately
destroying aquatic life ("eutrophication"). The most significant among these
pollutants are "nutrients", i.e., nitrogen and phosphate. Known as nutrient
loading, the discharge of these compounds into our rivers, lakes or estuaries is
a leading cause of eutrophication. Section 320 of the Clean Water Act lists 16
estuaries of national significance that require priority attention, with
provisions for additional estuaries to be added in the near future. The
economics involved in meeting these new mandates are forcing POTW operators to
seek new, alternative treatment and recycling technologies in order to achieve
compliance at an affordable cost.
The Clean Drinking Water Act passed by Congress, in addition to H.R. 1907,
which requires municipal authorities to publish, on a regular basis, the
contents and quality of the municipalities drinking water has set new and more
stringent requirements for municipal drinking water. The Company believes this
Act will bring to the attention of the public sector the amount of certain
undesirable elements existing in the drinking water provided by the municipal
water works, including ammonia and nitrogen. Such attention could result in
public pressure on municipal officials to provide drinking water free of
contaminants.
According to the Environmental Business Journal's ("EBJ") Annual Industry
Overview, Vol. IX, April, 1996, the US environmental industry reached $180
billion in revenues in 1995, posting a growth of 4.3% over 1994. The four
largest of EBJ's fourteen environmental industry segments, in terms of revenues
generated by private- and public-sector entities related to environmental
infrastructure, are solid waste management, wastewater treatment works, water
utilities and resource recovery. These four segments represent 57% of total
environmental industry revenues. The single largest sector of this market is
waste water treatment works, accounting for $27 billion annually, a market which
posted an annual average growth of 7.1% between 1989 and 1995.
The EPA, in its Needs Survey Report to Congress, 1992, estimated the
capital required to meet minimum waste water treatment standards in the United
States through the year 2012 would be between $31.3 and $37.4 billion.
The Clean Air Act, passed by Congress over 30 years ago and administered by
the EPA, regulates the content and quality of our air nationwide. In the past 10
years, the EPA has focused major efforts on regulating industries responsible
for small-particle air pollution caused by the burning of fossil fuels. Although
the world is not running out of energy, it is running out of environmental
capacity to absorb, without unacceptable consequences, the effluents of today's
fossil-fuel and traditional biomass-energy technologies. Because of the large
role of fossil-fuels in the current U.S. and world energy systems, the technical
difficulty and cost of modifying power plants to reduce carbon dioxide
emissions, and the long times typically required to develop new technologies to
the point of commercialization, the "greenhouse-gas-reduction effort" is the
most demanding of all of the looming energy challenges to national and
international energy R&D efforts.
World energy demand is projected to increase by more than 50 percent over
the next 20 years as the developing world begins to truly develop. Fossil fuels
will remain the world's overwhelmingly dominant energy source, with coal
comprising 69 % of the worlds fossil fuel reserve. Natural gas accounts for 14%
and imported oil, 17%. The energy content of recoverable US coal is about 275
billion tons. Every ton of coal that America can convert to energy saves the
U.S. 3.8 barrels of imported oil. Thus, new technologies dealing with the
conversion of fossil fuels, particularly coal, are vitally important to the
economic security of the U.S. and the electric utilities. Coal will be a
critical factor to America's continued success in the 21st century. The Company
believes that TIPS could make the critical difference to the nation's energy
needs.
The June, 1999 study published by the President's Committee of Advisors on
Science and Technology reports that a "business as usual" energy future, without
rapid technological innovation and increased cooperation to diffuse the results
worldwide, would be problem-plagued and potentially disastrous. Based on
"business as usual" assumptions, the Report estimates worldwide capital
investments in energy supply to be in the range of $12 to $19 trillion in 1997
dollars for the period 1990 to 2020, and $17 to $34 trillion in 1997 dollars for
the period 2021 to 2050, with about half of the total investments required in
the developing countries. Market pressures are forcing firms in energy
industries to scale back their long-term research and development to meet energy
needs, while the economics involved in meeting these new mandates are forcing
utility company operators to look for new technologies in order to achieve
compliance at an affordable cost. Management believes that TIPS is the new
technology that will not only achieve or exceed current compliance levels, but
will do so at a cost that will be less than the "business as usual" assumptions.
Although the Company can neither predict its share of the capital
expenditures for improvements by the wastewater and sludge treatment markets and
the energy market, nor predict the growth in such markets, the Company believes
that such improvements and growth could include both its clean water and clean
energy Technologies. The Company's ability to penetrate these markets depends on
1) successfully commercializing one or more of the technologies subsequent to a
successful technology demonstration as discussed below, 2) fully developing the
TIPS technology and 3) fully executing its marketing plan.
From a competitive standpoint in the wastewater and sludge treatment
markets, the lower capital requirements for an ARP or STORS/NitRem waste water
treatment facility make it an attractive option for municipalities, such as New
York City and the San Bernadino Valley Water District ( See New York City and
Colton project.). The top 60 municipal waste water treatment markets account for
approximately 80% of all the sewage sludge generated annually in the United
States. The Company believes these markets are excellent privatization
candidates where the Company could build, own and operate the waste water
facilities for the municipality over a contracted period (usually 20 years).
These contracts, known as "take or pay" agreements, would call for the local
municipal government to pay the Company on a per dry ton per day through-put
basis. The Company estimates that these 60 markets will produce approximately 8
million dry tons of sludge per year at a current average internal cost rate in
excess of $550 per dry ton or an equivalent of $4.4 billion annually.
As for a competitive standpoint in the clean energy market, the Company
believes TIPS will gain wide market acceptance and will meet or exceed any
current EPA clean air requirements because TIPS produces no air emissions when
converting fossil fuels to energy.
Business Strategy
The Company has completed NitRem/DSR, and ARP demonstration projects and
anticipates having a STORS demonstration project operating in the first quarter
of 2000. The Company will not be required to make capital contributions to this
project and will not receive any revenues or earnings from these demonstration
projects. The Company will be reimbursed for administrative and operating costs
from the STORS demonstration project.
In October 1994, the Company and Sam Houston State University, doing
business as the Texas Regional Institute for Environmental Studies ("TRIES"),
signed an agreement to undertake a demonstration project to evaluate the
nitrogen removal process and NitRem's ability to economically and safely treat
residual water streams produced from the manufacture of various explosives, such
as trinitrotoluene ("TNT") redwater, DNT contaminated wastewater, and various
RCRA waste streams within the Department of Defense industrial base and the
Department of Defense Commercial Facilities. TRIES holds the contract with the
DoD, Department of Army, and the Company has subcontracted with TRIES for the
project. The NitRem DSR unit was delivered to the project site, Radford Army
Ammunition Plant, Radford, Virginia, in June 1997 and began July 21, 1997.
Testing and processing of the DoD RAPP test material was concluded on September
5, 1997. The Company has received the final test results and report from TRIES.
Preliminary results indicate that the NitRem DSR reduces DNT in contaminated
wastewater to a level which could be discharged without further wastewater
treatment. Based on these preliminary results, the Company anticipates marketing
NitRem to the DoD. See "Business - NitRem Removal Demonstrations - United States
Department of the Army NitRem Demonstration."
In July 1996, the Company signed a No Cost Test Agreement ("New York
Agreement") with the City of New York, Bureau of Clean Water - Department of
Environmental Protection . The purpose of the New York Agreement is to allow the
City of New York to evaluate the Company's nitrogen removal processes, including
NitRem and any other nitrogen removal process the Company may acquire, and its
ability to satisfy the City of New York's nitrogen removal requirement imposed
on the City of New York by new federal and state wastewater discharge standards.
Successful laboratory and pilot plant results from testing actual samples of New
York City's centrate discharge led to the design of this demonstration project.
The Company chose to demonstrate the capabilities of its ARP technology at
New York City's Staten Island wastewater treatment facility. On August 4, 1998,
the Company signed an agreement with Foster Wheeler Environmental Corporation
("FWENC") to provide up to $500,000 of funding necessary to demonstrate the ARP
technology and to design, fabricate and operate the ARP pilot plant. It is
thereafter anticipated that any commercial business derived from the successful
demonstration of ARP will be engaged through ThermoEnergy Environmental
Corporation, a joint venture with FWEC. This is the first collaborative effort
between the Company and FWENC. See "Business - Nitrogen Removal Demonstrations -
New York City ARP Demonstration".
In September 1996, Congress appropriated $3,000,000 for use by the San
Bernardino Valley Water District ("SBVWD") for the design, construction and
operation of a large-scale STORS wastewater treatment demonstration facility. In
March, 1998, the SBVWD selected the City of Colton, California to host the STORS
demonstration project. The Company will not be required to make capital
contributions to this project and the Company will not receive any revenues or
earnings. The Company will be reimbursed for administrative and operating costs
for this project. The design plans for the STORS project have been completed.
The Company anticipates subcontracting with FWENC to fabricate, install and
operate the STORS demonstration unit. Once in operation, the Colton STORS
facility will have a larger processing capacity than 70% of the existing
municipal wastewater plants in the US. The demonstration project is scheduled to
begin in the first quarter of 2000.
The TIPS technology will be further developed to primarily compete with
coal power generation facilities that have been the recent subject of
enforcement actions by the United States Department of Justice and the EPA for
violations of the Clean Air Act. In order to expedite the advancement of the
TIPS technology, the management is working toward establishing a consortium of
corporate partners to design, build and test a prototype burner and exhaust
train. This data will provide the basis to analyze process economics, determine
size and scale of market, as well as provide a detailed design for a large-scale
demonstrations plant. This strategy is consistent with the Company's overall
business strategy to establish joint ventures or other collaborative working
arrangements with larger, more established companies currently operating in the
Company's targeted markets. The Company intends to enter into these
relationships to (i) effect direct sales of equipment and services to government
or industrial users, (ii) sublicense the technologies to industrial users, or
(iii) to build, own and operate municipal and/or industrial waste water
treatment facilities and electric power generation facilities.
On September 11, 1998, the Company agreed to form ThermoEnergy
Environmental Corporation ("TENC") with FWENC of Livingston, New Jersey to
pursue clean water projects worldwide. The new company will combine the
Company's state-of-the-art clean water technologies with FWENC's engineering
expertise and global presence to pursue industrial and municipal
water/wastewater projects around the world and is the Company's first joint
venture. The Company will own 49.9% of TENC and has granted a worldwide
sublicense of the ARP technology to TENC for municipal and agricultural
production facilities. It is thereafter anticipated that any commercial business
derived from the successful demonstration of ARP will be engaged through TENC.
At the option of the Company, projects utilizing NitRem, DSR and STORS may be
engaged through TENC.
The Company also has joint marketing arrangements with Dan Cowart, Inc.,
and Mitsui & Co. (USA.), Inc. and plans to enter project specific working
arrangements when such projects are identified and funding is obtained. The
Company seeks to identify potential joint venture partners to demonstrate and
market TIPS technology. See "Business - Strategic Corporate Relationships".
Although the Company believes that it will be able to enter into additional
working arrangements with additional strategic partners and, if the
demonstration projects are successful, be awarded sales and/or service contracts
based on the Technologies, there can be no assurance that any of these
discussions will result in working arrangements, demonstration project
contracts, or contract awards, or that such agreements or contracts will result
in revenue for the Company. Even if a demonstration project is successfully
completed, there can be no assurance that the Company will be awarded commercial
contracts for such a project. Even if such contracts are awarded, neither STORS,
NitRem, ARP DSR nor TIPS have ever been utilized on a large-scale commercial
basis, and there is no assurance that either STORS, NitRem, ARP, DSR or TIPS
will perform successfully on a large-scale commercial basis or that it will be
profitable to the Company. There can also be no assurance that either STORS,
NitRem, ARP, DSR or TIPS will not be superseded by other competing technologies.
General Operations
The Company is engaged in the development of clean water and clean energy
technologies (the "Technologies"). STORS, a thermochemical process for
converting sewer sludge to fuel; NitRem, the process of aqueous phase
destruction of nitrates, nitrites, ammonia in amines; ARP, a process designed to
recover ammonia from dilute waste streams and convert it to either N2 or
ammonium sulfate; and the DSR constitute the Company's suite of clean Water
Technologies. Although the STORS technology is generally focused at the
municipal waste water treatment market, and the NitRem technology is generally
focused at the hazardous waste disposal market, the two technologies work
together. NitRem is used to eliminate the ammonia stream and biological oxygen
demand for the waste water that is discharged by the STORS process. ARP's
primary market is municipal wastewater and wastewater discharge from
concentrated animal farming operations. The Company has recently engaged in the
development of TIPS, a clean energy technology, for converting fossil fuels to
energy without any air emissions.
The Company has pursued its development and commercialization of the
Technologies through direct marketing to potential end-users as well as through
strategic relationships with Battelle, the primary developer of the Water
Technologies, and Foster Wheeler USA Corporation, an international engineering
and construction company. The Company has License Agreements with Battelle, and
relies on Battelle to perform a majority of the research for the Company on its
Water Technologies. The Company filed a patent application January 14, 2000,
with the US Patent and Trademark Office for TIPS and will rely on its own
resources and that of strategic partners in the energy business to develop this
technology.
The License Agreements with Battelle grant ThermoEnergy an exclusive
license to make, use and/or sell the Water Technologies worldwide, except for
STORS in Japan. ThermoEnergy is required to pay royalties to Battelle based on
the volume of waste processed through commercialized technologies or the direct
sales of DSR equipment. Pursuant to the terms of the License Agreements, the
Company had until January 31, 1998 to commercialize either STORS or NitRem or
the DSR. "Commercialization" as defined in the License Agreement is the
construction and continuous operation of at least one facility with the capacity
of ten dry ton equivalent or 1,000 gallons of liquid per day including a full
scale demonstration facility. This requirement was fulfilled with the successful
demonstration of the Radford Army Ammunition Project for the Department of
Defense. Pursuant to the License Agreements, Battelle continues to reserve
rights in the Technologies for research and development purposes. See "Recent
Developments".
A Japanese corporation, Japan Organo, Inc. ("Organo") successfully built
and operated a large-scale demonstration STORS facility in a Tokyo suburb
between 1992 and 1996. Other than to confirm that the STORS process works on a
large-scale basis, this operation has no connection to the Company, and there
are no plans to work with Organo on this or any future STORS facility. However,
Organo has, in the past, allowed Battelle and the Company to bring potential
clients to the site to view the operation and talk directly to their operating
engineers. In addition, Organo continues to publish in relevant trade journals a
significant amount of operational data generated through the operation of the
large-scale demonstration plant. The Company has the exclusive worldwide rights
to STORS, except in Japan. The Company has the exclusive worldwide rights,
including Japan, to NitRem, ARP and the DSR. The Company is currently
negotiating with Mitsui & Co., Ltd. to market both the NitRem process and the
Dual-Shell Reactor system in Japan. Mitsui is not related to Organo. Although
the Company has an exclusive License Agreement with Battelle on the STORS
technology, STORS is not a patentable technology. Organo, which originally
sponsored the Battelle STORS research, has continued its own research in STORS
technology for the Japanese market.
STORS is a thermochemical liquefaction process which uses alkaline
digestion to dissolve sewage sludge. In the process the sludge is subjected to
temperatures ranging from 265 degrees to 350 degrees Centigrade and pressures
high enough to prevent boiling. Under these conditions, Aldol Condensation
occurs, breaking the sludge into low molecular weight components which recombine
to form aromatic compounds. Carbon dioxide and water are eliminated during the
dissolution, yielding a hydrophobic product (light oil) with a much higher
heating content than the starting sludge. The oil product has a heating value
equal to 80% - 90% of that of diesel, and accounts for up to 50% of the organics
contained in the influent. The char, or ash, product has a heating value of
about 1500-2500 cal/g; however, it represents such a small percentage (less than
5%) of the by-product that it is of little economic value.
The Company will employ conventional separation techniques standard in
similar industries. The oil fraction will be siphoned off and sent to a holding
tank. The water fraction will be returned via a dedicated pipeline to the
front-end of the wastewater treatment plant to be processed utilizing standard
industry practices. The char by-product will be handled in one of two ways. If
the incoming sewage sludge feedstock contains relatively small percentages of
toxic materials (e.g. cadmium, mercury, PCB's, etc.) then the char can
potentially be used as a stand-alone fuel source (for example in a cement kiln)
or mixed with the oil fraction and used as a fuel source for industrial furnaces
or incinerators. However, if the percentage of toxic materials in the influent
exceeds regulatory limits then the char can be grouted in cement blocks
utilizing conventional methods and landfilled. Both methods of char disposal
will be tested on the Colton STORS demonstration project scheduled for the first
quarter of 2000.
A retrofit STORS physical municipal waste water plant, which is an existing
plant to which the Company adds the STORS technology, will consist of one or
more reactor units, supported by ancillary equipment, including pumps, holding
tanks, valve, computerized controls, heat exchangers and centrifuges. A retrofit
of a small STORS facility, e.g. 20 million gallons per day, is projected to cost
approximately $8 million. A large scale facility, capable of handling
500,000,000 gallons per day or greater, has a projected cost range of
$65,000,000 to $100,000,000 depending on specific site conditions and sludge
constituency (i.e. % of industrial vs. residential, % metals, etc.).
Alternatively, a new STORS waste water treatment facility, which is a
greenfield project or a facility built from the ground up, would have capital
costs equal to a retrofit STORS system, in addition to the cost for supporting
waste water treatment equipment including, but not limited to, screens/filters
for incoming sewage, commutators, thickeners and clarifiers. However, this
equipment would be significantly smaller than that needed for current
conventional waste water treatment systems utilizing digestors and
denitrification equipment, representing a substantial savings in land and
capital equipment.
To sell a full scale commercial STORS waste water treatment system to a
municipality, a demonstration plant must be built at and integrated with a
working waste water treatment facility and operated for a long enough period of
time to generate engineering data sufficient for the initiation of construction
of a full scale commercial system. This requires a "host" city willing to join
with the Company and Battelle in such a project and participate by contracting
to have a STORS system located at one of its waste water treatment facilities.
See "Recent Developments".
NitRem is a noncatalytic, hydrothermal process that converts, under heat
and pressure, aqueous phase nitrogenous compounds (i.e., nitrates, nitrites,
amines and ammonia) found in industrial and municipal waste into nitrogen gas,
water, oxygen and carbon dioxide. The chemistry is similar to gas-phase thermal
deNOx except that it is conducted in the liquid or supercritical phases. The
NitRem process typically operates in the near-critical regime where temperatures
range between 325 degrees and 375 degrees Centigrade and pressures range from
2500 - 3000 psi.
Capital costs for a NitRem industrial process system is expected to range
from $300,000 to $10,000,000. The determining factors for costs are (a) the
specific waste stream, (b) through-put, and (c) the specific compliance standard
to be achieved. However, many large manufacturing facilities, such as large
refineries or chemical process plants, may need more than one NitRem system to
handle a variety of waste streams generated by different plant operations. Other
uses for NitRem systems, including commercial/government ships and oil drilling
platforms, require specialized designs that could add up to 30 to 40% in
additional capital costs.
NitRem can process a wide variety of waste streams from such industries as
food processing, oil refining, petrochemical and chemical processing, pulp and
paper processing, pharmaceuticals, nuclear materials production, textile
manufacturing, explosives and energetics manufacturing and heavy manufacturing
All STORS and NitRem facilities will utilize the DSR as the primary
equipment to process all waste streams addressed by these two process
chemistries. The DSR utilizes standard off-the-shelf materials, part and/or
ancillary components, including the reactor shell and insert, pumps, pipes,
valves, computer hardware, operations and diagnostic software. The uniqueness of
the technology lies in the combination of the chemistry and the configuration of
the process layout to produce the desired results. There are no raw materials
used in the fabrication of STORS or NitRem facilities, which are fabricated from
inventoried parts and components purchased direct from manufacturers or
suppliers.
STORS and NitRem facilities are very similar in design to existing
synthetic fuel, oil refining and chemical process facilities employed on a
large-scale by major corporations worldwide. The design of these existing
facilities can be readily modified to accommodate the STORS and/or NitRem
process differences.
Operating labor represents the single largest operating and maintenance
cost of a STORS or NitRem operating facility, accounting for approximately 10%
to 30% of the operating cost, depending on the size of the facility. Like any
chemical process or refinery operation, the economy-of-scale is directly
proportional to the size of the facility (i.e., the larger the facility, the
lower the per unit cost to process). Throughput capacity is determined by
reactor size. The demonstration projects will determine the optimum reactor
size. Thereafter, the volume of the waste stream will determine the number of
reactors necessary for any given flow in either a STORS or NitRem processing
facility.
Since all STORS and NitRem operational systems are computer monitored and
controlled, operation of a STORS or NitRem facility requires two different skill
levels. The first is the facility operations manager, who will typically be a
professional engineer (either chemical, mechanical or environmental). The second
level will consist of equipment operators which will be any employee with
average mechanical and/or equipment maintenance skills. All will receive
specific as well as cross training on the operations of their particular
facility.
