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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal period ended Commission file Number
December 31, 1999 0-9180
THERMAL ENERGY STORAGE, INC.
(Exact name of registrant as specified in its charter.)
Colorado
(State of Incorporation)
95-3333931
(IRS Employer Identification No.)
6362 Ferris Square, Suite C
San Diego, California 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (858) 453-1395
Securities registered pursuant to Section 12(g) of the Act:
Title of class: Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during
the preceding 12 months (or 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 [] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 1999:
Common Stock, $.001 Par Value - 58,931,289 shares
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THERMAL ENERGY STORAGE, INC.
1999 Annual Report on Form 10-K
TABLE OF CONTENTS
PART I
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7a. Quantitative and Qualitative Disclosures about Market Risks 13
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16
Item 13. Certain Relationships and Related Transactions 16
PART IV
Item 14. Exhibits Financial Statement Schedules and
Reports on Form 8-K 17
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PART I
Item 1. Business
General
Thermal Energy Storage, Inc. (TESI) is an innovator in the application of a
variety of thermal storage mechanisms, and in the application of one of these
mechanisms to the production of potable water from seawater. The Company has
designed, developed, and installed systems for reducing the peak load on air
conditioning systems. This is accomplished by "cool storage" a term for
describing the creation of a heat sink that can absorb peak air conditioning
loads. "Cool storage" produces economies by reducing the size and cost of the
air conditioning equipment, and by shifting air conditioning electrical loads
from peak periods to off-peak periods when electricity is cheaper.
The company's systems make use of patented technology that induces water to
form
ice-like crystals (a "clathrate") by adding certain chemicals to the water. A
system using CCl2FCH3 (monofluorodichloroethane or R141b) induced crystal
formation at 47.5F. The heat of fusion of the clathrate is close to that of
water, and provides the heat sink mechanism. In addition, the company has
recently designed, built, and tested small capacity experimental systems for
the
desalination of seawater. The desalination systems take advantage of the
phenomenon observed in ordinary ice; that it excludes the salt when it freezes
and the ice produced is nearly pure water. Clathrate crystals are used in this
process to produce crystals at temperatures well above the ice freezing
temperature in seawater. Crystals may be produced from cold seawater available
at ocean depths of about 2000 feet without mechanical refrigeration, reducing
the energy required to obtain potable water.
Products Background
Thermal Energy Storage Systems
The Company has developed a unique system to create a heat sink for thermal
energy as a means of reducing the initial and operating cost of large central
air conditioning units. The system absorbs energy by melting"clathrate"
crystals. The clathrates used by the company are structures formed of water
and
a small molecule of certain materials that promotes crystallization at higher
freezing temperature than water alone. In recent experiments the Company used
the clathrate forming compound R141b, or hydrochlorofluorocarbon (HCFC) 141b.
The clathrate crystals and water produce a slurry that is stored in a tank and
pumped through a heat exchanger to absorb heat when the air conditioning load
increases above the nominal capacity of the air conditioner.
The clathrate crystal slurry has several advantages over the more conventional,
ordinary water-ice systems in use for this purpose:
(i) the clathrate freezes at approximately 47.5F instead of 32F as with water-
ice and thus permits retrofitting thermal energy storage (TES) systems to
existing compressors;
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(ii) the clathrate requires much less energy to achieve storage at this higher
temperature as compared to ordinary ice; and
(iii) the clathrate does not expand as does ordinary ice, thereby simplifying
equipment design and minimizing the risk of damage that can occur with ordinary
ice.
The U.S. Environmental Protection Agency (EPA) has determined that R141b
depletes ozone in the upper atmosphere and that it has an Ozone Depletion
Potential (ODP) of 0.11. This is substantially lower than a
chlorofluorocarbon
used by the Company earlier, (trichloromono-fluoromethane, also known as CFC
11
or R11). The production of R11 has been banned by the EPA because it had an
ODP
of 1.0. Although the ODP of R141b is almost a factor of ten lower, the EPA has
ruled that the manufacture of R141b must cease in the year 2003. This ruling,
coupled with the uncertainty of finding a suitable replacement, has effectively
eliminated the Company's ability to sell its product in its prime marketplace.
Through work performed in the development of a freeze desalination system the
Company has identified alternative clathrate formers that have freezing
temperatures which may be suitable for the thermal storage application.
Although the freezing temperature is important in this application other
characteristics of the crystals are also important in determining the
feasibility of their use. Nevertheless, the search for a suitable clathrate
former for desalination may also yield a substitute clathrate former, with zero
ODP, for the purposes of thermal energy storage.