STORS will be primarily marketed to the municipal waste water treatment
industry. The Company believes that the municipal waste water treatment market
represents 90% of the long-term market potential for STORS, and represents $4.4
billion annually. Management further believes by using smaller size STORS and
NitRem plants, POTWs will be able to handle the same flow capacity with lower
capital and operating costs. In addition, management believes the STORS/ARP
combination facility goes further than other technologies to solving the total
waste problems faced by a waste water facility. For example, the Company
believes that STORS and ARP offer POTWs a more cost-effective basis for advanced
wastewater treatment, allowing the recovery and reuse of water processed through
the waste water treatment plant with a minimal amount of processing. STORS
removes nitrogen, heavy metals, phosphorus, many toxic compounds and produces a
high energy fuel. Industrial wastewater often poses the same issues as does
municipal wastewater
A review of the regulatory and technical situation for industrial
discharges was presented in the industry journal "Chemical Engineering" in June
of 1992: Part 1- New Environmental Regulations Pose Challenges for Industry, and
Part 2 - A Guide to Industrial Pretreatment. The review demonstrates the
diversity of wastewater issues faced by industrial facilities, and it is clear
that the best solution will vary by industry and even by facility. However,
management believes that there are many situations where either a robust
technology, insensitive to pollutant concentrations and solids content, or a
high destruction efficiency will be required. These situations will often become
sales opportunities for the Company.
ARP is a patent-pending process designed to recover ammonia from dilute
waste streams. The removed and concentrated ammonia can thereafter be converted
to nitrogen (N2) or recovered as a salt, such as ammonium sulfate (NH2)2SO4),
packaged and sold worldwide as a commercial grade fertilizer. ARP's primary
market is municipal wastewater treatment and treating wastewater discharge from
concentrated animal farming operations, such as in the dairy, beef, poultry or
pork industry. As a nitrogen/ammonia recovery technology, ARP is adaptable to
greenfield projects as well as for retro-fitting existing wastewater treatment
facilities for virtually any size population base. The capital cost of an ARP
facility can range from $1,500,000 to $80,000,000 and has a market potential of
500 municipalities world wide, through privatization or direct equipment sales.
The ARP technology was sublicensed to TENC on September 9, 1998 for worldwide
municipal and agricultural livestock production facilities for the purpose of
jointly developing, marketing and utilizing the ARP technology. (See "Certain
Relationships and Related Transactions")
Unlike NitRem, which destroys ammonia and other nitrogenous compounds, ARP
removes and reuses the ammonia from municipal, industrial and agricultural
wastewater. Over the past decade, the ever increasing levels of nitrogen/ammonia
being discharged to our nations fresh water resources has reached alarming
proportions. Excess nitrogen/ammonia concentration results in the acceleration
or eutrophication, or the starvation of oxygen in water. When phosphorus is
added to the equation, the result is know as "nutrient loading". For the first
time, the US EPA is preparing to establish federal guidelines limiting the
levels of nutrient loading for industrial and municipal wastewater discharge.
Currently operating municipal wastewater treatment facilities require advance
treatment processes to oxidize excess ammonia to nitrites (nitrification) and,
ultimately, to nitrogen gas, (denitrification), prior to the release of treated
water to surface streams. Given the expensive nature of current treatment
methods there is significant interest in the development of cost effective,
alternative nitrification /denitrification technology. ThermoEnergy's new
Ammonia Recovery Process (ARP) is a new state of the art system that addresses
many of the shortcomings of current treatment methods.
ARP requires little space, significantly lowers front-end capital costs as
well as variable (operating) costs. ARP not only effectively removes
nitrogen/ammonia from the discharge stream, it converts this liability into an
asset in the form of ammonium sulfate; a commercial grade fertilizer that can be
sold in worldwide markets. In addition, the utilization of ARP as existing
wastewater treatment facilities can potentially increase an existing wastewater
treatment plant's throughput capacity up to 25%.
The Company does not currently possess the technical, operational or
financial resources necessary to construct or operate STORS , NitRem or ARP
facilities at either a demonstration or commercial facility level. The Radford
Army Ammunition Plant and the New York City demonstration projects were funded
by the US Army and Foster Wheeler, respectively. The Colton STORS Project will
be funded by the US EPA. Consequently, the Company's operations continue to
depend upon its ability to attract adequate capital, so that it may in turn
acquire the technical and operational expertise and services required for
commercial and/or demonstration facilities of either the STORS, NitRem or ARP
technologies.
Until large-scale STORS demonstration facilities have been constructed, it
is not possible to accurately estimate capital costs needs for a STORS facility.
Capital needs can only be approximated at plus or minus 20% by an engineering
firm with experience and expertise in the chemical processing industry. The
Company believes that the large-scale Colton demonstration project will provide
the data necessary to determine the costs of and efficiencies of the STORS
technology. ( See " STORS Demonstration").
With regard to the Company's NitRem technologies, the large-scale
demonstration facility at the Radford Army Ammunition Plant and operated for a
sufficient period of time to produce operating data which the Company believes
it can rely upon in approximating capital needs for a NitRem facility. See
"Nitrogen Removal Demonstrations".
With regard to the Company's ARP technology, the large-scale demonstration
facility at the New York City Staten Island Wastewater Treatment facility
operated for a sufficient period of time to produce operating data which the
Company believes it can rely upon in approximating capital needs for an ARP
facility. See "Nitrogen Removal Demonstration ".
The Company has been granted patent pending status for TIPS by the US
Patent and Trademark Office. In order to expedite the advancement of the TIPS
technology, management is working toward establishing a consortium of corporate
partners to design, build and test a prototype burner and exhaust train. This
data will provide the basis to analyze process economics, determine size and
scale of market, as well as provide a detailed design for a large-scale
demonstrations plant. Management has further developed and implemented an
aggressive commercialization strategy which calls for building and operating a
large-scale demonstration plant by 2003. If successful, management anticipates
building a full-scale commercial plant by 2005 to 2008. The successful
development of TIPS depends on the ability of the Company to attract a
consortium of partners who possess the necessary skills and financial ability to
exploit the full potential of TIPS.
Recent Developments
The Company plans to continue its commercialization efforts during the next
fiscal year for the STORS/DSR, NitRem and ARP technologies within their target
markets, i.e., municipal sludge/waste water treatment, private industry
water/wastewater treatment and hazardous waste disposal and the same for DoE and
DoD markets. The Company seeks to identify prospective joint venture partners to
fund a full scale TIPS demonstrations and thereafter market this technology to
utility and power companies worldwide. The Company is not required to make
capital contributions to the following projects and although the Company will be
reimbursed for administrative and operating costs, it will not receive any
revenues or earnings from these demonstration projects.
STORS Demonstration
In May of 1996, ThermoEnergy and Battelle representatives met with
officials at San Bernardino Valley Water District ("SBVWD") to discuss siting of
a full-scale STORS demonstration project in the San Bernardino area.
Subsequently, the United States House and Senate approved, in PL 104-204,
September 26, 1996, a $3,000,000 federal grant to the SBVWD for the design,
construction and operation of a large-scale STORS Waste Water Treatment
Demonstration Facility. The General Accounting Office has authorized the EPA's
San Francisco office, to disburse the funds accordingly and to administer this
grant for the SBVWD project. In March, 1998, the SBVWD selected the City of
Colton, California to host the STORS demonstration project. The Company will not
be required to make capital contributions to this project and the Company will
not receive any revenues or earnings. The Company will be reimbursed for
administrative and operating costs for this project. The design plans for the
STORS project have been completed. The Company anticipates subcontracting with
FWENC to fabricate, install and operate the STORS demonstration unit. Once in
operation, the Colton STORS facility will have a larger processing capacity than
70% of the existing municipal wastewater plants in the US. The demonstration
project is scheduled to begin in the first quarter of 2000 .
The EPA continues to maintain discretionary control over the disbursement
of the $3,000,000 federal grant discussed above. While it is currently the EPA's
intention to disburse the funds for the SBVWD project, it is possible that the
EPA, in its sole discretion, may redirect these funds for use on a full-scale
STORS demonstration project in another EPA region.
Nitrogen Removal Demonstrations
The Company has completed two full scale nitrogen demonstration projects,
each of which were a pre-requisite to selling an ARP or NitRem unit for
commercial use by municipality, industrial or the DoD . The NitRem demonstration
was completed in September 1997 at the Radford Army Arsenal in Radford, Virginia
and the ARP demonstration was completed in December 1998 at New City's Staten
Island Wastewater Treatment facility.
ARP is a patent-pending process designed to recover ammonia from dilute
waste streams. The removed and concentrated ammonia can thereafter be converted
to nitrogen (N2) or recovered as a salt, such as ammonium sulfate (NH2)2SO4),
packaged and sold worldwide as a commercial grade fertilizer. ARP's primary
market is municipal wastewater treatment and treating wastewater discharge from
concentrated animal farming operations, such as for the dairy, beef, poultry or
pork industry.
United States Department of the Army NitRem Demonstration
ThermoEnergy and Sam Houston State University, doing business as the Texas
Regional Institute for Environmental Studies ("TRIES") signed an agreement in
October 1994 allowing ThermoEnergy to demonstrate its NitRem technology to
evaluate the nitrogen removal process and its ability to economically and safely
treat TNT redwater, DNT contaminated wastewater and various other RCRA waste
streams within the Department of Defense ("DoD") industrial base and DoD
commercial facilities. ThermoEnergy is the lead subcontractor on this project.
The first NitRem commercial scale DSR unit was demonstrated at the Radford
Army Ammunition Plant, in Radford, Virginia. The $5,000,000 NitRem demonstration
project was approved by the Army Armament Research Development Command
("ARDEC"). Pursuant to a purchase order issued by ARDEC, ThermoEnergy engaged
Glitsch Process System Inc. ( who was a wholly-owned subsidiary of Foster
Wheeler Corporation) to fabricate the NitRem unit. The demonstration unit was
delivered to Radford on June 16, 1997 and began testing and processing DoD waste
streams on July 21, 1997. Under the Company's supervision, this demonstration
facility was used to process a number of different hazardous waste streams
resulting from the manufacture of explosives, including TNT, DNT,HMX and RDX.
This NitRem system has been designed as a mobile system in order to process
additional waste streams from other Department of Defense sites.
Testing and processing of the of the DoD RAPP test material was concluded
on September 5, 1997. The final results and report from TRIES indicates that the
NitRem DSR reduces DNT in contaminated wastewater to a level which could be
discharged without further wastewater treatment. Based on these preliminary
results, the Company anticipates marketing NitRem to the DoD.
New York City ARP Demonstration
The second commercial scale nitrogen removal demonstration project is a
team effort between ThermoEnergy, Foster Wheeler Environmental Corporation and
the City of New York to test the Company's capability to cost-effectively
eliminate the concentrated ammonia discharge, or centrate, from eight of New
York City's fourteen waste water treatment facilities. The City of New York
currently produces over three million gallons of centrate daily, which the City
projects will reach five million gallons daily by 2001. This concentrated
ammonia waste stream is a leading cause of eutrophication in the Long Island
Sound. Laboratory tests conducted on actual samples of New York City centrate in
May of 1996, and June of 1997, by Battelle successfully resulted in eliminating
the ammonia present in the centrate. The City of New York and the Company signed
a No Cost Test Agreement in July 1996 which allows the Company to demonstrate,
on site, the Company's nitrogen removal processes, including NitRem and other
such nitrogen removal processes as the Company may acquire, to wit: ARP. The
Company has decided to demonstrate the capabilities of its newly acquired ARP
technology at New York City's Staten Island wastewater treatment facility. On
August 4, 1998, the Company signed an agreement with FWENC to provide up to
$500,000 funding necessary to demonstrate ARP and to design, fabricate and
operate the ARP pilot plant. (See Strategic Corporate relationships).
On September 11, 1998, the Company agreed to form ThermoEnergy
Environmental Corporation with Foster Wheeler Environmental Corporation of
Livingston, New Jersey to pursue clean water projects worldwide. The new company
will combine the Company's state-of-the-art clean water technologies with
FWENC's engineering expertise and global presence to pursue industrial and
municipal water/wastewater projects around the world and is the Company's first
joint venture. The Company will own 49.9% of TENC and has granted a worldwide
sublicense of the ARP technology to TENC for municipal and agricultural
livestock production facilities. It is anticipated that any commercial business
derived from the successful demonstration of ARP will be engaged through TENC.
ThermoEnergy Integrated Power Systems
In order to expedite the advancement of the TIPS technology, management is
working toward establishing a consortium of corporate partners to design, build
and test a prototype burner and exhaust train. This data will provide the basis
to analyze process economics, determine size and scale of market, as well as
provide a detailed design for a large-scale demonstration plant. Management has
further developed and implemented an aggressive commercialization strategy which
calls for building and operating a large-scale demonstration plant by 2003. If
successful, management anticipates building a full-scale commercial plant by
2005 to 2008. The successful development of TIPS depends on the ability of the
Company to attract a consortium of partners who possess the necessary skills and
financial ability to exploit the full potential of TIPS.
Strategic Corporate Relationships
In September 1994, the Company and Foster Wheeler USA Corporation executed
a non-binding Worldwide Marketing Agreement whereby both companies have agreed
to jointly market, develop and commercialize the Technologies on a non-exclusive
basis. The companies have agreed in principle to work together to develop
marketing strategies, identify potential projects and develop joint proposals.
The agreement contemplates that when a potential project is identified, the
Company will provide Foster Wheeler USA Corporation with the necessary process
and design information, and Foster Wheeler USA Corporation will design, procure
and construct the required processing facilities for any contracts awarded.
Under the agreement, each party is subject to confidentiality obligations. The
initial term of the agreement is ten years and the agreement will be
automatically extended in three-year periods thereafter. The agreement may be
terminated by the mutual agreement of the parties. The Company and Foster
Wheeler USA Corporation are working on a marketing strategy for private sector
business, initially targeting the pharmaceutical, pulp and paper and
petrochemical industries in the US and Europe. In addition, the Company and
Foster Wheeler USA Corporation have begun a joint marketing effort within the
Department of Navy Surface Systems Command.
On September 11, 1998, the Company agreed to form ThermoEnergy
Environmental Corporation with Foster Wheeler Environmental Corporation of
Livingston, New Jersey to pursue clean water projects worldwide. The new company
will combine the Company's state-of-the-art clean water technologies with
FWENC's engineering expertise and global presence to pursue industrial and
municipal water/wastewater projects around the world and is the Company's first
joint venture. The Company will own 49.9% of TENC. The main purpose of the joint
venture, among other things, is to develop, market and utilize the ARP
technology. Concurrently with forming TENC, the Company entered into a
shareholders agreement by an among FWENC, the Company and TENC and a worldwide
sublicense of the ARP technology to TENC for municipal and agricultural
livestock production facilities. It is thereafter anticipated that any
commercial business derived from the successful demonstration of ARP will be
engaged through TENC. At the option of the Company, projects utilizing NitRem,
DSR and STORS may be engaged through TENC.
In March 1996, the Company entered into a Marketing Agreement with the
Atlanta based Dan Cowart, Inc. ("DCI") to market, develop and commercialize the
Technologies in Georgia and Florida. DCI is a multi-discipline construction and
development firm for large scale real estate projects. Under the agreement, the
Company has granted DCI the exclusive right to exploit any and all applications
of the Technologies for municipal, local governmental and real estate
development markets in Georgia and Florida, and the nonexclusive right to
exploit any and all applications of NitRem for industrial markets in Georgia and
Florida. The agreement contemplates the formation of a joint venture between the
companies to construct and operate future projects. The Company will provide
technical and administrative support to assist DCI in its efforts to obtain such
projects. The Company will derive revenue upon the sale of a STORS DSR or NitRem
DSR unit to an end-user, and fees associated with the operation of such
projects. DCI is to be paid a one time success fee of 62,500 warrants
convertible into 62,500 shares of ThermoEnergy Series B Common Stock,
exercisable within ten years from the date of granting the warrants at a price
of $2.00 per share, within 90 days upon the signing of an agreement with a
target customer to purchase or utilize any of one of the Technologies. The
agreement is for a term of ten years and requires DCI to produce a contract for
a project by March 28, 1998 to retain exclusivity. Thereafter, the contract can
be terminated by either party upon one month's written notice and DCI's rights
to the Technologies in Georgia and Florida would become nonexclusive. To date,
no contracts have been signed. The Company has developed a comprehensive
audio-visual presentation to be used by DCI in its marketing efforts. In
addition, DCI has engaged the services of a regional engineering firm to work
directly with the Company and Battelle to work on scheduling meetings with
municipal and state waste water authorities in Georgia and Florida. Currently,
no specific projects are being negotiated.
In October 1996, the Company entered into a non-binding Memorandum of
Understanding ("MOU") with Foster Wheeler Environmental Corporation and Mitsui &
Co. (USA.), Inc. ("Mitsui") regarding potential water and waste water projects
in Brazil, Mexico and Peru. The purpose of the MOU is to set forth the likely
roles of the companies in connection with any business involving the
Technologies. As contemplated by the MOU, ThermoEnergy Corporation would provide
the rights to use the Technologies for projects jointly developed in Brazil,
Mexico and Peru, Foster Wheeler Environmental Corporation would, upon contract
awards, design, construct and, possibly, operate the Technologies at the
identified projects, and Mitsui would gather information regarding
opportunities, identify projects, and, possibly, seek to arrange financing for
various projects. The participants have held several meetings pursuant to the
MOU to discuss possible projects.
The Company has historically lacked the financial and other resources
necessary to market the Technologies or to build demonstration projects. The
Company believes that its working arrangement with Foster Wheeler Environmental
Corporation has enabled the Company to identify hosts and to fund these projects
as well. The Company believes that establishing such relationships is the most
efficient and effective way to commercialize the Technologies.
In addition, companies already engaged in the sewage sludge disposal
business, some of which have significantly greater financial capability than the
Company, could independently develop similar technological processes and
reactors and reach viable commercialization prior to the Company doing so.
Certain of the Company's potential competitors have contacted the Company or
have been contacted by the Company and have expressed interest in acting as
operators of STORS, NitRem and ARP facilities which the Company hopes to
install.
The Company anticipates that its primary markets fall into two basic
categories: remediation, or environmental clean-up of prior contamination, and
waste minimization, or pollution prevention. Both market segments will include
the disposal of a wide variety of waste streams, many of which contain toxic
and/or hazardous constituents. These two primary markets will consist of three
categories: municipal, federal agencies, and industry. The municipal markets
will involve the STORS. NitRem and ARP technologies for the process and
treatment of municipal waste water. Work for federal agencies will almost
exclusively utilize the NitRem technology to process a wide variety of waste
streams for the Departments of Defense (DoD) and Energy (DoE). DoD and DoE work
will involve both remedial and waste minimization efforts. The Company has
completed tests on DoD wastes utilizing the NitRem pilot plant located at the
Radford Army Ammunition Plant in Radford, Virginia. As a result of these tests,
the Company formed TENC with Foster Wheeler Environmental Corporation to pursue
contracts with DoD to dispose of (i) munitions residuals resulting from the
manufacture of explosives, (ii) rocket propellants, torpedo propellants,
chemical/biological weapons, and excess toxic and hazardous ship wastes.
Projects where the Company's NitRem technology could benefit DoE are remedial in
nature, e.g. the clean-up of aqueous radio nuclides resulting from the
production of radioactive materials for nuclear weapons over the past sixty
years. Management has identified sites where it believes that NitRem could prove
useful, including Hanford, Washington, Savannah River site, South Carolina, and
Mound, Ohio.
Privatization
A key part of the Company's long-term strategy is to capitalize on the
trend toward privatization of municipal services traditionally provided by city
government.
The Company intends to continue to form joint venture arrangements to
pursue privatization opportunities in the municipal water/waste water industry.
In February 1997, the Company joined with Foster Wheeler Environmental
Corporation and Dan Cowart, Inc. in responding to a preproposal solicitation by
the City of Atlanta for privatization concepts and Technologies, to which it has
not yet received a response.
Research and Development
Research and development activities with respect to STORS, NitRem and ARP
are ongoing and are generally conducted by Battelle. The Company conducted no
research and development activities for the Company for the year ended December
31, 1999. Payment under licenses expenditures for the Company were $65,000,
$65,000, and $40,000 for the years ended December 31, 1999 and September 30,
1998 and 1997.
Employees
As of December 31, 1999, the Company had a total of 3 employees, Two
full-time: the Chairman and Chief Executive Officer and the President and one
Part-time: Executive Vice President and Senior Vice President of Corporate
Technology. All of the Company's employees have entered into agreements with the
Company requiring them not to disclose the Company's proprietary information,
assigning to the Company all rights to inventions made during their employment,
and prohibiting them from competing with the Company. The Company's employees
are not represented by any labor union. The Company believes that relations with
its employees are satisfactory.
ITEM 2. PROPERTIES
The Company's principal executive offices are located 323 Center Street,
Suite 1300 space in Little Rock, Arkansas where the Company leases approximately
1200 square feet of from an unaffiliated third party under a month to month
lease. The Company leases approximately 500 square feet of space on a month to
month basis at 3100 George Washington Way, Suite 153 in Richland, Washington
from Sunna Corporation. Alex Fassbender, the Company's Executive Vice President
is an officer and shareholder of Sunna Corporation. The lease arrangement is no
more or less favorable than terms the Company could acquire from and
unaffiliated third party. In the event either of the Company's lease's are not
extended or renewed the Company believes that it would be able to find
comparable facilities in the same geographic area at lease rates comparable to
those it currently pays.
ITEM 3. LEGAL PROCEEDINGS
On October 6, 1998, the Company filed an action in the United States
District Court, Eastern District of Arkansas, Western Division, case No.
LR-C-98-657 against National Securities Corporation, a wholly owned subsidiary
of Olympic Cascade Financial Corporation and Steven A. Rothstein, Individually,
and as Chairman of National Securities in connection with purported efforts on
the part of the Defendants to underwrite a public offering of securities for the
Company. The Complaint alleges breach of contract, promissory estoppel, breach
of fiduciary duty and intentional or negligent misrepresentation and seeks
compensatory and punitive damages, jointly and severally, against the
Defendants.
On June 3, 1999, the Company signed an agreement with OCC to receive
$75,000.00, plus 50,000 shares of OCC common stock and 20,000 vested warrants to
purchase OCC common stock at $4.00 per share to settle the lawsuit the Company
brought against OCC and Steven A. Rothstein. See Note 10 of Notes to Financial
Statements for additional information.
ITEM 4. SUBMISSION OF MATERIALS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public market for the Company's common stock. No dividends have
been declared by the Company since inception.
The Amended and Restated Articles of Incorporation of the Company authorize
capital stock consisting of 75,000,000 shares of Common Stock, $0.001 par value,
of which 10,000,000 shares are designated as Series A Common Stock and of which
65,000,000 shares are designated Series B Common Stock. In addition, the
Company's authorized capital stock consists of 10,000,000 shares of Series
Preferred Stock, $1.00 par value ("Preferred Stock"). As of March 28, 2000,
there were no shares of Series A Common Stock issued and outstanding, 3,799,789
shares of Series B Common Stock outstanding and no shares of Preferred Stock
issued and outstanding.
As of March 28, 2000 the number of record holders of the Company's Series B
Common Stock was 1208.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data should be read in conjunction with and is qualified
in its entirety by reference to the consolidated financial statements and the
notes thereto set forth in this Annual Report on form 10-K.
Cumulative during
Development state December 31, September 30,
- ----------------- ---------------------- ------------------------------------------------
December 31, 1999 1999 1998 (2) 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Net loss (1) ($8,978,988) $(1,200,792) $(243,660)(3) $(797,099) $(1,196,036) $(551,621) $(896,998)
- ----------------------------------------------------------------------------------------------------------------------------
Total assets 798,036 594,482 673,068 349,911 173,333 125,215
- ----------------------------------------------------------------------------------------------------------------------------
Basis and
Diluted net
Loss per
Common share (2.37) (.29) (.06)(3) (.20) (.31) (.15) (.24)
- ----------------------------------------------------------------------------------------------------------------------------
(1) To date, the Company has not derived any significant revenues from
operations. See Note 9 of Notes to Financial Statements for management's
consideration of going concern matters.
(2) See Note 13 of Notes to Financial Statements for unaudited financial
information for the three months ended December 31, 1997.
(3) Three month transition period due to the Company's change in fiscal year
end.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company is the exclusive worldwide (except STORS in Japan) licensee for
four clean water environmental technologies developed by Battelle Memorial
Institute ("Battelle") and the exclusive owner of a clean energy technology for
which it has filed a patent. The four Battelle licensed technologies are
primarily aimed at solving waste water problems for broad-based markets. These
technologies include three chemical process technologies known as the
Sludge-To-Oil Reactor System ("STORS") (TM), Nitrogen Removal ("NitRem") and
Ammonia Recovery Process ("ARP") (TM). The fourth technology, a dual-shell
pressure balance vessel, known as the Dual-Shell Reactor ("DSR") (TM), is the
unique reactor equipment in which the STORS and NitRem chemistries are conducted
(collectively, STORS, NitRem, ARP and DSR are referred to as the " Water
Technologies"). The Company's applications of the Water Technologies eliminate
damaging organic and nitrogenous contaminants from municipal, DoD and industrial
waste streams. On January 14, 2000 the Company filed a patent application with
the US Patent and Trademark Office for the ThermoEnergy Integrated Power Systems
("TIPS") technology. TIPS chemically converts the energy in fossil fuels, such
as coal, gas and oil without producing any air emissions while simultaneously
sequestering the mercury and capturing the CO2 ( in liquid form) by-products for
beneficial reuse. This technology will be developed primarily to compete with
coal combustion electricity generation facilities that are currently responsible
for global air quality problems, acid rain and global warming.
The Company is the exclusive worldwide licensee for the clean Water
Technologies (except for STORS in Japan) which were developed by Battelle
Memorial Institute ("Battelle"), an independent research and development
organization. The Company intends to sell equipment (i.e. STORS-DSR, NitRem-DSR,
or ARP) and services to government and industrial users, sublicense the
Technologies to industrial users or third parties, or build, own and operate
municipal and/or industrial waste water treatment facilities. Another component
of the Company's business strategy is to enter into collaborative working
relationships with established engineering and environmental companies, or
formal joint venture agreements relative to the application of the technologies
for specified industries or markets. On September 11, 1998, the Company agreed
to form ThermoEnergy Environmental Corporation ("TENC") with Foster Wheeler
Environmental Corporation ("FWENC") of Livingston, New Jersey to pursue clean
water projects worldwide. The new company will combine the Company's
state-of-the-art clean water technologies with FWENC's engineering expertise and
global presence to pursue industrial and municipal water/wastewater projects
around the world and is the Company's first joint venture. It is thereafter
anticipated that any commercial business derived from the successful
demonstration of ARP will be engaged through TENC. At the option of the Company,
projects utilizing NitRem, DSR and STORS may be engaged through TENC.
The Company also has joint marketing arrangements with Dan Cowart Inc., and
Mitusi & Co. (USA.) and plans to enter project specific working arrangements
when such projects are identified and funding is obtained. (See "Strategic
Corporate Relationships ). The Company does not currently possess the technical,
operational or financial resources necessary to construct or operate STORS ,
NitRem or ARP facilities at either a demonstration or commercial facility level
and has relied on US Government grants and funding from its strategic partners
to fund its demonstration projects.
The US Army NitRem Demonstration and and the New York City ARP
demonstration projects were funded by the US Army and Foster Wheeler
Corporation, respectively. The Colton STORS Project is funded by a federal grant
administered by the US EPA. ( See summary below) Consequently, the Company's
operations continue to depend upon its ability to attract adequate capital, so
that it may in turn acquire the technical and operational expertise and services
required for the commercialization of the STORS, NitRem the ARP technologies.
With regard to STORS, no facilities have yet been built, outside Japan, on a
commercial basis.
STORS Demonstration Project
In May of 1996, ThermoEnergy and Battelle representatives met with
officials at San Bernardino Valley Water District ("SBVWD") to discuss siting of
a full-scale STORS/NitRem demonstration project (the "Project") in the San
Bernardino area. Subsequently, the United States House and Senate approved ( PL
104-204, September 26, 1996) a $3,000,000 federal grant to the SBVWD for the
design, construction and operation of a large-scale STORS Waste Water Treatment
Demonstration Facility. The General Accounting Office authorized the EPA's San
Francisco office to disburse the funds accordingly and to administer this grant
for the SBVWD project. In March, 1998, the SBVWD selected the City of Colton,
California to host the Project. On September 3, 1998, the Company signed an
agreement with the City of Colton for the Company to demonstrate its
STORS/NitRem technology. The EPA grant will pay for the construction of the
demonstration test equipment. At the conclusion of the demonstration project,
all right, title and interest to the test equipment shall be vested in the EPA.
The Company will not be required to make capital contributions to this project.
The Company will not receive any revenues or earnings from this project, but
will be reimbursed for administrative and operating costs. Subsequently the
Company contracted with Foster Wheeler Environmental Corporation ( See strategic
relationships) to fabricate, install and operate the STORS demonstration unit.
The design plans for the project have been completed. The Company is the general
contractor on the project, and, as such, has received approximately $2,560,000
in funds from the City of Colton. Through December 31, 1999, the Company has
paid approximately $2,451,000 to subcontractors and other vendors, primarily to
FWENC. Once in operation, the Colton STORS facility will have a larger
processing capacity than 70% of the existing municipal wastewater plants in the
US. The demonstration project is scheduled to begin in the first quarter of
2000.
Nitrogen Removal Demonstration Projects
United States Department of Defense Army NitRem Demonstration
ThermoEnergy and Sam Houston State University, doing business as the Texas
Regional Institute for Environmental Studies ("TRIES") signed an agreement in
October 1994 allowing ThermoEnergy to demonstrate its NitRem technology to
evaluate the nitrogen removal process and its ability to economically and safely
treat TNT redwater, DNT contaminated wastewater and various other RCRA waste
streams within the Department of Defense ("DoD") industrial base and DoD
commercial facilities. ThermoEnergy is the lead subcontractor on this project.
The first NitRem commercial scale DSR unit was demonstrated at the Radford
Army Ammunition Plant ("RAAP"), in Radford, Virginia. The $5,000,000 NitRem
demonstration project was approved by the Army Armament Research Development
Command ("ARDEC"). Pursuant to a purchase order issued by ARDEC, ThermoEnergy
engaged Glitsch Process System Inc. (a wholly-owned subsidiary of Foster Wheeler
Corporation) to fabricate the NitRem unit. The demonstration unit was delivered
to Radford on June 16, 1997 and began testing and processing DoD waste streams
July 21, 1997. Under the Company's supervision, this demonstration facility was
used to process a number of different hazardous waste streams resulting from the
manufacture of explosives, including TNT, DNT, HMX and RDX. This NitRem system
has been designed as a mobile system in order to process additional waste
streams from other Department of Defense sites.
Testing and processing of the of the DoD RAPP test material was concluded
on September 5, 1997. The final results and report from TRIES indicates that the
NitRem DSR reduces DNT in contaminated wastewater to a level which could be
discharged without further wastewater treatment. Based on these results, the
Company is actively marketing NitRem to the DoD and to private industry.
New York City ARP Demonstration
The second commercial scale nitrogen removal demonstration project is a
team effort between ThermoEnergy, Foster Wheeler Environmental Corporation and
the City of New York to test the Company's capability to cost-effectively
eliminate the concentrated discharge, or centrate, from eight of New York City's
fourteen waste water treatment facilities. The City of New York currently
produces over 4.5 million gallons of centrate daily, which the City projects
will reach five million gallons daily by 2001. This concentrated ammonia waste
stream is a leading cause of eutrophication in the Long Island Sound. Laboratory
tests conducted on actual samples of New York City centrate in May of 1996, and
June of 1997, by Battelle successfully resulted in eliminating the ammonia
present in the centrate. The City of New York and the Company signed a No Cost
Test Agreement in July 1996 which allowed the Company to demonstrate, on site,
the Company's nitrogen removal processes, including NitRem and other such
nitrogen removal processes as the Company may acquire, to wit: ARP. The Company
decided to demonstrate the capabilities of its ARP technology at New York City's
Staten Island wastewater treatment facility. On August 4, 1998, the Company
signed an agreement with FWENC to provide up to $500,000 funding necessary to
demonstrate ARP and to design, fabricate and operate the ARP pilot plant. (See
Strategic Corporate relationships). The New York ARP demonstration was
successfully completed on December 18, 1998. Based on the data generated during
the demonstration and computer modeling for large-scale commercial systems, the
economics of the Centrate Ammonia Recovery, or ARP process, are excellent when
compared to alternative sources such as steam stripping, hot air stripping and
biological nitrogen reduction technologies. Depending on the throughput of the
commercial system, on a privatized basis, the cost to the client (municipality)
to treat ammonia laden wastes with ARP at the concentrations found in the
centrate, would be between 3 cents and 4 cents per gallon, including capital
equipment recovery overhead. Based upon the demonstration results, the Company
is actively seeking a privatized contract to process all of New York City's
centrate through it's joint venture with FWENC.
ThermoEnergy Integrated Power Systems
TIPS converts any biomass, especially fossil fuels, such as coal, gas and
oil into electricity without producing any emissions while simultaneously
sequestering the mercury and capturing the carbon dioxide ( CO2) by-products for
beneficial reuse. TIPS integrates the combustion of any biomass or fossil fuel
and the efficient production of electricity with the recovery of CO2 in liquid
form and the elimination of both acid gas and particulate emissions.
TIPS is a novel approach to power production thermodynamics, mass transfer
and heat transfer. TIPS can use air, oxygen, and oxygen enriched air as the
oxidant, and any biomass of fossil fuel which can be pumped or injected, and
then combusted in a boiler. By changing the combustion and heat transfer process
parameters, TIPS recovers the latent heat vaporization from produced water,
scrubs out the acids and particulate matter, while its condenses and recovers
liquid CO2 as an integral part of the over-all process. Liquid CO2 represents a
form of stored energy. This stored energy can then be used to generate power for
peak demand periods. Additionally, the United States Department of Energy has
various programs identifying other end uses for liquid CO2. The success of DOE's
programs depends on the development of a low cost, long-term source of liquid
CO2. Management believes that TIPS may potentially be that source. The TIPS
technology can be used to economically retrofit existing fossil fuel power
plants or used in the construction of new power generation facilities.
Management believes that TIPS has the potential to replace the current
conventional coal, gas or heavy oil combustion technologies which are primarily
responsible for global air quality problem, acid rain and global warming.
Strategic Corporate Relationships
In September 1994, the Company and Foster Wheeler USA Corporation executed
a non-binding Worldwide Marketing Agreement whereby both companies have agreed
to jointly market, develop and commercialize the Technologies on a non-exclusive
basis. The companies have agreed in principle to work together to develop
marketing strategies, identify potential projects and develop joint proposals.
The agreement contemplates that when a potential project is identified, the
Company will provide Foster Wheeler USA Corporation with the necessary process
and design information, and Foster Wheeler USA Corporation will design, procure
and construct the required processing facilities for any contracts awarded.
Under the agreement, each party is subject to confidentiality obligations. The
initial term of the agreement is ten years and the agreement will be
automatically extended in three-year periods thereafter. The agreement may be
terminated by the mutual agreement of the parties. The Company and Foster
Wheeler USA Corporation are working on a marketing strategy for private sector
business, initially targeting the pharmaceutical, pulp and paper and
petrochemical industries in the US and Europe. In addition, the Company and
Foster Wheeler USA Corporation have begun a joint marketing effort within the
Department of Navy Surface Systems Command.
On September 11, 1998, the Company agreed to form ThermoEnergy
Environmental Corporation with Foster Wheeler Environmental Corporation of
Livingston, New Jersey to pursue clean water projects worldwide. The new company
will combine the Company's state-of-the-art clean water technologies with
FWENC's engineering expertise and global presence to pursue industrial and
municipal water/wastewater projects around the world and is the Company's first
joint venture. The Company will own 49.9% of TENC. The main purpose of the joint
venture, among other things, is to develop, market and utilize the ARP
technology. Concurrently with agreeing to form TENC, the Company entered into
agreement by and among FWENC, the Company and TENC and a worldwide sublicense of
the ARP technology to TENC for municipal and agricultural livestock production
facilities. On August 4, 1998, the Company signed an agreement with FWENC to
provide up to $500,000 funding necessary to demonstrate ARP and to design,
fabricate and operate the ARP pilot plant. It is thereafter anticipated that any
commercial business derived from the successful demonstration of ARP will be
engaged through TENC. At the option of the Company, projects utilizing NitRem,
DSR and STORS may be engaged through TENC.
In March 1996, the Company entered into a Marketing Agreement with the
Atlanta based Dan Cowart, Inc. ("DCI") to market, develop and commercialize the
Technologies in Georgia and Florida. DCI is a multi-discipline construction and
development firm for large scale real estate projects. Under the agreement, the
Company has granted DCI the exclusive right to exploit any and all applications
of the Technologies for municipal, local governmental and real estate
development markets in Georgia and Florida, and the nonexclusive right to
exploit any and all applications of NitRem for industrial markets in Georgia and
Florida. The agreement contemplates the formation of a joint venture between the
companies to construct and operate future projects. The Company will provide
technical and administrative support to assist DCI in its efforts to obtain such
projects. The Company will derive revenue upon the sale of a STORS/DSR or NitRem
DSR unit to an end-user, and fees associated with the operation of such
projects. DCI is to be paid a one time success fee of 62,500 warrants
convertible into 62,500 shares of ThermoEnergy Series B Common Stock,
exercisable within ten years from the date of granting the warrants at a price
of $2.00 per share, within 90 days upon the signing of an agreement with a
target customer to purchase or utilize any of one of the Technologies. The
agreement is for a term of ten years and requires DCI to produce a contract for
a project by March 28, 1998 to retain exclusivity. Thereafter, the contract can
be terminated by either party upon one month's written notice and DCI's rights
to the Technologies in Georgia and Florida would become nonexclusive. The
Company has developed a comprehensive audio-visual presentation to be used by
DCI in its marketing efforts. In addition, DCI has engaged the services of a
regional engineering firm to work directly with the Company and Battelle to work
on scheduling meetings with municipal and state waste water authorities in
Georgia and Florida. Currently, no specific projects are being negotiated.
In October 1996, the Company entered into a non-binding Memorandum of
Understanding ("MOU") with Foster Wheeler Environmental Corporation and Mitsui &
Co. (USA.), Inc. ("Mitsui") regarding potential water and waste water projects
in Brazil, Mexico and Peru. The purpose of the MOU is to set forth the likely
roles of the companies in connection with any business involving the
Technologies. As contemplated by the MOU, ThermoEnergy Corporation would provide
the rights to use the Technologies for projects jointly developed in Brazil,
Mexico and Peru, Foster Wheeler Environmental Corporation would, upon contract
awards, design, construct and, possibly, operate the Technologies at the
identified projects, and Mitsui would gather information regarding
opportunities, identify projects, and, possibly, seek to arrange financing for
MOU to discuss possible projects.
The Company has historically lacked the financial and other resources
necessary to market the Technologies or to build demonstration projects. The
Company believes that its joint venture (TENC) working arrangement with Foster
Wheeler Environmental Corporation will enable the Company to identify and fund
future projects. The Company believes that establishing such relationships is
the most efficient and effective way to commercialize the Technologies.
Management believes the STORS/NitRem combination facility goes further than
other technologies to solving the total waste problems faced by a waste water
facility. For example, the Company believes that STORS and NitRem offer POTWs a
more cost-effective basis for tertiary water treatment, allowing the recovery
and reuse of water processed through the waste water treatment plant with a
minimal amount of processing. STORS removes nitrogen, heavy metals, phosphorus,
many toxic compounds and produces a high energy fuel. Industrial wastewater
often poses the same issues as does municipal wastewater. In addition, there is
a large volume of toxic slurries and solutions which pose an even greater
problem for their generators than exists for municipalities. A review of the
regulatory and technical situation for industrial discharges was presented in
the industry journal "Chemical Engineering" in June of 1992: Part 1 - New
Environmental Regulations Pose Challenges for Industry, and Part 2 - A Guide to
Industrial Pretreatment. The review demonstrates the diversity of wastewater
issues faced by industrial facilities, and it is clear that the best solution
will vary by industry and even by facility. However, management believes that
there are many situations where either a robust technology, insensitive to
pollutant concentrations and solids content, or a high destruction efficiency
will be required. These situations will often become sales opportunities for the
Company. In addition, management believes by using smaller size STORS and NitRem
plants POTWs will be able to handle the same flow capacity with lower capital
and operating costs.
Since its formation in 1988, the Company has devoted substantially all of
its resources to funding the payments due under license agreements, searching
for opportunities to employ its technologies in demonstration facilities and
seeking capital necessary to sustain the Company's efforts. After a
demonstration unit has been successfully operated and the Technologies have been
proven commercially viable, the Company may still require additional investment
capital and/or debt financing to continue its operations.
Plan of Operations
The Company had planned to use the net proceeds of the proposed public
offering to fund it's day-to-day the operations until such time as the Company
either made substantial equipment sales or secured a long-term privatized
contract. All of the Company's demonstration projects have been funded by grants
or by its strategic corporate partners. As discussed in Note 7 of the financial
statements, the managing underwriter of the proposed offering notified the
Company in October of 1997 that it would be unable to complete the offering. The
Company now plans to use the balance of the proceeds from the issuance of up to
$7,500,000 of convertible debentures, primarily to shareholders, to satisfy the
cash requirements of its basic operations for the next year. The Company also
plans to repay the remaining 6.63% notes payable ($158,735) and related accrued
interest by issuing shares of Series B restricted Common Stock to the holders of
the notes if sufficient funds are not available to repay the notes at maturity.
The overall goal of the Company has been to successfully complete a full
scale demonstration of its technologies and to form strategic corporate
alliances to market the technologies discussed above. The Company has
successfully completed demonstration of the NtiRem; DSR and ARP technologies and
is scheduled to begin a STORS/NitRem project in the third quarter of 1999.
Management plans to utilize these demonstration projects and the TENC joint
venture to expand the visibility of the Company in the municipal, industrial,
Department of Defense and Department of Energy markets. These successful
demonstration projects are the single most important business factors in
implementing the Company's plan of operations as the Company takes on other
projects or makes an acquisition of another company to facilitate the
commercialization of its technologies.
Results of Operations
The net losses for the periods presented resulted primarily from salaries
and other administrative expenses, contractual obligations to Battelle Memorial
Institute, travel expenses, professional fees and interest expense. The increase
in general and administrative expenses and travel expenses for the year ended
December 31, 1999 compared to the year ended September 30, 1998 was due to the
Company's efforts regarding the projects discussed above. The decrease in
general and administrative expenses during the year ended September 30, 1998
compared to the same period of the prior year was due primarily to the Company's
efforts to conserve cash due to the failure of the 1997 proposed public
offering. The failed offering resulted in the recognition in general and
administrative expenses of approximately $282,000 of deferred offering expenses
as of September 30, 1997.
During 1998, the Company filed a lawsuit seeking compensatory and punitive
damages from the broker-dealer involved in the company's 1997 failed public
offering. During June 1999, the Company and the broker-dealer entered into a
release and settlement agreement. In connection with the agreement, the Company
received $75,000 in cash, 50,000 shares of common stock of the parent company of
the broker-dealer (the "Stock"), and 20,000 warrants to purchase shares of the
Stock at a price of $4.00 per share for a period of five years from the date of
the agreement. The Company sold all 50,000 shares of the Stock during June 1999.