Freeze Desalination Systems
For several years the Company has done research and development on the
application of clathrate technology to the desalination of seawater. This work
was funded by the Company's president through his solely owned engineering
consulting company, RAMCO, Inc., and support agreements with the Department of
Interior, Bureau of Reclamation (BuRec).
In this process, the clathrate former R141b is mixed with cold seawater from
2,000-foot depth, forming a slurry of the clathrate-crystals. The slurry is
pumped to a device known as a wash column where the clathrate crystals are
separated from and washed of surface brine. The crystals are then melted
producing fresh water and the R141b is recovered for reinjection in a
continuous
cycle. The initial studies and subsequent experiments show that, if certain
problems can be resolved, this process could compete economically with
desalination systems now in use.
Since the manufacture of R141b will cease in the US in 2003, an effort is under
way to find a suitable substitute clathrate-former for desalination purposes.
For this service a higher temperature clathrate former is desirable because it
would either make increased production efficiency possible where cold water is
available or would broaden the geographic applicability of the process. A
follow-on contract was received from the Bureau of Reclamation in 1999 to
identify possible replacement clathrate formers suitable for desalination.
During 1999 the work under this agreement identified clathrate formers that
have
a zero ozone depletion potential, and that form clathrate crystals at higher
temperatures than R141b, at pressures deemed feasible by the Company for the
desalination process. Additionally, some of the clathrate formers identified
for the purpose of desalination may be useful in certain thermal energy storage
applications.
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Customers
In 1988 the company installed a demonstration system at a field office of
Southern California Edison Company. The system, which used R11 as the
clathrate
former, operated successfully for a period of two years. In 1989, the EPA
ruled
that R11 could no longer be produced in the United States leading the company
to
search for a Freon-replacement chemical. The Company's research found a foam-
blowing agent (R141b) that, although relatively expensive, was otherwise
superior to R11. In 1993 the EPA ruled that R141b production would not be
permitted after 2003. In each instance where the EPA ordered production
stopped, the long-term unavailability of the clathrate formers precluded
marketing the Company's systems, necessitating a search for alternatives.
Consequently, the company has no current customers for its products, no
backlog,
and no in-house manufacturing capability. The company's sales and marketing
efforts at present are directed toward obtaining additional support for
research
and development testing of clathrate forming chemicals thus far identified.
Company Business Outlook
Since 1989 the Company's existence has been threatened by serious financial
difficulties as a result of circumstances that made the Company unable to
market
its products. These circumstances have been noted in prior 10-K reports and
are
briefly reviewed under History below. In fact, as early as 1989, the Company's
Directors were required to consider terminating the Company's business when it
became unclear that the Company could meet its obligations for operating funds.
However, certain of the Directors, including the President pledged personal
funds to attempt to keep the Company in operation, principally to explore the
possibility of a merger or acquisition with or by a stronger company, and more
recently to help advance the desalination technology. With this financial
support the Company was able to continue.
After 1992, substantial contributions from the President were a major source of
funding, combined with supplementary support from other Directors. In 1994,
dollar contributions from the other Directors ceased although these Directors
continue to provide services. Continued efforts from 1994 to present have
produced some positive results and the Company has received funds from the
Bureau of Reclamation for its desalination program. These funds from the
Bureau
have also carried with them an obligation for the Company to contribute on a
participatory basis and this latter obligation was met in major part by
continued funding of the Company by RAMCO, Inc.
In the 1995 Annual Report, Form 10K, the company reported that there was one
outside company with whom there had been discussions concerning a possible
merger of the two organizations. However in 1996 those discussions were
terminated. There have been no other discussions since and none are expected
unless and until a new replacement clathrate former is found.
Competition
Because of the delay created by the elimination of R11 and R141b, the Company
still has not entered the thermal energy storage (TES) market, which
exacerbates
the financial constraints under which the Company had been operating.
Management is aware of at least eight companies currently competing in the off-
peak storage air conditioning market. Seven of these companies produce systems
based on water-ice, or water, as the storage media. Management believes its
clathrate storage technology is unique and, as noted earlier, offers technical
advantages over systems presently marketed by competitors.
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Management is not aware of any manufacturer currently producing or developing a
clathrate-based cool storage system; however, other firms with greater
resources
than the Company are interested in the utilization of phase-change materials
for
thermal energy storage. Some of these firms have the technical capability of
developing a thermal energy storage system along the lines of the Company's
product should they decide to do so, subject to constraints imposed by our
patent position.
Both the technology and the utility perception as to the requirements for
energy
storage and electric power load management, are experiencing many new
developments. There can be no assurance that the Company's products will not
be
made uncompetitive or obsolete in the future.