The Company also exercised warrants for 5,000 shares of the Stock which were
sold during June 1999 ( see Note 12 for information concerning the sale of the
remaining warrants during January 2000). A gain of $293,779 was recorded in the
accompanying 1999 financial statement in connection with the release and
settlement agreement.
The company also sold scrap parts for $49,550 in connection with the City
of Colton project more fully described in Note 10 of the Notes to Financial
Statements.
Payments under licenses were $65,000 for the years ended December 31, 1999
and September 30, 1998 and $40,000 for the year ended September 30, 1997. The
increase during 1999 and 1998 was due primarily to the addition of the ARP
technology and specified yearly increases in the related agreements. Interest
expense increases for each of the years ended December 31, 1999 and September
30, 1998 due to the increase in the Company's borrowings, principally from
related parties, which are more fully described in Note 4 of the Note to
Financial Statements.
Liquidity and Capital Resources
During the year ended December 31, 1999, the Company used $774,908 of cash
in operations compared to $592,560 and $753,287 during the years ended September
30, 1998 and 1997 . During 1992, the Company initiated a public offering of
125,000 shares of Series B Common Stock at a price of $16.00 per share. The
offering was conducted on a "best efforts" basis, primarily by directors and
officers of the Company. Effective January 5, 1994, the offering was terminated.
A total of 93,129 shares were sold at a price of $16.00 per share and an
additional 6,438 shares were issued at $16.00 per share in satisfaction of notes
payable and related accrued interest. Currently, there is no public market for
the Series B Common Stock. As previously discussed, the Company's proposed 1997
public offering did not occur.
During 1999, 1998, and 1997, the Company met its liquidity needs primarily
from borrowings from stockholders. The Company converted substantially all of
its outstanding 10% notes payable to stockholders to Series 98, 15% Convertible
Debentures and plans to convert the remaining $158,735 of 6.63% notes payable to
stockholders to shares of Series B restricted Common Stock of the Company if
sufficient funds are not available to repay the notes at maturity. Management
plans to meet the Company's liquidity needs during the year ending December 31,
2000 through additional borrowings principally from shareholders via the
issuance of convertible debentures, from a public or private placement offering
of common stock and from the proceeds from the settlement of the Company's
lawsuit against its former underwriter. Management plans to meet long-term
liquidity needs primarily from revenues derived from commercial contracts the
Company hopes to obtain subsequent to the successful demonstrations of its
Technologies, such as the DoD Army NitRem and New York City ARP projects and the
upcoming Colton STORS/NitRem demonstration project.
Net Operating Losses
The Company had net operating loss carry forwards as of December 31, 1999
of approximately $ 6,450,000 which expire in the years 2003 through 2019. The
amount of net operating loss carried forward that can be used in any one year
will be limited by the applicable tax laws which are in effect at the time such
carry forward can be utilized. A valuation allowance of approximately $2,454,000
has been established to offset any benefit from the net operating loss carry
forwards as it cannot be determined when or if the Company will be able to
utilize the net operating losses.
Impact of Inflation
Although inflation has been slow in recent years, it is still a factor in
the economy. Since the Company has no significant revenues, inflation primarily
affects the Company's travel costs and costs of outside services. It could also
affect the cost of constructing demonstration and full-scale facilities in the
future. The Company will consider the impact of inflation in its financing
plans.
Transition Period Discussion ( Three months ended December 31, 1998 and 1997)
The discussion of the transition period resulting from the Company's change
in fiscal year end ( three months ended December 31, 1998) has been prepared in
accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X
Results of Operations
For the three months ended December 31, 1998, the Company incurred a net
loss of $243,660 as compared to $167,066 for the three months ended December 31,
1997.
General and administrative expenses increased during the three month period
ended December 31, 1998, compared to December 31, 1997, due to the Company's
efforts regarding the projects discussed above. Interest expense increased
significantly between the same two periods due to the issuance of the 15%
Convertible Debentures during 1998.
Liquidity and Capital Resources
During the period ended December 31, 1998, the Company used $179,266 of
cash in operations compared to $54,380 in 1997. During 1992, the Company
initiated a public offering of 125,000 shares of Series B Common Stock at a
price of $16.00 per share. The offering was conducted on a "best efforts" basis,
primarily by directors and officers of the Company. Effective January 5, 1994,
the offering was terminated. A total of 93,129 shares were sold at a price of
$16.00 per share and an additional 6,438 shares were issued at $16.00 per share
in satisfaction of notes payable and related accrued interest. Currently, there
is no public market for the Series B Common Stock. As previously discussed, the
Company's proposed 1997 public offering did not occur.
During 1998, and 1997, the Company met its liquidity needs primarily from
borrowings from stockholders. As discussed under Plan of Operations, the Company
may require additional funds in 1999 to pay notes as they become due. Management
plans to meet the Company's liquidity needs during the year ending December 31,
1999 with proceeds from the sale of convertible debentures and public or private
placement offerings of Common Stock. Management plans to meet long-term
liquidity needs primarily from revenues derived from commercial contracts the
Company hopes to obtain subsequent to successful demonstrations of its
Technologies, such as the Radford NitRem, New York City NitRem and San
Bernardino STORS demonstration projects.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act.
Investors are cautioned that such forward-looking s statements involve risks and
uncertainties including without limitation the following: (i) the Company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of the Company; (ii) the Company's plans and
results of operations will be affected by the Company's ability to manage its
efforts to commercialize its Technologies; and (iii) other risks and
uncertainties indicate from time to time in the Company's filings with the
Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is contained in Item 14 to this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
PART III
ITEM 10. EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The names and ages of the executive officers, key employees and directors
of the Company, and their positions with the Company, are as follows:
NAME AGE(1) POSITION
Dennis C. Cossey 53 Chairman of the Board, Chief Executive
Officer, Secretary and Director
Primo L. Montesi 65 President and Director
Alex G. Fassbender 46 Executive Vice President, Senior Vice
President of Corporate Technology
Louis J. Ortmann, DDS 63 Director
J. Donald Phillips 66 Director
Andrew T. Melton 53 Director
Dr. Paul A. Loeffler 52 Director
Jerald H. Sklar 63 Director
(1) As of December 31, 1999.
Dennis C. Cossey has served as Chief Executive Officer and Director of the
Company since 1988 and Chairman of the Board since 1990. Prior to joining the
Company, Mr. Cossey served in executive and sales positions at a number of
companies, including IBM Corporation and Peter Kiewit and Sons Engineering. Mr.
Cossey is a member of the American Society of Naval Engineers, the US Naval
Institute, the Society of Naval Architects and Marine Engineers and the
Association of Energy Engineers.
Primo L. Montesi has served as President, Chief Operating Officer and
Director of the Company since 1988.
Alex G. Fassbender has served as Executive Vice President and Senior Vice
President Corporate Technology since November 20, 1998. Mr. Fassbender serves
the Company on a half time basis and serves the remainder of his time as
President of Sunna Systems, a Washington based corporation. Prior to joining the
Company, Mr. Fassbender was Manger of Technology Commercialization at Battelle
Pacific Northwest Laboratories. He has held various positions with Battelle
since 1976. Mr. Fassbender received his BS (Chemical Engineering) in 1976 form
the University of California, Berkley, his MBA in 1980 and his MS (Chemical
Engineering) in 1988.
Dr. Louis J. Ortmann, DDS , age 62, is currently an associate of Louis J.
Ortmann Dental Clinic, Inc. and is active in the business management and
operation of the clinic. Dr. Ortmann is a graduate of the University of St.
Louis and had been engaged in the practice of dentistry for thirty years. Dr.
Ortmann had been a director of the Company since September, 1991.
J. Donald Phillips is a retired insurance executive in Little Rock,
Arkansas, who currently serves as an insurance consultant to Citizens Fidelity
Insurance, an Arkansas based insurance company. Mr. Phillips served as National
Sales Manager for Citizen's Fidelity Insurance Corporation from November 1989 to
January 1999. Mr. Phillips has served as Director of the Company since November
1990.
Andrew T. Melton, is currently President and principal shareholder of
Solomon Equity, Inc., a company he started in January of 1999, specializing in
financial consulting and loan brokerage. From January of 1997 to January 1999
Mr. Melton served as Chief Executive Officer and the principal shareholder of
Solomon Financial Inc., a company specializing in financing Canadian imports to
the US. Solomon Financial Inc. has been liquidated. Mr. Melton is a certified
public accountant and received an MBA in finance and a Bachelor of Science
degree in economics from Louisiana Tech University. From 1986 to 1994, Mr.
Melton served as Executive Vice President, Chief Financial Officer and Treasurer
of Worthen Banking Corporation, Little Rock, Arkansas. From 1995 to 1998, Mr.
Melton was Vice President with Merrill Capital Markets in Little Rock, Arkansas
Mr. Melton has served as director of the Company since his election on September
5, 1997.
Dr. Paul A. Loeffler is a professor of chemistry at Sam Houston State
University, Huntsville, Texas. He has been in this position since 1985, and has
been with the chemistry department of Sam Houston State University since 1975.
Dr. Loeffler received his Ph.D. and MA in organic chemistry from Rice
University. Dr. Loeffler also serves as a member of the Board of Directors and
is the associate director of the Texas Regional Institute for Environmental
Studies ("TRIES") in Huntsville, Texas. Dr. Loeffler has served with TRIES since
1992. Dr. Loeffler has served as a director of the Company since his election on
September 5, 1997.
Jerald H. Sklar, is a member of Waring Cox, PLC, Memphis, Tennessee, where
he has practiced since being admitted to the bar in 1965, concentrating in
corporate, financial and transactional work. He received a BA from Washington &
Lee University and an LL.B. from Vanderbilt University. Mr. Sklar is also a
principal in Ruby Avenue, LLC, a family business that develops and owns
residential and commercial real estate, and Crestwood Partners, LP, which
invests in operating businesses. Mr. Sklar has served as a director of the
Company since his election on September 5, 1997.
The Board of Directors of the Company consists of seven Directors. Up to
seven people may serve on the Board of Directors. Directors are elected at the
Company's Annual Meeting of Shareholders. Seven Directors serve staggered three
year terms, with two Directors elected each year, and one Director serves a five
year term. Louis J. Ortmann and J. Donald Phillips were elected on November 18,
1998 and will serve three year terms until May 2001 or until their successors
are duly elected. Primo L. Montesi was elected May 1, 1996 and will serve a
three year term until May 1999 or until his successor is duly elected. Thomas
Randall Kemp was also elected as a director May 1, 1996 to serve a three year
term. Mr. Kemp resigned April 15, 1997 at the request of the Company to ensure
the continued independence of the Company's auditors. On September 5, 1997, the
Board of Directors elected Jerald H. Sklar to fill the vacancy created by Mr.
Kemp's resignation. Mr. Sklar will serve until May of 1999 or until his
successor is duly elected. Dennis Cossey was elected to a five year term on May
1, 1996 and will serve until May 2001 or until his successor is duly elected.
Andrew T. Melton and Dr. Paul A. Loeffler were elected on September 5, 1997 and
will serve three years until the 2000 Annual Meeting of Shareholders or until
their successors are duly elected. The Company's last Annual Meeting of
Shareholders was November 18, 1998.
In addition to the Company's last annual shareholders meeting on November
18, 1998, the directors conducted 4 regular and 3 special Board meetings in the
fiscal year ended September 30, 1998, and 1 regular and 6 special Board meetings
in the last fiscal year. During fiscal year 1999, all directors attended at
least 75% of the meetings of the Board of Directors and committees of which they
are members.
The Board of Directors has established four standing committees. Messrs.
Phillips, Melton and Loeffler serve on the Executive Compensation Committee of
which Mr. Melton serves as chairman. The function of the Executive Compensation
Committee includes reviewing the Company's executive salary structure and
approving salary and bonus awards to certain key employees. Messrs. Sklar,
Ortmann and Montesi serve on the Stock Option Committee, of which Mr. Sklar
serves as Chairman. The Stock Option Committee will review and administer the
1997 Stock Option Plan . Messrs. Phillips, Ortmann and Sklar serve on the Audit
Committee, of which Mr. Phillips serves as chairman. The Audit Committee reviews
the scope and results of the audit by the Company's independent auditors, makes
recommendations to the Board as to the selection of independent auditors, and
has approval authority with respect to services provided by the independent
auditors. In addition, it reviews systems of internal control, reviews
accounting policies and procedures, and directs and supervises investigation
into matters within the scope of its duties. Messrs. Cossey, Montesi, Melton,
Phillips and Loeffler serve on the Executive Committee, the chairman of which is
Mr. Cossey. The Executive Committee meets on a monthly basis or as deemed
necessary to oversee the operations of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid by
the Company for the years ended December 31, 1999 and September 30, 1998, and
1997, and the three months ended December 31, 1998 ( the transition period) for
the Chief Executive Officer and to the four most highly compensated executive
officers of the Company. Except as set forth below, no executive officer of the
Company had a salary and bonus during the years indicated that exceeded $100,000
for services rendered in all capacities to the Company.
Summary Compensation Table
Name and Annual Compensation
Principal Position Year Salary Bonus
Dennis Cossey,
Chief Executive Officer and 12-31-99 $189,290 (2) (3)
Secretary 12-31-98 (1) $44,668 (2)
9-30-98 $161,618 (2)
9-30-97 $138,185 (2)
Primo L. Montesi, President 12-31-99 $189,290 (2) (3)
12-31-98 (1) $44,668 (2)
9-30-98 $161,618 (2)
9-30-97 $138,185 (2)
Alex G. Fassbender 1999 $67,500 (4)
(1) Three-month transition period due to change in Company's year end.
(2) All of the reported amount was accrued and not paid and classified as
deferred compensation in accordance with the Company's employment
agreements with the individuals.
(3) On June 24, 1999, the Board of Directors awarded each Mr. Cossey and Mr.
Montesi executive bonus compensation of 150,000 non-qualified, five year
stock options to purchase Series B restricted common stock at a price equal
to $2.00 per share. On March 16, 2000, the Board of Directors awarded each
Mr. Cossey and Mr. Montesi additional executive bonus compensation of
250,000 non-qualified, five year stock options to purchase Series B
restricted common stock at a price equal to $2.00 per share.
(4) On February 10, 2000 the Board of Directors awarded Mr. Fassbender an
executive compensation bonus of 100,000 non-qualified, five year stock
options to purchase Series B restricted common stock at a price equal to
$2.00 per share.
Employment Agreements
The employment agreements of Messrs. Cossey and Montesi provide a base
salary of $72,000 with 10 percent annual increases (which have been effective as
of January 1 of each year precedent, until the salary of each individual reaches
$175,000). Messrs. Cossey and Montesi also were subject to discretionary
incentive compensation of up to 50 percent of the base salary of each individual
determined by the Compensation Committee. Deferred compensation aggregating
$97,949, $25,555, $73,911 and $49,708 was accrued during the periods ended
December 31, 1999 and 1998, and September 30, 1998, and 1997, respectively,
pursuant to the interest provisions of the compensation agreements.
The Company is the sole beneficiary of a $500,000 and a $200,000 key man
life insurance policy on the lives of Messrs. Cossey and Montesi, respectively.
On November 20, 1998, the Company entered into a three-year employment
agreement with Mr. Fassbender under which he shall devote substantially all of
his business and professional time to the Company in it business development.
Under such agreement Mr. Fassbender will receive a base salary of $135,000 with
15% annual increases until his salary reaches $250,000. Due to the financial
condition of the Company at this time, the employment agreement with Mr.
Fassbender was amended on November 20, 1998 to engage Mr. Fassbender for an
interim period, not to exceed twelve months from the execution of the employment
agreement, where Mr. Fassbender will devote one-half of his business time and
attention to Company matters on a minimum annual salary of $67,500.
Stock Options
On January 3, 1997, as amended on January 30, 1997, the Board of Directors
adopted the Company's 1997 Stock Option Plan (the 1997 Plan), subject to
approval by the Shareholders to: (i) permit incentive stock options under
Section 422 of the Code to be granted from the Series B Common Stock of the
Company; and (ii) to provide for automatic grant provisions for non-employee
directors. The number of shares available for grant under the 1997 Plan is
750,000 Series B Common Shares. Except for automatic grants to non-employee
directors, no other grants have been made. The automatic grants are for
non-qualified options of 1,000 shares of Series B Common Stock to be awarded,
automatically, without further action by the Board or the Stock Option Committee
on the third business day following the day of each annual meeting of the
stockholders of the Corporation for each person who is then a member of the
Board of Directors and who is not an employee of the Corporation or any of its
subsidiaries. Each 1,000 share option granted to a non-employee Director will
become exercisable beginning one (1) year from the date of the annual meeting of
shareholders on which the date of the options were granted. If a non-employee
Director is elected by the Board of Directors to begin serving as Director on a
date not coincident with the annual meeting date, the Director will be granted
the initial 1,000 share option as of the date of the first meeting at which he
or she serves as Director; however, his or her options will become first
exercisable beginning one (1) year from the date of the annual meeting at which
he or she is first elected by the stockholders and he or she will not receive an
additional grant of options upon his first election to the Board. The five
non-employee directors have each received options for 3,000 shares, convertible
to restricted Series B, common stock at a price equal to $2.00 per share.
With respect to the qualified or "incentive stock options", as defined in
Section 422 of the Internal Revenue Code of 1986, as amended, the Plan provides
that the exercise price of each option must be at least equal to 100% of the
fair market value of the common stock as of the date such option is granted and
requires that all such options have an expiration date not later than the date
which is one (1) day before the tenth anniversary of the date of the grant of
such options. However, with certain limited exceptions and in event that the
option holder ceases to be associated with the Company, or engages in or is
involved with any business similar to that of the Company, such option holder's
incentive options immediately terminate.
Executive Bonus Plan
On January 3, 1997, the Company's Board of Directors established a
five-year Executive Bonus Plan (the "Bonus Plan") to reward executive officers
and other key employees based upon the Company achieving certain performance
levels. Under the Bonus Plan, commencing with the Company's 1997 fiscal year and
for each of the four fiscal years thereafter, the Company will have discretion
to award bonuses in an aggregate amount in each fiscal year equal to 1% of the
Company's net sales revenues for each fiscal year, provided and on condition
that the Company achieves a net profit before taxes of not less than 5% of net
sales in each year, and provided that the aggregate bonuses in each year (out of
the maximum amount of 1% of annual net sales) shall not be in excess of the
proportion by which the Company's net profit before taxes is greater than 5% of
net sales but less than 15% of net sales. The Compensation Committee of the
Board of Directors of the Company will determine the allocable amounts or
percentages of the bonus pool which may be paid annually to participants. For
fiscal 1998, no persons were entitled to receive bonus payments.
Bonuses under the Bonus Plan are not exclusive of other bonuses that may be
awarded by the Board of Directors of the Compensation Committee from time to
time.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 28,2000, the holdings of each
person who held, or was known by the Company to own beneficially, more than five
percent of any class of the Company's voting security, each director of the
Company and all directors and officers of the Company as a group. Unless
otherwise indicated, the following persons have sole voting and investment power
with respect to the number of shares set forth opposite their name.
NAME AND ADDRESS NUMBER OF SHARES %
OF OUTSTANDING
BENEFICIAL OWNERS OF COMMON STOCK(1) SHARESCOMMON
STOCK (2)
P.L. Montesi
22 Greenway Drive
Little Rock, AR 72212 728,890 (3) 16.80
Dennis Cossey
11706 Pleasant Ridge Drive
Little Rock, AR 72212 654,745 (4) 15.70
Alexander G. Fassbender
3100 George Washington Way, Suite 153
Richland, WA 99352 100,625 (5) 2.58
J. Donald Phillips
218 Belmont
No. Little Rock, AR 72216 9,250 (6) *
Louis J. Ortmann
3832 Victoria Road
Festus, MO 63028 112,081 (7) 2.88
Andrew T. Melton
11825 Hinson Road
Suite 102
Little Rock, AR 72212 3,000 (8) *
Dr. Paul A. Loeffler
128 Royal Oaks
Huntsville, TX 77340 3,000 (9) *
Jerald H. Sklar
50 N. Front Street, Suite 1300
Memphis, TN 38103 91,215 (10) 2.40
All Officers and Directors as a Group
(7 Persons) 1,702,807 34.34
Robert Trump
167 E. 61st Street
New York, NY 10021 994,595 (11) 22.43
* Less than 1%
(1) The number of shares of Series B Common Stock referred to below
reflects the number of shares beneficially owned after the 1994
Reverse Split and the 1996 Reverse Split were effected by the Company.
Computed based on the number of shares of common stock outstanding as
of March 28, 2000 plus securities deemed outstanding pursuant to Rule
13d-3(d)(1) under the Exchange Act.
(2) Computed based on the number of shares of Series B Common Stock
outstanding as of March 22,2000. Except as indicated in the footnotes
set forth below, the persons named in the table, to the Company's
knowledge, have sole voting and investment power with respect to all
shares of Series B Common Stock shown as beneficially owned by them.
The numbers shown include shares that are not currently outstanding
but which certain stockholders are entitled to acquire or will be
entitled to acquire within sixty (60) days. Such shares are deemed to
be outstanding for the purpose of computing the percentage of
outstanding Series B Common Stock owned by the particular stockholder
and by the group, but are not deemed to be outstanding for the purpose
of computing the percentage of ownership of any other person.
(3) Includes 1,875 Warrants purchased February 20, 1996 for $150
exercisable at $2.00 per share for Series B restricted common stock
within forty-eight months from date of purchase and assumes the
exercise of such Warrants. Includes 3,125 shares of Series B stock
representing a one-half interest in 6,250 shares owned jointly with
Dennis Cossey. Includes 125,000 options purchased January 12, 1999 for
$50,000 exercisable at $2.00 per share for Series B restricted common
stock at any time up to May 25, 2004 and assumes the exercise of such
options. Includes executive bonus compensation of 150,000 and 250,000
non-qualified, five year stock options granted June 20, 1999 and March
16, 2000, respectively, to purchase Series B restricted common stock
at a price equal to 2.00 per share and assumes the exercise of such
options. Includes 6,500 shares of Series B restricted Common Stock
received January 8,1999 in connection with a January 1997 loan to the
Company. Includes 41,081 shares of Series B restricted common stock
represented by converting the 1997 loan to the Company, together with
accrued interest , in the amount of $82,162 to 15% convertible
debentures due January 15, 2003. Includes 244,299 shares of Series B
restricted common stock represented by converting the balance of
deferred compensation due Mr. Montesi in the amount of $488,597 to 15%
convertible debentures dues January 15, 2003. The Debentures are
convertible to Series B restricted common stock at a conversion price
of $2.00 per share, at the option of the holder, up to the date of
maturity or afterwards until the entire principal and interest amount
shall have been paid and assumes the conversion of such debenture.
Does not include 2,188 shares of Series B Common Stock owned by Mr.
Montesi's wife distributed to her on February 9, 1993, pursuant to her
status as a shareholder of common stock of American Fuel and Power
Company ("AFP") in like amount. Pursuant to shareholder action of the
Company May 21, 1988, the Company agreed to issue to AFP stockholders
one share of the Company's common stock for each share of AFP common
stock outstanding as of April 15, 1988. Mr. Montesi's wife was one of
such shareholders of AFP entitling her to stock of the Company. Mr.
Montesi disclaims beneficial ownership of the shares of Series B
Common Stock owned by his wife
(4) Includes 1,875 Series B Warrants purchased February 20, 1996 for $150
exercisable at $2.00 per share for restricted stock within forty-eight
months from date of purchase and assumes the exercise of all Warrants.
Includes 3,125 shares representing a one-half interest in 6,250 shares
owned jointly with P.L. Montesi. Includes executive bonus compensation
of 150,000 and 250,000 non-qualified, five year stock options share
granted June 20, 1999 and March 16, 2000, respectively, to purchase
Series B restricted common stock at a price equal to $2.00 per share
and assumes the exercise of such option. Includes 244,299 shares of
Series B restricted common stock represented by converting the balance
of deferred compensation due Mr. Cossey in the amount of $488,597.00,
to 15% convertible debentures dues January 15, 2003. The Debentures
are convertible to Series B restricted common stock at a conversion
price of $2.00 per share, at the option of the holder, up to the date
of maturity or afterwards until the entire principal and interest
amount shall have been paid and assumes the conversions of such
debenture.
(5) Includes executive bonus compensation of 100,000 non-qualified, five
year stock options granted February 10, 2000 to purchase Series B
restricted common stock at a price equal to $2.00 per and assumes the
exercise of such options.
(6) Includes non-qualified options convertible to 3.000 shares of Series B
restricted Common Stock at a price equal to $2.00 per share, issued
February 10, 2000 under the Company's 1997 Stock Option, which
provides for a grant of 1,000 share of common stock to non-employee
directors for each year of service on the Board. This represents
options accumulated, but not granted for 1997, 1998, 1999 and assumes
the exercise of such options.
(7) Includes 1,250 shares of Series B Common Stock Dr. Ortmann
beneficially owns through Dr. Louis J. Ortmann Dental Clinic, Inc.,
Profit Sharing Plan. Includes 7,600 shares of Series B Common Stock
received in connection with of a June 1997 loan to the Company.
Includes 83,480 shares of Series B restricted common stock represented
by the conversion of a 1997 loan to the Company on July 20, 1999,
together with accrued interest , in the amount of $91,960 of Series
98, 15% convertible debentures due January 15, 2003 and separate
Series 98, debentures purchased in the amount of $50,000, and $25,000
on December 1, 1998 and June 22, 1999 respectively. The Debentures are
convertible to Series B restricted common stock at a conversion price
of $2.00 per share, at the option of the holder, up to the date of
maturity or afterwards until the entire principal and interest amount
shall have been paid and assumes the conversions of such debentures.
Includes non-qualified options convertible to 3,000 shares of Series B
restricted Common Stock at a price equal to $2.00 per share, issued
February 10, 2000 under the Company's 1997 Stock Option, which
provides for a grant of 1,000 share of common stock non-employee
directors for each year of service on the Board. This represents
options accumulated, but not granted for 1997, 1998, 1999 and assumes
the exercise of such options. Does not include the following owned by
Dr. Ortmann's wife: 26,563 shares of Series B Common Stock, Warrants
purchased September 17, 1996 by Mrs. Ortmann for $339.40 exercisable
at $2.00 per share for 4,244 shares of Common Stock within forty-eight
months from date of purchase, 5,000 shares of Series B Common Stock
received in connection with a August 14, 1997 loan to the Company and
16,992 shares of Series B restricted common stock represented by the
conversion of a 1997 loan to the Company, together with accrued
interest , in the amount of $33,983 to 15% convertible debentures dues
January 15, 2003 and assumes the conversions of such Debentures. The
Debentures are convertible to Series B restricted common stock at a
conversion price of $2.00 per share, at the option of the holder, up
to the date of maturity or afterwards until the entire principal and
interest amount shall have been paid and assumes the conversions of
such debenture. Dr. Ortmann disclaims beneficial ownership of the
shares, warrants and debentures owned by his spouse.
(8) Includes non-qualified options convertible to 3,000 shares of Series B
restricted Common Stock at a price equal to $2.00 per share, issued
February 10, 2000 under the Company's 1997 Stock Option, which
provides for a grant of 1,000 share of common stock non-employee
directors for each year of service on the Board. This represents
options accumulated, but not granted for 1997, 1998, 1999 and assumes
the exercise of such options.
(9) Includes non-qualified options convertible to 3,000 shares of Series B
restricted Common Stock at a price equal to $2.00 per share, issued
February 10, 2000 under the Company's 1997 Stock Option, which
provides for a grant of 1,000 share of common stock non-employee
directors for each year of service on the Board. This represents
options accumulated, but not granted for 1997, 1998, 1999 and assumes
the exercise of such options.
(10) Represents 88,215 shares owned by Waring Cox, PLC., a law firm in
which Mr. Sklar is a partner, and non-qualified options owned by Mr.
Sklar which are convertible to 3,000 shares of Series B restricted
Common Stock at a price equal to $2.00 per share, issued February 10,
2000 under the Company's 1997 Stock Option, which provides for a grant
of 1,000 share of common stock non-employee directors for each year of
service on the Board. This represents options accumulated, but not
granted for 1997, 1998, 1999 and assumes the exercise of such options.
(11) Includes 361,773 shares of Series B common stock, assumes the
conversion of 282,822 warrants convertible to Series B restricted
common and the conversion of Series 98 Convertible Debentures to
350,000 shares of Series B restricted common stock as follows:
includes 392,168 warrants purchased at par value exercisable at $8.00
per share within ten years of (58,825 December 23, 1992; 125,000 April
1, 1993; 208,344 July 15, 1993). Includes an additional 62,500
warrants purchased October 14, 1994 for $.02 exercisable at $2.00 per
share for restricted stock within 48 months and assumes the exercise
of all warrants by Mr. Trump. Includes an additional 25,000 shares of
restricted common stock purchased May 10, 1995 at $0.50 per share and
an additional 25,000 warrants purchased May 10, 1995 at par value
exercisable at $2.00 per share for restricted stock which were
exercised in June, 1995. Includes an additional 6,250, 5,000 and
12,500 Warrants purchased March 20, 1996, May 17, 1996 and August 28,
1996, respectively, for $500, $400 and $1,000 exercisable at $2.00 per
share for restricted stock within forty-eight months from date of each
purchase and assumes the exercise of all warrants. Includes 245,596
shares of Series B Common Stock issued to Mr. Trump in July 1997 in
consideration of (i) an additional $100,000 capital contribution to
the Company, (ii) the conversion of $391,192 in short-term debt to
equity, and (iii) the cancellation of 195,596 Series B Warrants
exercisable at $8.00 per share. Includes 350,000 shares of Series B
restricted common stock represented by the purchase of $700,000 of
Series 98, 15% convertible debentures due January 15, 2003 by Mr.
Trump, $250,000 purchased each on January 15, 1998 and August 24,
1998, respectively and $200,000 purchased May 20, 1998. The Debentures
are convertible to Series B restricted common stock at a conversion
price of $2.00 per share, at the option of the holder, up to the date
of maturity or afterwards until the entire principal and interest
amount shall have been paid and assumes the conversions of such
debenture.
Escrow Agreement
All the directors and officers of the Company, and a 5% or more shareholder
who were considered a promoter of the Company, on the effective date of the
initial public offering that was subsequently terminated January 5, 1994, placed
their shares in an escrow account with Worthen Trust Company. According to the
terms of the Escrow Agreement, these shareholders could not sell their
respective shares of Series B Common Stock for a minimum period of twenty-four
months commencing on the effective date of the public offering. That term was
completed June 24, 1994. Additionally, the shares are being held in escrow for a
maximum period of five years from the effective date or until the Company has
met certain financial requirements as provided for in the Escrow Agreement.
Shareholders owning shares of Series B Common Stock held under the Escrow
Agreement continue to have all voting rights to which the shares are entitled.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Organization and Capitalization of the Company
During and subsequent to fiscal year 1993 the Company distributed 1,416,236
shares of the Company's Series B Common Stock to individual shareholders of AFP
in satisfaction of the Company's obligation pursuant to a Sublicense Agreement
between the Company and AFP effective March 30, 1988. As of the date of this
Prospectus, 127,515 shares remain in a voting trust for the benefit of
additional AFP shareholders. The Company acquired the right to some shares of
such stock from several former AFP shareholders, and 83,829 shares of such stock
were issued to the Company from the voting trust.
The Company issued Series B Warrants at price equal to par value to Robert
Trump of New York for 58,524 shares as of December 23, 1992, 125,000 shares as
of April 1, 1993 and 208,344 shares as of July 15, 1993. The related Warrant
Agreements provide for an exercise period of ten years from the date of issuance
at a price of $8.00 per share. The exercise price is subject to an adjustment in
the event that the Company issues shares of Series B Common Stock at a price per
share which is less than the Series B Warrant price or the current market value
of such shares. On October 14, 1994, the Company sold 62,500 Series B Warrants
to Mr. Trump at a price of $0.08 per warrant exercisable within a period of 48
months at a price of $2.00 per share. The Warrant Agreement is related to
$245,000 in Bridge Financing provided to the Company by Mr. Trump by a term note
at market rates prepayable at any time within 48 months without penalty, from
the proceeds of a public offering. On April 25, 1995, the Board of Directors
accepted a proposal from Mr. Trump to purchase 25,000 shares of Series B Common
Stock at $2.00 per share and purchase 25,000 Series B Warrants at par value per
warrant exercisable at $2.00 per share. The effect of the Company selling Series
B Common Stock at $2.00 per share (adjusted for the December 12, 1996
four-to-one reverse stock split) activated the terms in prior warrant agreements
adjusting the price of 525,000 unexercised warrants to $2.00 per share. The
amount discussed above includes an additional 6,250, 5,000 and 12,500 warrants
purchased March 20, 1996, May 17, 1996 and August 28, 1996, respectively, for
$500, $400 and $1,000 exercisable at $2.00 per share for restricted stock within
forty-eight months from date of each purchase and assures the exercise of all
warrants. In addition, on July 25, 1997, the Company issued 245,596 shares of
Series B Common Stock to Mr. Trump in consideration of (i) an additional
$100,000 capital contribution to the Company, (ii) the conversion of $391,192 in
short-term debt to equity, and (iii) the cancellation of 195,596 Series B
Warrants owned by Mr. Trump. Mr. Trump also purchased $70,000 of Series 98, 15%
convertible debentures dues January 15, 2003 by Mr. Trump, $250,000 purchased
each on January 15, 1998 and August 24, 1998, respectively and $200,000 on May
1998. The Debentures are convertible to Series B restricted common stock at a
conversion price of $2.00 per share, at the option of the holder, up to the date
of maturity or afterwards until the entire principal and interest amount shall
have been paid.
Relationship with Battelle
In August 1991, Battelle entered into a license agreement with the Company,
pursuant to which the Company was granted certain rights to make, use and sell
the STORS and NitRem processes ("License Agreement"). All prior agreements
licensing the STORS and NitRem technologies to the Company, including payments
thereunder, were superseded by this Agreement.
Under the License Agreement, Battelle granted the Company the following:
(1) An exclusive world-wide license, except in Japan, to practice the
STORS thermochemical process for converting municipal sludge and
combinations of municipal sludge and municipal solid waste to liquid fuels
and the NitRem process, as developed by Battelle including improvements
designed by Battelle, in addition to the right of first opportunity for any
other applications (e.g. non-municipal) of the STORS and NitRem processes,
as they may have been identified, upon payment of an additional fee and
royalty at a rate to be negotiated.
(2) A license to utilize technical information including any
unpublished research and development information, unpatented invention,
know-how, trade secrets, and technical data in the possession of Battelle
prior to the effective date of the License Agreement and which comes into
the possession of Battelle during the terms of the License Agreement which
relates to the STORS and NitRem processes. Battelle reserved the right to
practice the technology for research purposes.
The Company agreed to the following terms under the License Agreement:
(1) The Company paid Battelle a license fee of $129,000.
(2) The Company shall pay Battelle a royalty fee not greater than 4%
of the invoiced cost of processing sludge material or $6 for each ton of
dry equivalent weight material input to the STORS process, whichever is
greater.
(3) The Company shall pay Battelle a royalty fee not greater than 5%
of the invoiced cost of processing each thousand gallons or $1 for each
thousand gallons of input to the NitRem process, whichever is greater.
(4) If both STORS and the NitRem technologies are used on a single
waste stream, then the combined royalty of (2) and (3) above shall not
exceed the greater of 5% of the invoiced cost of processing each dry ton
equivalent weight material input to the STORS process, or $7.50 for each
dry ton equivalent weight material processed.
(5) If the Company enters into an agreement with a municipal
government, wherein the Company sublicenses the STORS and/or NitRem
technologies for a sum of money which does not contemplate royalty
payments, then the Company shall pay Battelle a lump sum of 10% of the
consideration received from the municipality.
(6) Battelle may, by written notice to the Company, terminate the
License Agreement at any time on or after January 31, 1998, if construction
and continuous operation of at least one facility with a capacity of ten
dry tons equivalent or 1,000 gallons of liquid per day has not been
achieved by that date.
(7) The License Agreement makes explicit the right of any STORS and
NitRem facility owner to continue using the Technologies at that facility
even after the expiration of the License Agreement.
As new applications for the Technologies were developed by Battelle, the
Company entered into additional agreements with Battelle to expand the
applicable license fields for the Technologies. In October 1993, the Company and
Battelle entered into an option agreement for the Company to apply NitRem to
nitrogen bearing waste from explosives and propellent manufacturers. The Company
paid $25,000 for the option. This option was extended in 1994, and in July 1995,
the Company and Battelle entered into a license agreement for this license
field. This extension of the license field allows the Company to market NitRem
to the Department of Defense, and defense manufacturers ("defense license
field"). The Company paid Battelle a license fee of $25,000 cash and shares of
Series B Common Stock having a value of $80,000. Battelle may terminate this
license during April 1999, and during any subsequent April thereafter, if the
Company has not generated royalties to Battelle for the defense license field in
the amount of $5,000 for the preceding calendar year.
On July 7, 1995, the Company and Battelle entered into another license
agreement to apply NitRem to waste from industrial processes, excluding nitrogen
bearing waste from explosives and propellent manufacturers. This includes waste
from agriculture and food processing operations, petroleum refining, metal
working, chemical, pharmaceutical and materials manufacture, textile processing,
and similar waste from government operations ("industrial license field"). The
Company paid Battelle a license fee of Series B Common Stock having a value of
$75,000 to Battelle. This license also may be terminated by Battelle during
April 1999, and during any subsequent April thereafter, if the Company has not
generated royalties to Battelle for the industrial license field in the amount
of $5,000 for the preceding calendar year.
On February 15, 1995, the final payment from the Company of $75,000 was due
and payable to Battelle under the License Agreement, as amended. Due to the
financial condition of the Company at that time, the Company was unable to pay
the fee. In addition, the Company also owed Battelle reimbursement of expenses
advanced by Battelle to cover travel, research, development and associated costs
for Alex Fassbender and other technical staff at Battelle engaged in the
marketing of the Technologies for the Company. Due to the financial condition of
the Company, Battelle agreed, in lieu of cash payment, to accept 18,750 shares
of restricted common stock of the Company representing a value of $150,000 based
on the Company's last net restricted stock sale at that point in time as full
and total payment of all license fees and expenses due from the Company. The
License Agreement, when combined with the additional two licenses for defense
and industrial license fields, grants the Company the exclusive worldwide rights
to STORS and NitRem for all fields of use (except STORS in Japan).
In December, 1998, Battelle entered into an additional license agreement
with the Company, pursuant to which the Company was granted certain rights to
make, use and sell the Ammonia Recovery Process (ARP).
Under the License Agreement, Battelle granted the Company the following:
(1) An exclusive world-wide license to practice the ARP technology for the
recovery of ammonia from fluid waste streams for use at municipal and
agricultural livestock production facilities, as developed by Battelle
including improvements designed by Battelle.
(2) A license to utilize technical information including any unpublished
research and development information, unpatented invention, know-how,
trade secrets, and technical data in the possession of Battelle and
that which may come into the possession of Battelle during the term of
the License Agreement which relates to the ARP processes. Battelle
reserved the right to practice the technology for research,
development, and demonstration purposes and to license the technology
in field and territories not exclusively licensed therein.
The Company agreed to the following terms under the license agreement:
(1) The Company paid Battelle a $25,000 license fee at the time of the
execution of the license and is obligated to pay an additional $25,000
license fee on the first anniversary of the effective date.
(2) The Company shall pay Battelle a continuing royalty fee of (1) 5% of
all revenues received from processing fluids or (2) $1.00 for each
1,000 gallons of input to the ARP process, whichever is greater.
(3) In the event the Company or it's sublicensee enters into an agreement
wherein the customer will design, and/or build, and/or own, and/or
operate a licensed facility, the Company agrees to pay Battelle 5% of
the installed cost of the facility using ARP or $40,000, whichever is
greater. The installed cost of a facility shall be calculated as equal
to 2.72 times the total delivered cost to the major purchased
equipment. It does not include land, building yard improvements,
services, taxes, contingency fees or working capital.
(4) The Company is required to pay Battelle a minimum royalty of $10,000
for 1998, $20,000 for 1999, $30,000 for 2000 and $40,000 for each year
thereafter.
(5) In the event the Company has not contracted to build a commercial
facility to practice ARP within three years of the effective date in
Territory 1, the United States; Territory 2, the Americas outside of
the United States; and Territory 3, Europe; Battelle may, in its sole
discretion, elect to terminate the Company's rights for that
particular territory. In the event the Company has not contracted to
build a commercial facility to practice ARP within five years of the
effective date in Territory 4, Battelle may, in its sole discretion,
elect to terminate the Companies rights for Territory 4. Otherwise,
the License Agreement terminates upon the expiration of the last to
expire of the patent(s) included therein.
On or about July 6, 1998, Battelle and the Company amended all of the
aforementioned licenses from Battelle to the Company to allow Battelle the right
to directly license the technologies to TENC in the event that access to the
technologies is impeded due to a voluntary or involuntary bankruptcy of the
Company.
On June 29, 1999 Battelle agreed to accept a Series 98 Convertible
Debenture, in lieu of cash payment, in the amount of $129,623 representing
$30,000 in minimum royalties for 1998 due Battelle pursuant to the Company's
NitRem and DSR license agreements and $92,722 for additional patent expenses for
said world wide license agreements. The Debentures are convertible to a minimum
of 64, 812 shares Series B restricted common stock at a conversion price of
$2.00 per share, at the option of the holder, up to the date of maturity or
afterwards until the entire principal and interest amount shall have been paid.
The Company is totally dependent upon the engineering, laboratory, research
and development skills and expertise of Battelle to supervise the design and
implementation of a STORS, NitRem or ARP demonstration facility, for the
conducting of laboratory analysis and characterization of various waste streams
to be processed through a STORS, NitRem or ARP unit, to collect and analyze
process equipment and performance data generated during a STORS , NitRem and/or
ARP demonstration test, and for on-going research and development of the STORS,
ARP and NitRem processes. While, at this time, the Company must rely on
Battelle's engineers to work with the Company's strategic partners to supervise
the design and implementation of the demonstration projects, management believes
that it will eventually be able to reduce its dependence on Battelle's
supervision over the design and implementation of the STORS, ARP and NitRem
demonstration facilities through the employment of Mr. Fassbender, and the
ability of the Company to hire and contract with its own engineers and
technicians. Although Battelle has no contractual obligation to support the
Company's efforts to commercialize the Technologies, as the Licensor of the
Technologies, it has been Battelle's practice to support the Company, as its
Licensee, in such efforts. Battelle has provided services including legal
services to maintain Technology patents, laboratory services, engineering and
marketing personnel, materials and research and development to support the
Company's efforts to commercialize the Technologies and pursue demonstration
projects. The Company has reimbursed Battelle an aggregate of $64,000 over the
last three years in connection with such support services.