The clathrate former (R141b) used in the Company's storage medium is currently
being manufactured by several major chemical companies in the U.S. at a price
that permits the company to compete in the market. However, the uncertainty
surrounding the Company's ability to find a suitable replacement has stalled
the
Company's entrance into the market place. Should the price of a replacement
increase significantly over that of R141b the Company's system could be
rendered
uncompetitive. An alternate clathrate former will have to be used after 2003.
The Company continues to seek R&D funds to meet this need.
The company is aware of other makers of thermal storage systems for air
conditioning applications. The primary market for the Company's systems is for
large central air conditioning systems such as those employed in office
buildings, shopping malls, and high-technology manufacturing facilities. The
Company believes that its systems have significant advantages, including higher
efficiency, over competing thermal storage systems. The company is aware of
another patent on clathrate desalination, but does not believe that the
clathrate desalination technology embodied in that patent offers the advantages
inherent in the company's technology. The Company anticipates that competition
from makers of distillation and reverse osmosis desalination systems will be
significant because of their current presence in the marketplace.
Marketing
Analysis of a typical utility company's electrical load pattern over a 24-hour
period shows that daytime use by customers is much higher than nighttime. A
utility must have sufficient generating capacity to meet this daytime, or
"peak"
period, load. Such being the case, many utility generators are left under-
utilized during the nighttime, or "off-peak" period. In fact, the typical
utility company has approximately twice the installed generating capacity it
would need if its load were level throughout the day. Because of this
disparity, to the extent that a utility can shift electrical loads from peak to
off-peak periods, the utility can avoid building additional generating
capacity.
By virtue of such load shifting, utilities would be able to operate more
efficiently by utilizing their most efficient generators at a higher capacity
through the night. For this reason electricity rates are generally much higher
during peak periods than during off-peak periods. The difference in rates is
such that a thermal energy storage system can produce substantial economies in
energy costs. The restructuring of the electrical industry that results in
market-based prices for electricity is expected to emphasize the need for off-
peak energy storage.
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History
Thermal Energy Storage, Inc. (the Company) was incorporated under the laws of
Colorado on December 8, 1978. Initially the Company's business was the
manufacture and marketing of thermal energy storage systems to the solar
industry. In fact, the great majority of the Company's existing shareholders
trace their participation to the 1979-1983 period.
By the end of 1984 consumer demand for solar energy systems declined and the
Company directed its efforts into the growing commercial demand for off-peak
cool thermal storage in large central air conditioning systems. The TES system
first developed by the Company relied on the use of the refrigerant labeled R11
(monofluorotrichloromethane), a chlorofluorocarbon (CFC) that was subsequently
(in 1989) identified with the depletion of the earth's ozone layer. The U.S.
government placed a heavy tax on the use of CFC R11 in 1990 and the U.S.
Environmental Protection Agency (EPA) ordered the termination of manufacture of
all CFC products at the end of 1995.
Under a contract with Consolidated Edison of New York, the Company was
successful in identifying the R141b as a suitable replacement to R11. However,
the expenditures made by the Company to accomplish the development of the
'SnoPeak (A contraction of "there's no peak") thermal energy storage system
depleted the Company's resources so that it was unable to sustain a marketing
effort. The Company then began to seek merger partners to promote the product
line.
In 1993 an effort was begun to pursue clathrate desalination technology. This
work led to a sharing contract with the Bureau of Reclamation (BuRec) to
design,
build, and test a small-scale pilot plant at the Natural Energy Laboratory of
Hawaii, on the Big Island of Hawaii. As part of this endeavor a search for a
new clathrate former for use with the desalination technology was made and that
work is ongoing. In order to obtain this contract, RAMCO met the financial
sharing obligations required by BuRec.
In January, 1995 the Company's President filed for a patent on a clathrate
desalination system, which patent has subsequently been issued. All costs
incurred up to the time of issuance of the patent and thereafter, for
developing, obtaining and supporting the patent were paid by RAMCO. The
Company's Board of Directors has proposed, and the Company's president has
agreed, that RAMCO cross-license the technology, as embodied in the patent
application and developments through the completion of the aforementioned BuRec
contract, to the Company in perpetuity, on a world-wide, royalty-free basis.
Additionally, RAMCO has agreed to assign all its rights to the desalination
technology to the Company upon reimbursement of expenditures and amounts owed
RAMCO by the Company.
In 1995 the EPA dealt the company another blow when it ruled that the
manufacture of R141b must also be terminated and established the year 2003 as
the date after which no new material can be produced. This ruling by EPA
effectively removed the Company from both the thermal energy storage and
desalination markets.