Centerpoint Power Corporation
In October 1988, the Company engaged the services of Centerpoint Power
Corporation, a Virginia corporation, ("Centerpoint"), through a General
Compensation and Stock Warrant Agreement, to receive 701,875 warrants
convertible commons stock at $.16 per share to provide assistance in locating
capital financing and/or public funding of a STORS and/or NitRem demonstration
facility. The Company executed an amended agreement with Centerpoint in April
1991 which had an expiration date of October 1994. In January 1992, the
agreement was amended regarding stock warrant rights. In 1993, the Board of
Directors extended the Compensation Agreement with Centerpoint for an additional
three years to April 22, 1996 and extended the time for exercising warrant
rights for an additional five years to April, 2001, in consideration of the
funding to be provided by the US Army, Department of Defense for the Sam Houston
State University, doing business as, the Texas Regional Institute for
Environmental Studies ("TRIES")/Army Nitrogen Removal Demonstration.
On June 15, 1999, Centerpoint assigned its interest in all of the warrants
to the principals of the Company and subsequently ceased all business or
consulting services to the Company.
Washington Consulting Alliance and Tom Burgum
On June 28, 1998, the Company entered into an agreement with Thomas Burgum
of the Washington Consulting Alliance, a Washington DC based consulting and
lobbying firm, to provide professional services to the Company in connection
with the Colton STORS Demonstration. The WCA was instrumental in securing
Congressional approval the $3,000,000 grant for the STORS project. Pursuant to
the terms of the agreement, Mr. Burgum will be paid a maximum of $5,000.00 per
month for 24 months. The agreement may be canceled by either party upon 30
notice to the other. Mr. Burgum was a principal of Centerpoint Power
Corporation.
TENC and Foster Wheeler Environmental Corporation
On September 11, 1998, the Company agreed to form ThermoEnergy
Environmental Corporation with Foster Wheeler Environmental Corporation of
Livingston, New Jersey to pursue clean water projects worldwide. The new company
will combine TEC's state-of-the-art clean water technologies with FWENC's
engineering expertise and global presence to pursue industrial and municipal
water/wastewater projects around the world and is TEC's first joint venture. TEC
will own 49.9% of TENC. Dennis Cossey, CEO of the Company serves as Vice
President of TENC.
Concurrently with forming TENC, the Company entered into a Shareholders
Agreement by and among FWENC, TEC and TENC and a sublicense agreement between
the Company and TENC.
Under the sublicense agreement, the Company granted TENC the following:
(1) The exclusive worldwide sublicense of the ARP technology to TENC for
municipal and agricultural livestock production facilities. The
sublicense also grants to TENC non-exclusive use of NitRem/DSR for
industrial and US government applications and a non-exclusive grant of
STORS (except for Japan) for municipal applications.
(2) A license to utilize technical information including any unpublished
research and development information, unpatented invention, know-how,
trade secrets, and technical data in the possession of the Company and
Battelle and that which may come into the possession of the Company
and Battelle during the term of the Sublicense Agreement which relates
to the ARP processes. The Company and Battelle reserved the right to
practice the technology for research, development, and demonstration
purposes and to license the technology in field and territories not
exclusively licensed herein.
TENC agreed to the following terms under the license agreement:
(1) TENC paid the Company $1.00 and other good and valuable consideration,
to wit: to provide any and all funding, not to exceed $500,000,
necessary for the demonstration of the ARP technology pursuant to the
Company's No-Cost-Test-Agreement with the City of New York as set
forth in a separate agreement with FWENC.
(2) TENC shall pay the Company a continuing royalty fee of (1) 7% of all
revenues received from processing fluids or (2) $1.40 for each 1,000
gallons of input to the ARP process, whichever is greater.
(3) In the event TENC executes an agreement with a customer or other end
user for the purchase of a NitRem of ARP system, then TENC agrees to
pay the Company 7% of the invoiced cost of either the NitRem/DSR or
ARP system. When using STORS for treating solids laden streams
(sludge) and when using NitRem for treating nitrogen laden aqueous
streams associated with wastewater treatment plant operations whether
prior to or after the STORS operation where the measurement is in
gallons ( in thousands ), TENC agrees to pay the Company 140% of the
royalties as set forth in paragraph 5 of License Agreement 9120-C
between the Company and Battelle.
(4) In the event TENC has not contracted to build a commercial facility or
the construction of a privatized commercial facility within three
years of the effective date of the sublicense the Company may, in its
sole discretion, elect to terminate TENC's rights thereunder for that
particular technology. Other wise the sublicense agreement shall end
upon the expiration of the last to expire of the patents described
therein.
On or about July 6, 1998, Battelle and the Company have amended all of the
aforementioned licenses to allow Battelle the right to directly license the
technologies to TENC in the event that access to the technologies is impeded due
to a voluntary or involuntary bankruptcy of the Company.
On August 4, 1998, the Company signed an agreement FWEC to provide up to
$500,000 funding necessary to demonstrate ARP and to design, fabricate and
operate the ARP pilot plant in connection with the Company's
No-Cost-Test-Agreement with the City of New York. It is thereafter anticipated
that any commercial business derived from the successful demonstration of ARP
will be engaged through TENC.
Nutrecycle Ventures
On November 28, 1998, the Company entered into an agreement with Nutrecycle
Ventures to promote the Company and the New York City Nitrogen Removal
Demonstration and to assist the Company in getting ARP selected as the
technology of choice to solve all or part of the nitrogen disposal problems
associated with the City of New York's water/wastewater treatment facilities.
Nutrecycle Ventures will be paid a maximum of $2,500.00 per month, plus expenses
for consulting services. The term of the agreement is 24 months and may be
terminated by either party upon 30 days notice to the other. Nutrecycle Ventures
is also in a position to receive additional compensation based upon a percentage
of the overall capital cost of the ARP demonstration facility, plus an option to
buy additional stock in the Company in the event the Company enters into an
agreement to sell one or more ARP units to the City or the Company processes
wastewater for the City under a privatized agreement.
Other Transactions
Mr. Montesi loaned the Company $65,000 in January of 1997 in connection
with the Company's bridge financing activities. Under the terms of the agreement
Mr. Montesi received 6,500 shares of Series B restricted common stock in January
1999 in connection with said loan. Mr. Montesi also converted the principal
amount of the January 1997 loan, together with accrued interest in the, in the
amount of $82,162, to Series 98, 15% convertible debentures due January 15,
2003. The Debentures are convertible to Series B restricted common stock at a
conversion price of $2.00 per share, at the option of the holder, up to the date
of maturity or afterwards until the entire principal and interest amount shall
have been paid.
Louis Ortmann loaned the Company $76,000 in June of 1997, in connections
with the Company's bridge financing activities. Under the terms of the
agreement, Dr. Ortmann received 7,600 shares of Series B restricted common stock
in January of 1999 in connection with said loan. Dr. Ortmann also converted the
principal amount of the June 1997, loan together with accrued interest in the
amount of $91,960, to Series 98, 15% convertible debentures due January 15, 2003
and also purchased separate Series 98, debentures in the amount of $50,000, and
$25,000 on December 1, 1998 and June 22, 1999 respectively. The Debentures are
convertible to Series B restricted common stock at a conversion price of $2.00
per share, at the option of the holder, up to the date of maturity or afterwards
until the entire principal and interest amount shall have been paid
Dr. Paul A. Loeffler, a director of the Company, elected on September 5,
1997 to a three year term expiring at the Annual Meeting of Shareholders 2000,
or until his successor is duly elected, is a member of the board of directors of
the Texas Regional Institute for Environmental Studies in Huntsville, Texas, and
is also the associate director of TRIES. TRIES is the prime contractor with the
US Army for the Company's Radford Army Munitions Plant Demonstration Project.
See "Business - Nitrogen Removal Demonstration - United States Department of the
Army Program".
Mr. Jerald Sklar, was elected by the Board of Directors on September 5,
1997, to complete the unexpired term of Thomas Randall Kemp. Mr. Sklar is a
member of Waring Cox, PLC, counsel to the Company. Waring Cox, PLC also owns
88,215 shares of Series B Common Stock.
Future Transactions
The Company's Board of Directors has adopted a policy whereby any future
transactions between the Company and any of its subsidiaries, affiliates,
officers, directors, principal stockholders and any affiliates of the foregoing
will be on terms no less favorable to the Company than could reasonably be
obtained in "arm's length" transactions with independent third parties.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND
REPORTS ON FORM 8-K
(a)(1)
1. Balance Sheets December 31, 1999 and 1998, and September 30, 1998
2. Statements of Operations -- year ended December 31, 1999, three months
ended December 31, 1998 and years ended September 30, 1998 and 1997
and cumulative during development stage through December 31, 1999.
3. Statements of changes in stockholders' equity (deficit) -- periods
ended September 30, 1988 through December 31, 1999.
4. Statements of cash flows -- year ended December 31, 1999, three months
ended December 31, 1998 and years ended September 30, 1998 and 1997
and cumulative during development stage through December 31, 1999.
5. Notes to financial statements.
(a)(2)
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(a)(3) Exhibits.
Number assigned
in regulation
S-K, Item 601 Description of Exhibit
- ------------- ----------------------
3.1** Amended and Restated Articles of Incorporation.
3.2** Amended and Restated Bylaws of the Company.
4.1** Form of Stock Certificate - Series A Common Stock.
4.2** Form of Stock Certificate - Series B Common Stock.
9.1* Voting Trust Agreement between American Fuel and Power
Corporation and P.L. Montesi, Trustee, dated November 1, 1991.
10.1* License Agreement between Battelle Memorial Institute and
ThermoEnergy Corporation dated as of August 5, 1991.
10.2(4) License Agreement between the Company and Battelle
Memorial Institute for Battelle's dated July 7, 1995 (defense
purposes for NitRem).
10.3(5) License Agreement between Battelle Memorial Institute and
ThermoEnergy Corporation dated July 7, 1995 (industrial
purposes for NitRem).
10.4* Substitute General Compensation and Stock Warrant Agreement
between ThermoEnergy Corporation and Centerpoint Power
Corporation of Virginia for STORS/Denitrification and NitRem
Technologies between ThermoEnergy Corporation and Centerpoint
Power Corporation, dated April 22, 1991.
10.5* First Amendment to Substitute General Compensation and Stock
Warrant Agreement between ThermoEnergy Corporation and
Centerpoint Power Corporation for STORS/Denitrification and
NitRem Technologies by and between ThermoEnergy Corporation
and Centerpoint Power Corporation, dated January 30, 1992.
10.6*(1) Employment Agreement dated January 1, 1992 by and between
ThermoEnergy and P. L. Montesi.
10.7*(1) Employment Agreement dated January 1, 1992 by and between
ThermoEnergy and Dennis Cossey.
10.8* STORS/NitRem Option Agreement between the Company and a
Corporation in Formation dated March, 1992.
10.9* Agreement between the Company and McKeown and Franz, Inc.
dated March, 1992.
10.10(2) Warrant Agreement with Robert Trump dated December 23, 1992.
10.11(2) Warrant Agreement with Robert Trump dated April 1, 1993.
10.12(3) Warrant Agreement with Robert Trump dated July 15, 1993.
10.13(6) Form Warrant Agreement and Term Note with Robert Trump dated
October 14, 1994, October 17, 1994, March 20, 1996, May 17,
1996, and May 28, 1996, respectively.
10.14(7) Form of Promissory Note, Subscription Agreement and Warrant
Agreement Concerning Financing Activities of the Company.
10.15(8) Warrant Agreement dated May 10, 1995 with Robert Trump.
10.16** Joint Marketing Agreement between Dan Cowart, Inc. and
Registrant dated April 1, 1996.
10.17** Worldwide Marketing Agreement between the Company and Foster
Wheeler USA Corporation dated September 1994.
10.18** Memorandum of Understanding between the Company and
Roy F. Weston, Inc. dated April 10, 1996.
10.19** No Cost Test Agreement Between City of New York - Department
of Clean Water and Registrant dated July 26, 1996.
10.20** Memorandum of Understanding Between Foster Wheeler
Environmental Corporation and Mitsui Company (USA.) Inc.
dated October, 1996.
10.21** Subcontract between Sam Houston State University and the
Company dated October 31, 1994.
10.22** Modification Number 001 Subcontract SHSU - 5000 - 002 between
Sam Houston State University and the Company dated August,
1996.
10.23(1) 1997 Stock Option Plan
10.24 Amendment Number 1 to License Agreement between the Company
and Battelle Memorial Institute dated June, 1998.
10.25 Amendment Number 1 to License Agreement between the Company
and Battelle Memorial Institute dated June, 1998.
10.26 Amendment Number 1 to License Agreement between the Company
and Battelle Development Corporation dated June, 1998.
10.27 Amendment Number 2 to License Agreement between the Company
and Battelle Memorial Institute dated June, 1998.
10.28 Sublicense Agreement between the Company and Thermoenergy
Environmental Corporation.
10.29 Shareholder Agreement by and among Foster Wheeler
Environmental Corporation, the Company and Thermoenergy
Environmental Corporation dated September 9, 1998.
10.30 Agreement between the Foster Wheeler Environmental Corporation
and the Company dated August 4, 1998.
10.31 Consulting Agreement between the Company and Nutrecycle
Ventures dated November 22, 1998.
10.32 License Agreement between the Company and Battelle Memorial
Institute effective December 30, 1997.
10.33 Form of Convertible Debenture dated August 24, 1998, with
Robert S. Trump.
10.34 Amendment Number 1 to License Agreement between the Company
and Battelle Memorial Institute effective December 30, 1997.
10.35(1) EmploymentAgreement between Alex G. Vasbender and the Company
dated November 18, 1998.
10.36(1)(9) Non Qualified Bonus Compensation Option Agreement for
P.L. Montesi
10.37(1)(9) Non qualified Bonus Compensation Option Agreement for
Dennis Cossey
10.38 Consulting Agreement between the Company and Washington
Consulting Alliance dated June 22, 1998.
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule (to be filed by amendment pursuant to
Rule 12b-25).
28.1* Form of Security Escrow Agreement.
* Incorporated by reference from the Company's Registration
Statement on Form S-18, File No. 33-46104-FW, effective June
24, 1992.
** Incorporated by reference from the Company's Registration
Statement on Form SB-2, File No. 333-21613.
(1) Management Contract or Compensatory Plan or Arrangement.
(2) Incorporated by reference from the Company's Form 10-Q of
March 31, 1993.
(3) Incorporated by reference from the Company's Form 10-Q of June
30, 1993.
(4) Incorporated by reference from the Company's Form 10-K of
September 30, 1993.
(5) Incorporated by reference from the Company's Form 10KA of
September 30, 1993.
(6) Incorporated by reference from the Company's Form 10-Q of
March 31, 1995.
(7) Incorporated by reference from the Company's Form 10-Q of June
30, 1995.
(8) Incorporated by reference from the Company's Form 10-Q of
March 31, 1996.
(9) Incorporated by reference from the Company's Form 10-Q of
September 30, 1999.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of
the period covered by this Report.
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
THERMOENERGY CORPORATION
By: /s/ P. L. Montesi
-----------------
P. L. Montesi
President, Chief Operating Officer,
Director and Principal Financial Officer
Signature Title Date
/s/ Dennis C. Cossey Chairman, Chief Executive March 28, 2000
- -------------------- Officer, Secretary and Director
Dennis C. Cossey (Principal Executive Officer)
/s/Primo L. Montesi President and Director March 28, 2000
- ------------------- (Principal Financial Officer)
Primo L. Montesi
/s/ J. Donald Phillips Director March 28, 2000
- ----------------------
J. Donald Phillips
- -----------------------
Dr. Louis J. Ortmann Director March 28, 2000
/s/ Andrew T. Melton
- --------------------------
Andrew T. Melton Director March 28, 2000
Director March 28, 2000
- ---------------------------
Dr. Paul A. Loeffler
- ---------------------------
Jerald H. Sklar Director March 28, 2000
Report of Independent Auditors
Board of Directors
ThermoEnergy Corporation
Little Rock, Arkansas
We have audited the accompanying balance sheets of ThermoEnergy Corporation (A
Development Stage Company) as of December 31, 1999 and 1998 and as of September
30, 1998, the related statements of operations and cash flows for the year ended
December 31, 1999, the three months ended December 31, 1998, and the years ended
September 30, 1998 and 1997, and for the period cumulative during development
stage through December 31, 1999, and the related statements of changes in
stockholders' equity (deficit) for each of the periods from October 1, 1991
through December 31, 1999. 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 did not audit the balance sheets of
the Company as of September 30, 1991 and 1990, and the related statements of
operations, changes in stockholders' equity (deficit) and cash flows for each of
the three years in the period ended September 30, 1991 and cumulative since
inception through September 30, 1991. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts cumulative during development stage through September 30,
1991 included in the statements of operations and cash flows cumulative during
development stage through December 31, 1999, is based solely on the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of ThermoEnergy Corporation (A Development Stage Company)
as of December 31, 1999 and 1998, and as of September 30, 1998, and the results
of its operations and its cash flows for the year ended December 31, 1999, the
three months ended December 31, 1998 and the years ended September 30, 1998 and
1997, and for the period cumulative during development stage through December
31, 1999, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 9, the Company is in the
development stage with no significant revenues from operations, has incurred net
losses since inception and will likely require substantial capital to continue
commercialization of the Company's technologies. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 9. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Little Rock, Arkansas
March 3, 2000
Exhibit (a)(1)(1)
THERMOENERGY CORPORATION
(A Development Stage Company)
BALANCE SHEETS
December 31, September 30,
------------ -------------
1999 1998 1998
---- ---- ----
ASSETS
Cash - Total Current Assets $ 101,091 $ 113,220 $ 242,486
Advances to officers (Note 6) 598,015 423,015 381,015
Accrued interest receivable - officers (Note 6) 98,930 58,247 49,567
Property and equipment, at cost:
Equipment 14,818 14,818 14,818
Furniture and fixtures 4,991 4,991 4,991
Less accumulated depreciation (19,809) (19,809) (19,809)
----------- ----------- -----------
- - -
----------- ----------- -----------
$ 798,036 $ 594,482 $ 673,068
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Accounts payable (Note 12) $ 661,176 $ 564,183 $ 590,903
Accrued interest payable - principally related
parties (Note 4) 414,425 299,130 246,671
Deferred compensation (Note 6) 1,660,695 1,282,114 1,192,779
Notes payable to stockholders (Note 4) 178,735 932,900 932,900
------- ------- -------
Total Current Liabilities 2,915,031 3,078,327 2,963,253
========= ========= =========
Convertible Debentures - principally related
parties (Notes 4 and 12) 2,199,379 956,000 906,000
--------- ------- -------
Total Liabilities 5,114,410 4,034,327 3,869,253
========= ========= =========
Commitments and contingencies (Notes 2, 3, 4, 7, 10,
11 and 12)
Stockholders' equity (deficit) (Notes 4, 7 and 12):
Preferred stock, non-voting, $1 par value:
Authorized - 10,000,000 shares; none issued
Common Stock, $.001 par value:
Series A Common Stock; Authorized - 10,000,000
shares; no shares issued and outstanding
Series B Common Stock; Authorized - 65,000,000
shares; issued: 3,883,618 shares at December 31,
1999 and 3,486,797 shares at December 31, 1998
and September 30, 1998; outstanding: 3,799,789
shares at December 31, 1999 and 3,402,968 shares
at December 31, 1998 and September 30, 1998 3,884 3,487 3,487
Additional paid-in capital 4,658,797 4,334,864 4,334,864
Deficit accumulated during the development stage (8,979,055) (7,778,196) (7,534,536)
---------- ---------- ----------
(4,316,374) (3,439,845) (3,196,185)
---------- ---------- ----------
$ 798,036 $ 594,482 $ 673,068
=========== =========== ===========
See notes to financial statements.
Exhibit (a)(1)(2)
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Cumulative Three
During Year Months
Development Ended Ended Year Ended
Stage Through December 31, December 31, September 30,
December 31, 1999 ------------ ------------ -------------
----------------- 1999 1998 1998 1997
---- ---- ---- ----
Operating expenses:
General and administrative $ 6,760,790 $ 1,018,076 $ 171,773 $ 556,243 $ 930,866
Payments under licenses
(Note 3) 797,266 65,000 65,000 40,000
Travel and entertainment 1,178,330 196,805 27,446 50,472 152,937
--------- ------- ------ ------ -------
8,736,386 1,279,881 199,219 671,715 1,123,803
--------- --------- ------- ------- ---------
Loss From Operations (8,736,386) (1,279,881) (199,219) (671,715) (1,123,803)
---------- ---------- -------- -------- ----------
Other income (expense):
Interest income (Note 6) 161,693 46,647 10,018 28,394 15,849
Gain on settlement of lawsuit
(Note 10) 293,779 293,779
Other income (Note 10) 49,550 49,550
Interest expense - principally
related parties (Note 4) (747,624) (310,887) (54,459) (153,778) (88,082)
-------- -------- ------- -------- -------
(242,602) 79,089 (44,441) (125,384) (72,233)
-------- ------ ------- -------- -------
Net Loss $(8,978,988) $(1,200,792) $ (243,660) $ (797,099) $ (1,196,036)
=========== =========== =========== ========== ============
Basic and Diluted per Common
Share (Notes 1, 4, 7 and 12):
Loss From Operations $ (2.31) $ (.31) $ (.05) $ (.17) $ (.29)
Net Loss $ (2.37) $ (.29) $ (.06) $ (.20) $ (.31)
See notes to financial statements.