Over the long and difficult period, from 1989 to present, while the Company was
developing its 'Snopeak product line and searching for a suitable replacement
for its clathrate-forming chemical, many fundamental and structural changes
were
occurring in the traditional electric utility industry leading up to the
current
restructuring of the industry. Having lost its ability to market its 'Snopeak
product line because of EPA rulings, the Company sought to align with a
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financially strong company with comparable business interests that would
continue to fund the search for new a clathrate-former as well as to develop
the
desalination technology. However management judges that the best opportunity
to
find an appropriate partner is to find a suitable replacement clathrate-former
and also to develop a working system for its desalination technology for a
demonstration plant. The NELH site is a prime candidate for a demonstration
plant because of the available supply of cold deep seawater (42F at 2,000 feet)
pumped to the surface for use by the various tenants of NELH.
In an approach to revitalize itself the Company was able to obtain two cost-
sharing desalination contracts from the Bureau of Reclamation amounting to
$553,000. In order for the Company to obtain these contracts it was necessary
for RAMCO to agree to fund in kind the major part of the cost-sharing amount of
$241,000.
The testing to date has shown that four of the five subsystems making up the
desalination system operate satisfactorily. The fifth subsystem did not work
as
required for the overall system to be deemed successful. Follow on funding was
sought from BuRec to modify the design of this subsystem and to perform further
testing.
This funding was held back by BuRec because of an incident at NELH in
September,
1998 whereby certain parties accused, falsely as it turns out, NELH and the
Company of causing a fish kill through the release of R141b into the outfall
tidepool from the company's test facility. The company's subsequent
investigation determined that the most likely cause of the alleged fish kill
would have been thermal shock caused by the release of very cold water into the
warm water that collects in the outfall tidepool during periods when the
company's system is not operating. Further it was shown that for R141b to be
toxic to humans, fish or plant life it would have to be in concentrations on
the
order of magnitude of 1 million times or 1000 times greater, respectively than
the amounts reportedly detected. It was concluded that the most likely cause
of
there being R141b in the outfall was through the efforts of one or more
disgruntled defendants in a suit brought by NELH to eject them from the land to
which they claim ownership, which land is part of NELH's facility.
The Company received the follow on contract from BuRec in March 1999 and
expects
to complete work under this agreement before June 2000. Although the company
had intended to continue experiments with the pilot plant at NELH, extremely
stringent requirements the Company deems arbitrary, were established by the
Hawaii Department of Health that made further experiments there financially
infeasible. As a consequence, the Company dismantled the pilot plant in 1999
and vacated the NELH facility. Instead of experiments at the pilot plant, the
Company contracted for the construction of a small-scale test facility in San
Diego near the company offices. A small-scale system, designed to permit
observation during operation, was constructed and evaluated with the test
facility. Early test results indicated that the wash column has the capability
of producing product water that has dissolved solids substantially below EPA
standards for potable water. Further design and testing will be required to
evaluate alternative clathrate formers that have been identified in this work,
and to determine the requirements for scaling up the process equipment to
commercial plant size. In addition, although prior work indicated that the
economies of the TESI process were competitive with other desalination
technologies, the effect of the change in clathrate formers must be evaluated
to
assess the market potential.
Nevertheless, the results to date have provided management with optimism that
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its desalination efforts will lead to a marketable product in the foreseeable
future.
Research and Development
In October, 1993 the Company was awarded a $103,000 participatory contract from
the U.S. Department of Interior, Bureau of Reclamation (BuRec), to perform a
feasibility study to determine if clathrate technology is suitable for the
desalination of sea water. Known as "Freeze Desalination" a clathrate system,
theoretically, has the potential to be a more efficient desalination system
than
reverse osmosis systems currently in use. The study was completed in April
1995
and verified the technical feasibility of the clathrate desalination system and
showed that there is potential for this system to compete with other
desalination systems now in commercial use.
In October 1995, the Company received a follow-on, $450,000, participatory
contract to build a small demonstration plant to be located at the Natural
Energy Laboratory of Hawaii. Certain costs associated with obtaining the
follow-on contract and funding needed for the $178,000 participatory share,
were
paid by RAMCO, the Company not having sufficient funds to meet the funding
requirements.
In October 1996, the company was awarded a $250,000 contract by the Center of
Excellence for Research in Ocean Sciences (CEROS) to evaluate the effects of
greater pressures at ocean depths on crystal formation, and to design,
construct, and test a subsystem module for the removal and recovery of trace
quantities of the clathrate from the product water stream. This work was
completed in March 1999.
In March 1999, the company was awarded a $100,000 financial assistance
agreement
by the Bureau of Reclamation. The agreement, which supported participation by
the company at a somewhat higher level, was for research into higher
temperature
clathrate formers and experimentation with the wash column. RAMCO provided
funds on behalf of the Company in support of this work.
In accordance with generally accepted accounting principles, all costs
associated with research and development incurred by the Company were expensed.
The company has also received significant support in its research from the
Department of Interior, Bureau of Reclamation and from CEROS. The Company has
published three technical reports on the work supported by these agencies, and
a
paper presented at the International Desalination Association's 1999 World
Congress. These technical reports, listed below, are available from those
agencies.
1. Richard A. McCormack and Richard K. Andersen, Thermal Energy Storage,
Inc., "Clathrate Desalination Plant Preliminary Research Study," Bureau of
Reclamation Contract Number 1425-3-CR-81-19520, Water Treatment Technology
Program Report Number 5, June 1995
2. Richard A. McCormack and Glenn A. Niblock, Thermal Energy Storage, Inc.,
Build and Operate a Clathrate Desalination Pilot Plant, Final Technical Report,
Bureau of Reclamation Assistance Agreement Number 1425-5-FC-81-20690, Water
Treatment Technology Program Report Number 31, May 1998
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3. Richard A. McCormack, Thermal Energy Storage, Inc., Development and
Testing of a Clathrate Desalination Research Facility, DARPA Grant Number MDA
972-94-1-0010, Final Technical Report, January 1999.
4. Richard A. McCormack, Thermal Energy Storage, Inc. and Glenn A. Niblock,
Vertex Associates Inc.; "Clathrate Freeze Desalination Progress," IDA Log No:
SD99165 presented at the International Desalination Association 1999 World
Congress, August 29-September 4, 1999.
Intellectual Property Rights
Patents
The Company has patented its clathrate phase-change technology based on the
concept of freezing the clathrate mix in a range of 42F to 48F while
maintaining high thermal storage capacity. Clathrates, also known as gas-
hydrates, are produced by mixing certain compounds with water using off-the-
shelf mechanical and chemical components. At certain temperatures and
pressures, depending on the chemistry of the mixture, molecules of the
clathrate
forming compound are completely enclosed with a group of water molecules in a
solid crystalline structure to form the clathrate heat sink medium. The Company
was issued U.S. Patent Number 4,696,338 on September 29, 1987 covering the
formation of a clathrate under specific physical and chemical conditions. This
patent was for a warm temperature (118F) heat storage medium that the Company
no longer considers commercially valuable. The Company's second clathrate
patent, number 4,821,794 which was issued on April 18, 1989 covers different
methods and chemicals for forming its clathrate heat sink medium.
In January 1995, Richard McCormack, the Company's President filed for a patent
on a clathrate desalination system. U.S. Patent 5553456 was issued to RAMCO as
the originator of the basic patent applications on freeze desalination that is
used by the Company in its desalination development work. All costs of
obtaining the patent have been, and are being, paid by RAMCO. The Company's
Board of Directors has proposed, and the Company's president has agreed, that
RAMCO cross-license the technology, as embodied in the patent application and
developments through the completion of aforementioned BuRec contract, to the
Company in perpetuity, on a world-wide, royalty-free basis. Additionally,
RAMCO
has agreed to assign all its rights to the desalination technology to the
Company upon reimbursement of expenditures and amounts owed RAMCO by the
Company.
Work completed under the financial assistance agreement received in 1999, and
work funded by RAMCO may lead to additional patents. No evaluation of the
potential for patent protection has yet been done and there is no assurance
that
additional patents will be granted.
Trademark
In 1981 the Company was granted a federal trademark for the name, Thermal
Energy
Storage, Inc., as well as the acronym, "TESI", and the Company's logo. A state
trademark registration has been granted by the State of California. The
Company
believes its name is an asset as it reflects the name for thermal energy
storage
(TES) commonly used in the literature and in the industry.
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Material Customers
In 1999, 100 percent of the Company's revenues were derived from research
supported by contracts with the U.S. Department of Interior, Bureau of
Reclamation (BuRec). In 1998, and 1997, 100 percent of the Company's revenues
were derived from research supported by contracts with the BuRec and the
Centers
of Excellence for Research in Ocean Sciences. The failure of the Company to
contract with additional new customers is having a material adverse effect on
the Company.
Manufacturing and Assembly
The Company's production of storage systems consists primarily of engineering,
procurement and final assembly of components produced by other manufacturers to
Company specifications, and charging the system with its storage medium.