Exhibit (a)(1)(3)
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Periods Ended September 30, 1988 Through December 31, 1999
Deficit
Series Accumulated
B Additional During the
Common Paid-in Development
Stock Capital Stage Total
----- ------- ----- -----
Issuance of stock, January 1988,
(2,205,762 shares at $.08
per share) $ 2,206 $ 178,094 $ $ 180,300
Net loss (290,483) (290,483)
-------- -------- -------- --------
Balance (deficit),
September 30, 1988 2,206 178,094 (290,483) (110,183)
Conversion of $412,000 of
debentures and accrued
interest, September 1989
(306,335 shares) 306 456,695 457,001
Net loss (338,985) (338,985)
-------- -------- -------- --------
Balance (deficit),
September 30, 1989 2,512 634,789 (629,468) 7,833
Net loss (255,036) (255,036)
-------- -------- -------- --------
Balance (deficit),
September 30, 1990 2,512 634,789 (884,504) (247,203)
Conversion of $63,000 of
unsecured debentures and
accrued interest at 10%,
March 1991, (44,286 shares) 44 70,813 70,857
Issuance of stock, May - June
1991, (387,880 shares:
366,630 at $1.60 per share;
21,250 shares at $.80 per
share) 388 603,219 603,607
Issuance of stock for interest,
June 1991, (1,375 shares at
$1.60 per share) 1 2,199 2,200
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)CONTINUED
Periods Ended September 30, 1988 Through December 31, 1999
Deficit
Series Accumulated
B Additional During the
Common Paid-in Development
Stock Capital Stage Total
------ -------- --------- -----
Issuance of stock for
expenses incurred by
stockholders, July 1991
(5,081 shares at $1.60 per share) $ 5 $ 8,124 $ $ 8,129
Net loss (670,179) (670,179)
-------- -------- -------- --------
Balance (deficit), September 30,
1991 2,950 1,319,144 (1,554,683) (232,589)
Issuance of stock, October -
December 1991 (150,925
shares at $1.60 per share) 151 241,329 241,480
Shares purchased in rescission
offer (10,562 shares) (11) (16,888) (16,899)
Issuance of stock, public
offering, August - September
1992 (344 shares at $16.00 per
share) 1 5,499 5,500
Net loss (562,751) (562,751)
-------- -------- -------- --------
Balance (deficit), September 30,
1992 3,091 1,549,084 (2,117,434) (565,259)
Issuance of stock, public offering
October 1992 - September 1993
(92,785 shares at $16.00 per
share) 93 1,484,457 1,484,550
Issuance of stock for exercise
of stock options, May 1993
(2,500 shares at $1.60 per share) 3 3,997 4,000
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)CONTINUED
Periods Ended September 30, 1988 Through December 31, 1999
Deficit
Series Accumulated
B Additional During the
Common Paid-in Development
Stock Capital Stage Total
----- ------- ----- -----
Issuance of warrants to
stockholder $ $ 6,333 $ $ 6,333
Conversion of $103,000 of
notes payable to stockholders
and accrued interest, December
1992 (6,438 shares) 6 102,994 103,000
Issuance of stock for
consulting services, June
1993 (9,375 shares at
$16.00 per share) 9 149,991 150,000
Net loss (1,207,921) (1,207,921)
-------- -------- -------- --------
Balance (deficit), September 30,
1993 3,202 3,296,856 (3,325,355) (25,297)
Issuance of warrants to
stockholders 226,000 226,000
Issuance of stock for exercise
of stock options, March 1994
(3,750 shares at $1.60 per share) 4 5,996 6,000
Issuance of stock for exercise
of warrants by stockholder,
August 1994 (3,677 shares at
$13.60 per share) 4 49,997 50,001
Net loss (767,427) (767,427)
-------- -------- -------- --------
Balance (deficit), September 30,
1994 3,210 3,578,849 (4,092,782) (510,723)
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 1999
Deficit
Series Accumulated
B Additional During the
Common Paid-in Development
Stock Capital Stage Total
----- ------- ----- -----
Issuance of warrants to stockholders $ $ 9,760 $ $ 9,760
Issuance of stock, May 1995
(6,250 shares at $8.00 per share) 6 49,994 50,000
Issuance of stock for
exercise of warrants by
stockholder, June 1995
(6,250 shares at $8.00 per share) 6 49,994 50,000
Issuance of stock for expenses, July 1995
(18,750 shares at $8.00 per share) 19 149,981 150,000
Net loss (896,998) (896,998)
-------- -------- -------- --------
Balance (deficit), September 30, 1995 3,241 3,838,578 (4,989,780) (1,147,961)
Issuance of warrants to stockholders 5,340 5,340
Net loss (551,621) (551,621)
-------- -------- -------- --------
Balance (deficit), September 30, 1996 3,241 3,843,918 (5,541,401) (1,694,242)
Issuance of stock, July 1997
(50,000 shares at $2.00 per share) 50 99,950 100,000
Conversion of $338,100 of notes
payable to stockholders and accrued
interest, July 1997 (195,596 shares) 196 390,996 391,192
Net loss (1,196,036) (1,196,036)
-------- -------- -------- --------
Balance (deficit), September 30, 1997 3,487 4,334,864 (6,737,437) (2,399,086)
Net loss (797,099) (797,099)
-------- --------- --------- ---------
Balance (deficit), September 30, 1998 3,487 4,334,864 (7,534,536) (3,196,185)
Net loss (three months) (243,660) (243,660)
-------- -------- -------- --------
Balance (deficit), December 31, 1998 3,487 4,334,864 (7,778,196) (3,439,845)
Issuance of stock in connection with 10%
notes payable to stockholders, January
1999 (67,600 shares at par value) 67 (67)
Conversion of $238,165 of notes payable to
stockholders and accrued interest, various
months during 1999 (147,602 shares) 148 295,056 295,204
Issuance of stock for expenses, August
1999 (181,619 shares at $.16 per share) 182 28,877 29,059
Net loss (1,200,792) (1,200,792)
-------- -------- -------- --------
Balance (deficit), December 31, 1999 $ 3,884 $4,658,797 $(8,979,055) $(4,316,374)
======= ========== =========== ===========
See notes to financial statements.
Exhibit (a)(1)(4)
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Cumulative Three
During Year Months
Development Ended Ended Year Ended
Stage Through December 31, December 31, September 30,
December 31, 1999 ------------ ------------ -------------
----------------- 1999 1998 1998 1997
---- ---- ---- ----
Operating activities:
Net loss $(8,978,988) $(1,200,792) $(243,660) $(797,099) $(1,196,036)
Items not requiring
(providing) cash:
Depreciation 19,809 2,831 2,831
Expenses funded by Common
Stock issuance 625,338 29,059 53,092
Other (Note 10) (290,438) (293,779) 16,000
Changes in:
Advances to officers (796,998) (175,000) (42,000) (122,650) (162,165)
Other receivables (98,930) (40,683) (8,680) (25,898) (14,531)
Accounts payable 790,799 226,616 (26,720) (142,757) 238,762
Accrued expenses 600,220 301,090 52,459 153,778 34,990
Deferred compensation 1,859,677 378,581 89,335 323,235 289,770
--------- ------- ------ ------- -------
Net cash used in
operating activities (6,269,511) (774,908) (179,266) (592,560) (753,287)
---------- -------- -------- -------- --------
Investing activities:
Purchases of fixed assets (19,808)
Other (Note 10) 290,438 293,779
------- -------
Net cash used in
investing activities 270,630 293,779
------- -------
Financing activities:
Proceeds from issuance of
Common Stock and warrants 2,720,562 100,000
Proceeds from notes payable 1,665,609 20,000 656,000
Proceeds from convertible
debentures 1,760,000 469,000 50,000 750,000
Payments on notes payable (154,609)
Other 108,410
---------- -------- -------- --------
Net cash provided by
financing activities 6,099,972 469,000 50,000 770,000 756,000
--------- ------- ------ ------- -------
Increase (decrease) in cash 101,091 (12,129) (129,266) 177,440 2,713
Cash, beginning of period 0 113,220 242,486 65,046 62,333
------- ------- ------- ------ ------
Cash, end of period $ 101,091 $ 101,091 $ 113,220 $ 242,486 $ 65,046
=========== ========= ========= ========= ==========
See notes to financial statements.
Exhibit (a)(1)(5)
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 1: Organization and summary of significant accounting policies
- --------------------------------------------------------------------
Change in fiscal year end
- ---------------------------
During 1998, the Board of Directors of ThermoEnergy Corporation ("the Company")
approved a change in the Company's fiscal year end from September 30 to December
31. The Company filed a transition report on Form 10-Q with the Securities and
Exchange Commission for the period from October 1, 1998 through December 31,
1998.
Nature of business
- ------------------
The Company was incorporated in January 1988, for the purpose of marketing and
developing certain environmental technologies. These technologies include three
chemical processes known as Sludge-to-Oil Reactor System, or STORS, and Nitrogen
Removal, or NitRem, and Ammonia Recovery Process, or ARP, which were developed
through research projects at Battelle Memorial Institute (Battelle). A fourth
technology, a dual-shell pressure balance vessel, known as the Dual Shell
Reactor ("DSR"), is the unique reactor equipment in which the STORS and NitRem
chemistries are conducted. STORS, NitRem, ARP and DSR are referred to
collectively as the "Technologies". (See Note 12 for discussion of the Company
filing for a patent for a fifth technology during January 2000.)
The Company was formed for the transfer of technology from American Fuel and
Power Corporation ("AFP") in 1988 to continue development of the STORS
technology under assignment of the license from AFP, the original licensee.
Management of the AFP division developing the STORS technology became management
of the Company concurrent with the terms of the transfer. The license was
assigned to the Company under an agreement requiring that 70 percent of the
Company's initial outstanding Common Stock, approximately 1,543,750 shares, be
issued to AFP for distribution to AFP stockholders.
The Company is totally dependent upon the engineering, laboratory, research and
development skills and expertise of Battelle to supervise the design and
implementation of a STORS, NitRem or ARP demonstration facility, for the
conducting of laboratory analysis and characterization of various waste streams
to be processed through a STORS, NitRem or ARP unit, to collect and analyze
performance data generated during a demonstration test, and for on-going
research and development of the Technologies. The Company owns the worldwide
licensing rights to the Technologies, except for STORS in Japan, pursuant to
exclusive license agreements with Battelle. The Technologies are currently in
the demonstration phase. No commercial contracts have been awarded to the
Company.
Property and equipment
- -----------------------
Property and equipment are depreciated over the estimated useful life of each
asset. Depreciation is computed primarily using the straight-line method.
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 1: Organization and summary of significant accounting policies (continued)
- -------------------------------------------------------------------------------
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Loss per common share
- ----------------------
Loss per common share is computed by dividing the net loss for the period by the
weighted average number of shares outstanding during the period. Stock options
and warrants issued within twelve months of the initial public offering filing
date (February 27, 1992,) have been treated as outstanding for all periods
presented in accordance with SAB 83 Topic 4D. The adjusted weighted average
number of common shares used in the basic and diluted loss per share
computations were 4,105,128, 4,045,557, 4,045,557, 3,844,636 and 3,786,998
shares for the periods ended December 31, 1999 and 1998, and September 30, 1998
and 1997, and cumulative since inception through December 31, 1999,
respectively. Warrants to purchase approximately 671,000 shares of Series B
Common Stock, stock options awarded to officers for 300,000 shares of Series B
Common Stock and stock options under the 1997 Stock Option Plan, which provides
for the issuance of up to 750,000 shares of Series B Common Stock, were not
included in the computation of diluted loss per share since the effect would be
antidilutive. See Notes 4 and 12 for information regarding convertible
debentures issued during 1998, 1999 and 2000 and for additional awards of stock
options.
Reclassifications
- -----------------
Certain amounts in the 1998 and 1997 financial statements have been reclassified
in order to conform with the reporting format used for the 1999 financial
statements.
Note 2: Joint venture corporation agreement
- -----------------------------------------------
During 1998, the Company and Foster Wheeler Environmental Corporation ("FWEC")
agreed to form ThermoEnergy Environmental Corporation ("TENC") to act as a joint
venture for purposes of, among other things, developing, marketing and utilizing
the ARP technology. The shareholders' agreement executed in connection therewith
obligates the Company to sub-license the ARP technology to TENC (see Note 3) and
FWEC to provide funding, not to exceed $500,000, for the demonstration project
with the City of New York, which is more fully discussed in Note 10. The
Company's ownership percentage will be 49.9% (requiring a cash capital
contribution of $499) and FWEC's ownership percentage will be 50.1% of the
outstanding stock of TENC. As of December 31, 1999, TENC had not been
capitalized and had no transactions.
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 3: License and marketing agreements
- -----------------------------------------
The license agreements with Battelle permit the Company to commercialize the
Technologies with respect to municipal, industrial and Department of Defense
hazardous and non-hazardous water/wastewater/sludge processing. Payments under
the terms of the license agreements have been charged to operations.
The license agreements provide for payment of royalties to Battelle from
revenues generated using the Technologies. The Company has not been required to
make royalty payments to Battelle under the agreements since no revenues have
been generated from the use of the Technologies.
In connection with the agreement to form of TENC (see Note 2), the Company
sub-licensed the ARP technology to TENC. The sub-license agreement provides for
the payment of royalties to the Company when revenues are generated from the use
of the Technologies by TENC.
The Company entered into a memorandum of understanding with Foster Wheeler and
Mitsui & Co. (U.S.A.) Inc. in September 1996 to pursue various water and waste
water projects in Brazil, Mexico and Peru. In April 1996, the Company entered
into a teaming agreement with Roy F. Weston, Inc. to jointly pursue both
municipal and governmental projects using the Technologies. In March 1996, the
Company executed a marketing agreement with a Georgia corporation for the
purpose of marketing the Technologies in Georgia and Florida (see Note 7). The
Company entered into a ten-year worldwide marketing agreement with Foster
Wheeler USA Corporation in September 1994, for the purpose of marketing,
developing and commercializing the Technologies. The agreement provides for
three-year extensions after the initial period and conditions for changing or
terminating the arrangement.
The Company entered into the agreements referred to above and in Notes 2 and 10
as part of its business strategy of creating collaborative working relationships
with established engineering and environmental companies. Management believes
that such relationships will limit the Company's participation in future
projects to providing the Technologies and technical support relevant to the
design of STORS, NitRem, ARP and/or the DSR portion of such projects. The
Company may be required to bear a portion of the operational costs of such
collaborative efforts. Accordingly, the profitability of future projects and the
Company's financial success may be largely dependent upon the abilities and
financial resources of the parties collaborating with the Company. (See Note 12
for discussion of the Company filing for a patent for a fifth technology during
January 2000.)
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 4: Borrowings, principally from related parties
- -----------------------------------------------------
Notes payable to stockholders consisted of the following:
December 31, September 30,
------------ -------------
1999 1998 1998
---- ---- ----
6.63% unsecured notes $158,735 $396,900 $ 396,900
10% unsecured notes 20,000 536,000 536,000
------ ------- -------
$178,735 $932,900 $932,900
======== ======== ========
The 6.63% notes outstanding at December 31, 1999 mature during the year ending
December 31, 2000. The notes provide that the principal balances and accrued
interest will become immediately due and payable at the closing of the next
public offering of securities of the Company should that event occur prior to
the stated maturity dates. In addition, if the Company obtains financing from a
third party on terms more favorable to the third party than the terms of the
notes to the stockholders, the Company and the stockholders may agree to modify
the notes to the stockholders to reflect the more favorable terms. During 1999
and 1997, the Company converted $238,165 and $338,100, respectively, of the
6.63% notes and related accrued interest to 147,602 and 195,596 shares,
respectively, of Series B Common Stock (see Note 7). Management anticipates that
the remaining $158,735 of 6.63% notes and related accrued interest will be
converted to shares of the Company's Series B Common Stock if sufficient funds
are not available to repay the notes as they mature during 2000.
During the year ended September 30, 1997, the Board of Directors authorized the
Company to borrow from stockholders up to $700,000 to fund operations through
the completion of a proposed public offering (see Note 7). The terms of the 10%
notes provided for maturities six months from the date of execution or the
closing of the proposed public offering, whichever was sooner. The notes also
provided for the issuance of shares of Series B Common Stock to holders of the
notes in the ratio of one share for each $10 loaned to the Company (see Note 7).
Since the public offering did not occur, the Company issued convertible
debentures (described below) during 1999 and 1998 in exchange for all but
$20,000 (which management anticipates will be exchanged for a convertible
debenture during 2000) of the 10% notes and related accrued interest.
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 4: Borrowings, principally from related parties (continued)
- ----------------------------------------------------------------
During 1998 and 1999, the Company's Board of Directors approved the issuance of
up to $2,500,000 of Series 98, 15% Convertible Debentures, due January 15, 2003
(see Note 12 for approval of a $5,000,000 increase in the authorized amount of
the Debentures during 2000). Debentures with an aggregate principal balance of
$469,000, $50,000 and $750,000 were sold for cash during during the periods
ended December 31, 1999 and 1998, and September 30, 1998, respectively.
Debentures with an aggregate principal balance of $644,756 and $156,000 were
issued to stockholders during the years ended December 31, 1999 and September
30, 1998 in exchange for the 10% notes and related accrued interest due to them
by the Company. During the year ended December 31, 1999, the Company issued a
Debenture in the amount of $129,623 to Battelle in satisfaction of an accounts
payable balance. The holders of the Debentures can convert the principal amount
and accrued interest into shares of Series B Common Stock at the conversion
price of $2.00 per share at any time prior to the maturity date.
Based on the borrowing rates currently available to the Company for borrowings
with similar terms, the fair value of borrowings approximated the book value of
such borrowings at December 31, 1999.
Note 5: Income taxes
- --------------------
The Company uses the liability method of accounting for income taxes as required
by Statement of Financial Accounting Standards No. 109. The Statement provides
that 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 are reflected in deferred taxes. A valuation allowance
equal to the total of the Company's deferred tax assets has been recognized for
financial reporting purposes. The net changes in the valuation allowance during
the periods ended December 31, 1999 and 1998, and September 30, 1998, were
increases of approximately $447,000, $90,000 and $302,000, respectively. The
Company's deferred tax liabilities are not significant.
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 5: Income taxes(continued)
- -------------------------------
Significant components of the Company's deferred tax assets are as follows:
December 31, September 30,
------------ -------------
1999 1998 1998
---- ---- ----
Net operating loss
carryforwards $2,454,000 $2,151,000 $2,095,000
Deferred compensation 631,000 487,000 453,000
Capitalized costs for income
tax reporting purposes 78,000 78,000 78,000
Other 36,000 36,000 36,000
------ ------ ------
3,199,000 2,752,000 2,662,000
Valuation allowance for
deferred tax assets (3,199,000) (2,752,000) (2,662,000)
---------- ---------- ----------
$ 0 $ 0 $ 0
========== ========== ===========
A reconciliation of income tax expense (credit) at the statutory rate to income
tax expense at the Company's effective rate is shown below for the period ended:
December 31, September 30,
------------ -------------
1999 1998 1998 1997
---- ---- ---- ----
Computed at the statutory
rate (34%) $(408,269) $(82,844) $(271,014) $(406,652)
Increase in taxes resulting from
net operating loss benefit
not recognized 408,269 82,844 271,014 406,652
------- ------ ------- -------
Provision for income taxes $ 0 $ 0 $ 0 $ 0
========= ======== ========= ==========
The Company has net operating loss carryforwards at December 31, 1999 of
approximately $6,450,000 which expire in various amounts during 2003 through
2019.
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 6: Related party transactions
- ----------------------------------
During the periods ended December 31, 1999 and 1998, and September 30, 1998 and
1997, the Company advanced an aggregate of $175,000, $42,000, $122,650, and
$162,165, respectively, to officers of the Company. The advances outstanding are
due on demand with interest at the average prime rate of a local bank. Interest
income on the advances amounted to $40,683, $8,680, $25,899, and $14,531 for the
periods ended December 31, 1999 and 1998 , and September 30, 1998 and 1997,
respectively. See Notes 4, 7 and 12 for information concerning notes payable and
other transactions with stockholders.
During the periods ended December 31, 1999 and 1998, and September 30, 1998 and
1997, the Company incurred expenses for support services by Battelle of
approximately $86,000, $14,000, $52,000 and $72,000, respectively. See Notes 4
and 7 for information concerning other transactions with Battelle.
During 1991, the Board of Directors adopted a resolution specifying amounts of
deferred compensation for the Company's Chief Executive Officer and the
Company's President for services rendered prior to September 30, 1991. The Board
of Directors also approved employment agreements with the officers effective
January 1, 1992 specifying minimum levels of compensation and terms of
employment. The agreements provide a minimum annual salary of $72,000 to each of
the individuals with 10% annual increases until the salary for each individual
reaches $175,000. The agreements provide for incentive compensation in addition
to the above described salary, not to exceed 50% of such salary determined in
accordance with a formula to be established annually in good faith by a
committee of the Board of Directors. Any amounts earned as salary and incentive
compensation but not paid by the Company are classified as deferred compensation
and accrue interest based on the prime rate of a local bank until payment.
Deferred incentive compensation aggregating $50,000 has been approved by the
Board of Directors. No incentive compensation was earned during the periods
ended December 31, 1999 and 1998, and September 30, 1998 and 1997. Compensation
expense aggregating $97,949, $25,555, $73,911 and $49,708 was accrued during the
periods ended December 31, 1999 and 1998, and September 30, 1998 and 1997,
respectively, pursuant to the interest provisions of the compensation
arrangements. The Board resolution provides that amounts due from officers may
be offset against accrued deferred compensation.
In addition to the compensation described above, the agreements specify that the
Company will provide $250,000 of life insurance, financial planning and tax
preparation, annual medical examinations and membership dues in a social or
business club. Also, should the individuals' employment terminate within one
year of a change in control, the agreements require a payment of 2.99 times
annual salary.