Management believes that all major equipment components of its system are, and
will remain, readily obtainable from numerous suppliers to the extent necessary
to meet the Company's production needs. The Company has not entered into any
long-term contract for the supply of any component. The Company does not
intend
to build any manufacturing facilities in the foreseeable future.
Employees
As of December 31, 1999 the Company had no full time employees. Part time
employees, consultants and contractors are hired as needed in engineering,
marketing, manufacturing and administration.
ITEM 2. PROPERTIES
Office Facilities
The company neither owns nor leases real property. In March, 1998 the Company
moved to 6362 Ferris Square, Suite C, San Diego, California 92121, where it
shares 1,600 square feet of office space with RAMCO. RAMCO signed a three year
lease, commencing on March 1, 1998, and RAMCO is currently sharing the office
space with the Company. The company has leased or subcontracted for laboratory
space and facilities in the recent past but currently has no leased facilities.
ITEM 3. LEGAL PROCEEDINGS
There are no pending or threatened lawsuits against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Securities Market
The Common Shares of the Company are traded via an over-the-counter bulletin
board (OTCBB) and quoted under the symbol "THES". TESI Common Shares are not
currently quoted by the National Quotation Bureau. The Company acts as
Transfer
Agent for the Common Shares. There are approximately 3,000 shareholders of
record of Common Shares.
The Company has not, since inception, declared or paid a cash or other dividend
with respect to the Common Shares. Management does not contemplate the payment
of such dividend on the Common Shares in the foreseeable future.
On June 26, 1984, the Company was removed from the NASDAQ automated reporting
system as the Company was not in compliance with requirements of the NASD
Bylaws
because it no longer met the financial net worth standards set by NASDAQ.
Delinquent filings and effects in market for securities
The Company did not hold its annual meeting in 1989 or 1990 until November of
each year, and did not hold an annual meeting in 1992, 1994, 1995, 1996, 1997,
1998 and 1999, and did not timely file all of the quarterly form 10-Q reports
required to be filed under Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, therefore, the Company failed during these periods to
qualify for the use of Rule 144 under the Securities Act of 1933. By filing
this 10-K the company will be current in its reporting under the referenced
provisions of the 1934 act.
In 1998 the company failed to file the first of two required Y2K compliance
reports and in 1999 the Securities and Exchange Commission cited the Company
for
violations of Section 17 (a)(3) and Section 17A (d) (1) of the Securities
Exchange Act of 1934 and Rule 17Ad-18. In 1999 the company submitted the first
and second of the required Y2K planning reports, and entered into a settlement
agreement with the Securities and Exchange Commission ordering the firm to
cease
and desist from further such violations. The civil penalty was waived by the
SEC because of the financial condition of the Company.
Sales of restricted Common Shares under Rule 144 under the Securities Act of
1933 are available.
Item 6. Selected Financial Data
The following table summarizes certain financial data of the Company for the
years ended December 31, 1996 through December 31, 1999 and is qualified in its
entirety by the financial statements and notes thereto included in "ITEM 8.
Financial Statements and Supplementary Data."
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Year Ended December 31,
1999 1998 1997 1996
Revenues $84,205 $140,714 $280,787 $153,684
Net income (loss) (34,974) (4,013) (21,578) (83,707
Per common share (0.001) (0.000) (0.001) (0.001)
Total assets 25,860 29,000 27,828 58,557
Long term obligations 0 0 0 0
Cash dividends per share 0 0 0 0
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and capital resources
In 1990 a new United States federal excise tax on the material R11 used in the
formation of the Company's storage media forced the Company to terminate its
U.S. marketing efforts until a suitable substitute material was identified and
successfully demonstrated.
Under contract from Consolidated Edison of New York and Empire State Electric
Energy Research Corp. (a group of New York State utilities) the Company
conducted successful research and identified a new clathrate forming material,
R141b, as a suitable replacement. This material is being manufactured by
several major chemical companies in the U.S. as a substitute for R11 in the
rigid foam insulation industry. Currently the EPA, through the National Clean
Air Act, has approved this material, which has an Ozone Depletion Potential of
approximately 11% of the former clathrate former R11, for manufacture through
2003.
The Company's Board of Directors has directed management to seek an alignment
with a financially strong company with compatible business interests to market
its 'Snopeak Storage System and to retain cognizant of any new development with
clathrate forming materials that have zero ODP, such as certain
hydrofluorocarbons (HFC's) that are not now being manufactured but which are
under study by several U.S. chemical companies. Without such an alignment the
company may be unable to market its products and may terminate its business.
In 1988 the Company obtained a $50,000 bank loan, guaranteed by the Directors
and a major stockholder, and in January 1990 completed a Private Placement
which
sustained the Company operations until receipt of the Consolidated
Edison/ESEERCO contract. In 1992, $25,000 of the Bank loan was repaid by the
Directors and the major stockholder (who became a member of the Board of
Directors in 1991). In 1993, $15,625 was repaid by the Directors and the major
stockholder. In 1994, the bank loan was paid off by the Directors and the
major
stockholder. The Company is actively seeking additional operating funds to
sustain operations until such time as it generates a positive cash flow from
internal operations.
As of December 31, 1999, the Company had no accounts receivable as compared to
accounts receivable totaling $25,000 as of December 31, 1998. As of December
31, 1999 the Company had a cash balance of $23,000 as compared to $1,000 cash
at
December 31, 1998.
The Company had a net loss of $35,000 in 1999 as compared with a net loss of
$4,000 in 1998. This loss was due to an excess of expenses over contract
revenues.
11
<PAGE>
A negative cash flow from operations was approximately $1,800 per month
throughout 1999, as compared to a negative cash flow from operations of
approximately $500 per month in 1998.
Current assets and total assets were $26,000 as of December 31,1999 compared to
current assets and total assets of $29,000 as of December 31,1998.
As of December 31, 1999 the Company had a working capital deficiency of
$700,000. As of December 31, 1998 the Company had a working capital deficiency
of $665,00. This deficiency in working capital was due to operating losses.
As of December 31, 1999 the Company had no bank loans outstanding. A bank loan
to the company was paid off as of December 31, 1994.
As of December 31, 1999 the Company had accounts payable totaling $26,000. As
of December 31, 1998 the Company had accounts payable totaling $24,000.
Effective July 20, 1987, the Company entered into an agreement with Renewable
Resource Systems, Inc. (RRSI) of Menlo Park, California whereby RRSI purchased
3,000,000 Common Shares for $150,000 cash or $.05 per share, and an additional
6,375,000 Common Shares at $.133 per share for a total of $850,000. As of
December 31, 1987 the total of $1,000,000 was received by the Company and
9,375,000 Common Shares were issued to RRSI.
In October, 1989 RRSI informed the Company that they were terminating their
business in the U.S. and intended to use their Company holdings to satisfy
their
contractual agreements with certain key employees. As a result of negotiations
between RRSI, the Company and Mr. A. Philip Bray, (former CEO of RRSI, and who,
in 1992, became a Company Board Member) and in return for a release of
obligations and liabilities among the Company, RRSI and two (then current)
Company Board Members employed by RRSI, it was agreed that the Company would
issue to RRSI a warrant to purchase up to 2,280,427 Common Shares at a price of
$.13 1/3 per share, exercisable for a period of 5 years commencing October 15,
1989 and RRSI would return 3,000,000 of its shares to be canceled by the
Company. These canceled shares formed the basis of a non-dilutive Private
Placement completed by the Company in February 1990. Mr. Bray received the
remainder of the Common Shares held by RRSI and RRSI's warrant to purchase
2,280,427 Common Shares at $.13 1/3 per share. Mr. Bray also assumed RRSI's 40
percent guarantee obligation on the $50,000 bank loan. In 1990 Mr. Bray lent
the Company $15,000 in working capital.
During the period 1989 through 1996 there were periods when there were lapses
in
the Company's liability insurance coverage. The Company may have financial
exposure for claims arising during the periods in which no coverage existed.
No
such claims against the Company had been made as of December 31, 1999 and the
Company knows of no incidents that would lead to any such claims.
In 1990 the Company settled a lawsuit with Alternate Energy Development
Corporation by paying $2,500.
The Company needs to raise additional funding to sustain operations until the
Company becomes self sustaining through the sale of its thermal energy storage
(TES) systems or funding of its freeze desalination development. The Company
is
currently seeking to align itself or merge with a financially strong company
with compatible business interests. Since 1994 the Company has discussed
possible mergers, acquisitions and affiliations with several companies but
currently there are no ongoing negotiations.
12
<PAGE>
Management believes that the company can pursue a strategic alliance with
another firm only after it has been able to complete its desalination testing
successfully and has found a substitute clathrate former for both the
desalination technology and the thermal storage technology. The most recent
experiments are encouraging but further work is required to have high
confidence
in the technical and commercial feasibility of the TESI processes.
Results of Operations
In 1988, a field demonstration of a 250 ton-hour storage system was placed in
trial operation. At approximately the same time a 24 ton-hour system also was
placed in a field operation. Both systems immediately developed similar and
unexpected operating problems relating to equipment sizing and scale-up from
the
Company's test stand system.