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 6: Related party transactions (continued)
- ----------------------------------------------
During November 1998, the Company entered into an employment agreement with an
individual to serve as the Company's Executive Vice President and Senior Vice
President of Corporate Technology. In order to assist the Company in conserving
cash, an amendment to the agreement was executed which provides the executive
with a half-time position for a period not to exceed twelve months. The
employment agreement provides for, among other things, basic, incentive and
other compensation. The Company leases office space on a month to month basis
from a company of which this individual is an officer and stockholder.
Note 7: Common Stock
- --------------------
During 1994 and 1996, the Company's stockholders approved four-to-one reverse
stock splits of the Company's Common Stock. These reverse stock splits were
implemented during 1997. All numbers of Common Stock shares and per share data
have been restated to reflect the reverse stock splits.
During 1996, the Board of Directors of the Company approved the execution of a
nonbinding letter of intent with a NASD member broker-dealer to act as managing
underwriter in connection with a proposed public offering. During 1997, the
broker-dealer informed the Company that it would be unable to complete the
proposed public offering. The Company terminated its relationship with the
broker-dealer and filed a lawsuit against the firm (see Note 10). Deferred
public offering expenses of approximately $282,000 were expensed as of September
30, 1997 as a result of the failure of the public offering.
In January 1999, the Company issued 67,600 shares of Series B Common Stock to
the holders of the 10% notes payable to stockholders in accordance with the
related note agreements. In August 1999, the Company issued 181,619 shares of
Series B Common Stock in satisfaction of expenses aggregating $29,059. The
Company issued 147,602 shares of Series B Common Stock to the holders of 6.63%
notes payable to stockholders, which had matured during the year ended December
31, 1999, in the aggregate amount of $295,204, including $57,039 of accrued
interest. During 1997, the Company and a stockholder agreed to convert $338,100
of 6.63% notes payable and related accrued interest of $53,092 to 195,596 shares
of Series B Common Stock. The stockholder also purchased 50,000 shares of Series
B Common Stock at $2.00 per share.
During June 1999, the Board of Directors approved executive bonuses for two
officers in the form of 150,000 non-qualified stock options to each officer. The
options expire in five years and are exercisable at $2.00 per share. Since the
exercise price approximates the fair value of the Company's Series B Common
Stock, no compensation expense was accrued in the accompanying financial
statements (see Note 12).
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 7: Common Stock (continued)
- --------------------------------
During 1995, a stockholder purchased 6,250 shares of Common Stock at $8.00 per
share and warrants for 6,250 shares of Common Stock at $8.00 per share at a
price equal to the par value of the Company's Common Stock. The stockholder
exercised the warrants during 1995.
During the year ended September 30, 1995, the Board of Directors approved the
issuance of 18,750 shares of the Company's Common Stock, at $8.00 per share
(based on the price for the May 1995 sale of the Company's Common Stock), to
Battelle in lieu of a cash payment for $75,000 of license fees and $75,000 of
expenses.
During the year ended September 30, 1994, the Company issued Common Stock
warrants, at prices ranging from $.40 to $3.20 per warrant, to stockholders for
289,375 shares of the Company's Common Stock. The Company issued Common Stock
warrants, at a price equal to par value of the Company's Common Stock, to a
stockholder for 395,845 shares during the year ended September 30, 1993. The
related Warrant Agreements provide for an exercise period of 10 years from the
date of issuance at prices ranging from $12.80 to $14.40 per share, subject to
adjustment in the event that the Company issues shares of Common Stock at a
price per share which is less than the warrant price or the current market value
of such shares. The exercise prices for the warrants were adjusted to prices
ranging from $2.00 to $8.00 during the year ended September 30, 1995 due to the
sale of Common Stock in May 1995 for $8.00 per share. During the year ended
September 30, 1997, a stockholder cancelled warrants for 195,596 shares of
Common Stock at an exercise price of $8.00 per share in connection with the
conversion of notes payable to Common Stock described below. During the year
ended September 30, 1994, a stockholder exercised warrants for 3,677 shares at
$13.60 per share.
In connection with the issuance of 6.63% notes payable to stockholders described
in Note 4, the Company sold warrants to stockholders for 187,500 shares of the
Company's Common Stock. The related Warrant Agreements provide for an exercise
period of 4 years from the date of issuance at a price of $2.00 per share, as
adjusted per the terms of the Warrant Agreements.
An agreement with Centerpoint Power Corporation (CPC) specifies compensation at
an hourly rate plus expenses for services rendered and grants CPC stock warrants
for 701,875 shares of Common Stock (which were registered in connection with the
Company's public offering), exercisable at $.16 cent per share, if CPC obtains
public funding for a demonstration facility or obtains capital financing from an
investor entity. The agreement expires in April 2001. No payments have been made
to CPC under the terms of the agreement and CPC has not obtained funding which
obligates the Company to compensate CPC under the agreement.
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 7: Common Stock (continued)
- --------------------------------
During November 1998, the Company entered into a consulting agreement with a
third party in connection with the City of New York demonstration project. The
agreement specifies compensation at an hourly rate plus expenses for services
rendered. In the event the Company sells an ARP unit to or operates an ARP unit
for the City of New York under a privatized agreement, the agreement provides
for additional cash compensation based upon a percentage of the overall capital
cost of the ARP demonstration facility and for the issuance of warrants to
purchase 62,500 shares of Series B Common Stock of the Company at an exercise
price of $4.00 per share, exercisable within two years from the date of issuance
of the warrants.
The marketing agreement with a Georgia corporation discussed in Note 3 provides
for the issuance to the corporation of 62,500 warrants for 62,500 shares of the
Company's Common Stock exercisable within 10 years from the date of granting the
warrants at a price of $2.00 per share within 90 days upon the signing of an
agreement with a customer to purchase or utilize the Technologies.
In connection with the assignment of the license for the STORS technology from
AFP, 1,543,750 shares of the Company's Common Stock were issued to AFP. The
shares were placed in a Voting Trust and distributed to the AFP stockholders.
The Company owns 83,829 shares of its Common Stock previously included in the
Voting Trust pursuant to a settlement agreement with a former AFP stockholder.
These treasury shares have a zero cost basis.
The Company's 1997 Stock Option Plan (the "Plan") provides for incentive and
non-incentive stock options for an aggregate of 750,000 shares of Series B
Common Stock for key employees and non-employee Directors of the Company. The
Plan, which terminates in May 2007 or sooner if all of the options granted under
the Plan have been exercised, provides that the exercise price of each option
must be at least equal to 100% of the fair market value of the Common Stock on
the date of grant. The Plan contains automatic grant provisions for non-employee
Directors of the Company. At December 31, 1999 the Company was committed to
issue options under the automatic grant provisions for 15,000 shares of Series B
Common Stock. No other grants under the Plan have been made.
At December 31, 1999, approximately 3,341,000 shares of Series B Common Stock
were reserved for future issuance under warrant and stock option arrangements
and the 1997 Stock Option Plan (see Note 12).
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 8: Employee stock ownership plan
- -------------------------------------
The Company has adopted an Employee Stock Ownership Plan. However, as of
December 31, 1999, the Plan had not been funded nor submitted to the Internal
Revenue Service for approval.
Note 9: Management's consideration of going concern matters
- -----------------------------------------------------------
The Company has incurred net losses since inception and will likely require
substantial capital to continue commercialization of the Technologies. The
financial statements have been prepared assuming the Company will continue as a
going concern, realizing assets and liquidating liabilities in the ordinary
course of business and do not reflect any adjustments that might result from the
outcome of the aforementioned uncertainties. Management is considering several
alternatives for mitigating these conditions during the next year. As more fully
described in Note 12, the Company is authorized to issue an additional
$5,000,000 of Series 98 Convertible Debentures. The sale of stock pursuant to
private placement or public offerings and fees from projects involving the
Technologies are other alternatives management is pursuing. Additional funds may
be necessary in the event the Company takes on other projects or makes an
acquisition of another company to facilitate the Company's commercial
demonstration of the Technologies. If the Company is unable to enter into
commercially attractive collaborative working arrangements for one or more
commercial or industrial projects, the Company may sub-license the Technologies
to third parties.
The overall goal of the Company is to successfully complete a demonstration
project for STORS, NitRem and/or ARP (see Note 12). Management plans to utilize
any demonstration facilities to expand the visibility of the Company in
municipal, industrial, Department of Defense and Department of Energy markets. A
successful demonstration project is the single most important business factor in
implementation of the Company's plan of operations.
Management has determined that the financial success of the Company may be
largely dependent upon the ability and financial resources of established third
parties collaborating with the Company with respect to projects involving the
Technologies. As described more fully in Notes 2 and 3, the Company has entered
into agreements with third parties in order to pursue this business strategy.
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 10: Commitments and contingencies
- --------------------------------------
The Company is the general contractor in connection with a Technology
demonstration for the City of Colton, California, which is being funded by a
federal grant. The Company has contracted with Foster Wheeler Environmental
Corporation ("FWEC") to fabricate, install and operate the demonstration unit.
During 1999, the Company sold scrap parts to the project for $49,550. The
Company has received funds aggregating approximately $2,560,000 from the City of
Colton of which approximately $2,451,000 have been paid to FWEC and other
subcontractors. The custodial funds held by the Company pending payment to
subcontractors for the project, are maintained in a separate bank account which
is not included in the accompanying financial statements.
During 1996, the Company signed an agreement with the City of New York which
allows the Company to demonstrate certain services and equipment. The Company
agreed to provide the test equipment at no cost to the City of New York for a
period of not less than 150 consecutive calendar days nor more than 200
consecutive calendar days from the start-up of the demonstration. As described
in Note 2, the Company and Foster Wheeler Environmental Corporation agreed to
form a corporation during 1998 to conduct the demonstration project.
During 1998, the Company filed a lawsuit seeking compensatory and punitive
damages from the broker-dealer involved in the Company's 1997 failed public
offering. During June 1999, the Company and the broker-dealer entered into a
release and settlement agreement. In connection with this agreement, the Company
received $75,000 in cash, 50,000 shares of common stock of the parent company of
the broker-dealer (the "Stock"), and 20,000 warrants to purchase shares of the
Stock at a price of $4.00 per share for a period of five years from the date of
the agreement. The Company sold all 50,000 shares of the Stock during 1999. The
Company also exercised warrants for 5,000 shares of the Stock which were sold
during 1999 (see Note 12 for information concerning the sale of the remaining
warrants during January 2000). A gain of $293,779 was recorded in the
accompanying 1999 financial statements in connection with the release and
settlement agreement.
Note 11: Executive Bonus Plan
- -----------------------------
During 1997, the Company's Board of Directors established a five-year Executive
Bonus Plan (the "Bonus Plan") to reward executive officers and other key
employees based upon the Company achieving certain performance levels. Under the
Bonus Plan, commencing with the Company's 1997 fiscal year and for each of the
four fiscal years thereafter, the Company will have discretion to award bonuses
in an aggregate amount in each fiscal year equal to 1% of the Company's net
sales revenues for each fiscal year, provided and on condition that the Company
achieves a net profit before taxes of not less that 5% of net sales but less
that 15% of net sales.
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 11: Executive Bonus Plan (continued)
- -----------------------------------------
The Board of Directors approved bonus payment percentages for certain
individuals for the year ended September 30, 1997. In the future, the
Compensation Committee of the Board of Directors of the Company will determine
the allocable amounts or percentages of the bonus pool which may be paid
annually to participants. No persons were entitled to receive bonus payments
since the inception of the plan.
Note 12: Subsequent events
- ---------------------------
During January 2000, the Company exercised the remaining warrants received in
connection with the agreement with a broker-dealer (more fully discussed in Note
10) for 15,000 shares of stock which were sold simultaneously with the exercise
of the warrants. A gain of $23,644 was realized in connection with this
transaction.
During January 2000, the Company filed a patent application for the ThermoEnergy
Corporation Integrated Power Systems ("TIPS") technology, a clean energy process
for converting fossil fuels to energy without air emissions. Management
anticipates that the Company will rely on its own resources and that of
strategic partners in the energy business to develop TIPS.
During February 2000, the Company's Board of Directors approved the issuance of
an additional $5,000,000 (increasing the authorized amount to $7,500,000) of the
Series 98, 15% Convertible Debentures, due January 15, 2003. Debentures
aggregating $97,000 were issued for cash during January and February of 2000.
Debentures aggregating $195,377 were issued during February 2000 in satisfaction
of an accounts payable balance.
During February 2000, a stockholder exercised warrants to purchase 2,500 shares
of Series B Common Stock at $2.00 per share.
During February 2000, the Board of Directors awarded 100,000 non-qualified stock
options to purchase Series B Common Stock to the Company's Executive President
and Senior Vice President of Corporate Technology. The options expire in five
years and are exercisable at $2.00 per share.
During March 2000, the Board of Directors awarded 250,000 non-qualified stock
options to purchase Series B Common Stock to both the Chief Executive Officer
and the President of the Company. The options expire in five years and are
exercisable at $2.00 per share.
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 13: Unaudited condensed financial statements - transition period
- ---------------------------------------------------------------------
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q, Article 10 of Regulation S-X
and the Exchange Act rules for transition reports for the change in the
Company's fiscal year from September 30 to December 31. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The 1998 financial
statements have been derived from the audited financial statements at that date,
which are included herein, and reference is made to those financial statements
and footnotes.
Condensed Statements of Operations
Three Months Ended December 31, 1998 and 1997 and Period Cumulative During
Development Stage Through December 31, 1998
Cumulative
1998 1997 1998
---- ---- ----
(Unaudited)
Operating expenses:
General and administrative $ 171,773 $ 120,526 $ 5,742,714
Payments under licenses 732,266
Travel and entertainment 27,446 29,024 981,525
---------- ---------- -----------
199,219 149,550 7,456,505
--------- --------- -----------
Loss from Operations (199,219) (149,550) (7,456,505)
--------- --------- -----------
Other Income (Expense)
Interest income 10,018 5,855 115,046
Interest expense (54,459) (23,371) (436,737)
---------- ---------- -----------
(44,441) (17,516) (321,691)
---------- ---------- -----------
Net Loss $(243,660) $(167,066) $(7,778,196)
========= ========= ===========
Basic and Diluted per share
Loss from Operations $ (.05) $ (.04) $ (1.99)
Net Loss $ (.06) $ (.04) $ (2.07)
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note 13: Unaudited condensed financial statements - transition period
(continued)
- --------------------------------------------------------------------------------
Condensed Statements of Cash Flows
Three Months Ended December 31, 1998 and 1997 and Period Cumulative During
Development Stage Through December 31, 1998
Cumulative
1998 1997 1998
---- ---- ----
(Unaudited)
Net cash used in operations $(179,266) $ (54,380) $(5,494,603)
Investing activities:
Purchases of fixed assets (19,808)
Other (3,341)
-------- --------- ------------
(23,149)
-------- --------- ------------
Financing activities:
Proceeds from common stock 2,720,562
Proceeds from notes payable 20,000 1,665,609
Proceeds from debentures 50,000 1,291,000
Other (46,199)
-------- --------- ------------
50,000 20,000 5,630,972
-------- --------- ------------
Increase (decrease) in cash (129,266) (34,380) 113,220
Cash, beginning of period 242,486 65,046 0
-------- --------- ------------
Cash, end of period $113,220 $ 30,666 $ 113,220
======== ========= ===========
Notes to unaudited condensed financial statements - transition period
(1) The adjusted weighted average number of common shares outstanding used in
the basic and diluted loss per share computations were 4,045,557 shares for
the three months ended December 31, 1998 and 1997 and 3,751,814 shares for
the period cumulative during development stage through December 31, 1998.
(2) Certain amounts in the 1997 financial statements have been reclassified to
conform to the reporting format used in the 1998 financial statements.
Exhibit 10.38
CONSULTING AGREEMENT
This agreement is entered into this 22 day of June, 1998, by and between,
ThermoEnergy Corporation, ("TEC"), having it principal place of business at 323
Center Street, Suite 1300, Little Rock, Arkansas, 72201 and Thomas L. Burgum
("Consultant") having offices at Washington Consulting Alliance, 421 New Jersey
Ave., SE, Washington, D.C. 20003.
WHEREAS, the San Bernadino Valley Municipal Water District ("SBVMWD") was
name recipient of a $3,000,000 grant (the "Grant") from the United States
Government pursuant to Public Law 104-204 to host the demonstration of a new
sludge and wastewater treatment technology (the "Demonstration Project"), to
wit:
STORS/DSR;
WHEREAS, TEC is the worldwide licensee of the STORS/DSR Technology (the
"Technology") and is interested in proceeding with the Demonstration Project;
WHEREAS, Consultant was instrumental in securing Congressional
appropriation of the Grant; and
WHEREAS, TEC desires to retain Consultant as in independent contractor to
provide professional services in connection with the Demonstration Project;
NOW THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto mutually agree as follows:
1. SCOPE OF WORK AND SERVICES
A. Consultant shall furnish such services to TEC as TEC and Consultant
jointly determine to be beneficial to TEC from time to time, and at such
places(s) as shall be mutually agreeable, including, but not limited to the
following:
(1) to promote TEC and the Demonstration Project; and
(2) to serve as a liaison between TEC and the SBVMWD;
B. Consultant agrees to perform all work to the complete satisfaction of
TEC. If the quality of the Consultant's work is not satisfactory, TEC has in its
sole discretion the right to (1) require Consultant to meet with TEC to review
the quality of the work and resolve matters concerned and (2) to submit
unresolved matters for binding arbitration pursuant to Article 9 of this
agreement.
2. TERM AND TERMINATION
A. The term of this agreement is twenty four (24) months. Notwithstanding,
the term specified above, Consultant's compensation pursuant to Article 3 of
this agreement will not begin until the EPA releases the necessary funds to
commence the Demonstration Project. TEC may in its sole discretion terminate
this agreement at any time if the purpose, condition or needs of TEC change with
respect to the Demonstration Project, such as cancellation of the Demonstration
Project by the EPA or SBVMWD, provided that Consultant is given thirty (30) days
notice.
B. The parties may modify or extend the terms of this agreement through an
addendum or other instrument signed by the parties.
3.COMPENSATION
A. In consideration of Consultants performance of the Scope of Work and
Services pursuant to Article 1 of this agreement, TEC shall pay Consultant Five
Thousand Dollars ($5,000) per month upon release of the funds frm the EPA
necessary to commence the Demonstration Project. TEC shall reimburse Consultant
for all reasonable and actual expenses incurred in the performance of work under
this Agreement, provided any and all proposed expenditures first approved in
writing by TEC.
B. TEC agrees to pay all fees and expenses within thirty days after receipt
of an invoice for same from Consultant. Invoices shall be sent to TEC at the
address in Article 8 of this agreement.
4. LIMITATION OF LIABILITY
At all times herein, Consultant, his employees, agents and servants in
performance of Article 1 of this Agreement shall be deemed to be performing as
an independent contractor and not as agents, employees or servants of TEC.
5. WARRANTY AND REPRESENTATIONS
Consultant warrants and represents to use his best efforts at all times
herein, to act in good faith at all times herein and to perform in an acceptable
profession manner in furtherance of the terms of Article 1 of this agreement.
Consultant makes no guarantee as to the result of any task undertaken by
Consultant under the terms of this agreement.
6. GOVERNING LAW
This agreement shall be government by and controlled in accordance with the
laws of the State of Arkansas.
7. ASSIGNMENT
Neither party to this agreement my assign and interest in, nor any other
right of obligation thereunder to any third party, nor may a security interest
therein by created without the prior written consent of the other party.
8. NOTICES
Any notice to be given under this agreement shall be given by enclosing the
same in a sealed, postage prepaid envelop, and depositing the same in the United
States Postal Services, addressed as follow:
If to TEC: Mr. Denis Cossey, CEO
----------
ThermoEnergy Corporation
323 Center Street, Suite 1300
Little Rock, AR 72201
If to Consultant: Mr. Tom Burgum
-----------------
Washington Consulting Alliance
421 New Jersey Ave. Suite 20A
Washington, D.C. 20003
9. DISPUTE RESOLUTION
In the event of a disagreement or dispute regarding matter covered by this
Agreement, which cannot be resolved by mutual agreement, the parties hereto
shall submit such disagreement of dispute to binding arbitration in accordance
with the rules and procedures of the American Arbitration Association.
Arbitration shall take place in Little Rock, Arkansas. Any questions of law
shall be decided under the laws of the State of Arkansas. It is the intention of
the parties hereto that this provision shall govern all disputes.
10. ENTIRE AGREEMENT
This agreement is the entire agreement between the parties hereto which
supersedes any prior oral or written agreements, commitments, understandings, or
communication with respect to the subject matter of the Agreement. This
Agreement shall not be deemed or construed to be modified, amended, rescinded,
canceled or waived, in whole or part, except by written amendment signed by the
parties hereto.
IN WITNESS THEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
THERMOENERGY CORPORATION THOMAS BURGUM
By: By:
------------------- -------------------
Exhibit 23.1
[BAIRD, JURTZ & DOBSON LETTERHEAD]
Consent of Independent Accountants
To the Board of Directors
Thermo Energy Corporation
(Formerly Innotek Corporation)
Little Rock, Arkansas
We consent to the inclusion in the Form 10K of our report dated December
11, 1991 on our audit of the balance sheets of INNOTEK CORPORATION as of
September 30, 1991 and 1990, and the related statements of operation, changes in
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended September 30, 1991 and cumulative since inception through
September 30, 1991. We also consent to the reference to our firm under the
caption "Experts" included in the Form 10K.
/s/Baird, Kurtz & Dobson
Little Rock, Arkansas
March 24, 2000