These scale up and sizing problems led to the decision by the Board of
Directors
to suspend marketing activities and to initiate the subsequent extensive
testing
program. These decisions further led to substantial cost increases during 1988
and 1989.
To solve these technical operating problems management commenced an around-the-
clock test program on the Company's test stand and, at the same time, halted
field testing of the field units. The test ran for over five months and was
completed in December 1988. Subsequently, all data was reduced and analyzed.
On the basis of this analysis certain modifications were made to the design of
the Company's system such that operation of the system at the 100% storage
capacity rating for each of the Company's field demonstration units was
successfully demonstrated.
The Company had $84,000 in contract revenues for the year ended December 31,
1999 and $141,000 in contract revenues in 1998.
As of December 31, 1999 the only backlog of business was the contract with the
Bureau of Reclamation. The BuRec contract awarded in 1999 was more than 80%
completed and no other new contracts were in place.
There were no internally funded research and development expenses in 1999, 1999
and 1997.
There was no interest income or interest expense for 1999, 1997 and 1996.
Selling, general and administrative expenses were $35,000 in the year ended
December 31, 1999, and were $29,000 in 1998 as compared to $16,000 in 1997.
It is Management's opinion that inflation had no significant effect on Company
operations in 1999 and no significant effect is forecast for 2000.
Item 7a. Quantitative and Qualitative Disclosures about Market Risks
The company has not prepared quantitative evaluations of market risks for its
systems. In the recent past regulatory actions have made the use of the
company's clathrate formers impracticable, precluding the sale of the company's
systems, both for thermal energy storage and for desalination. The research
completed to date into alternative clathrate formers to find a suitable
chemical
that is safe, non-toxic, and commercially available at prices that result in
competitive desalination systems has been encouraging. There is no assurance,
however, that the Company will be able to find a suitable clathrate former for
desalination or thermal storage systems, nor is there assurance that future
regulatory actions will not have a similar adverse effect on the ability of the
Company to market its systems.
13
<PAGE>
The Company's product and proposed products are subject to, or are affected
directly and indirectly by various aspects of federal, state and local
governmental regulations and tax laws. The federal excise tax imposed on R11,
which made the Company's use of R11 impractical, is an example. After 2003 the
clathrate former R141b will also be prohibited by EPA regulations. Residential
and commercial use of the Company's thermal energy storage systems is also
affected by various state and local building codes. Such regulations, while
not
directed specifically to thermal energy storage devices, can impact the use of
systems in which the Company's energy storage units are used.
There is growing interest and activity at all levels relating to government and
industry regulation of alternate energy sources. Governmental entities could
impose regulations applicable to the Company and its products, which might
require the Company to submit its products to various testing, certification
and
labeling programs. Management also expects that private industry associations
will become more active in this area. In the future the Company may also be
required to submit its products for testing and certification to independent
organizations. Compliance with future regulatory or private industry standards
could involve substantial costs and have a material impact on Company
operations.
Item 8. Financial Statements and Supplementary Data
The information required by this item is Included in Part IV, Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
In December 1992, the Company's management, citing severe financial
restrictions, instituted a change to the Company's use of independent auditors,
approving instead the change from Peterson & Co., a La Jolla based accounting
firm, to use financial results as prepared by the Company's independent
bookkeeper since 1988, Mr. William Jankowski. Management had no disagreements
with Peterson & Co. during the 1990 and 1991 fiscal year audits on any matter
of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. All financial results presented herein are in accord with
all previous practices used by the Company and past auditors and are considered
accurate. The sole reason for making this change is to conserve operating
funds.
In 1998 the Company hired William G. McKee, Inc.,CPA, to prepare the financial
statements without audit or review and continued this relationship in 1999.
The
1998 10k and 10q reports were prepared by Mr. Jankowski. The 1999 10-K and
10-Q
reports were prepared by a consultant, Glenn A. Niblock of Vertex Associates,
Inc., using the financial reports prepared by William G. McKee, Inc., and an
accrual of compensation due for services in 1999 in order to reflect the effect
of amounts due for those services on the financial state of the company.
14
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company regrets to announce the death of Mr. Lawrence O'Donnell in 1999.
Mr. O'Donnell had been a Board Member since 1994. Mr. O'Donnell offered wise
business counsel and was a good friend of shareholders, management, and Board
members alike. He is greatly missed by his family and his associates.
The company has a single Executive Officer who holds all of the executive
positions. Mr. Richard A. McCormack is President, Secretary, and Treasurer.
Mr. McCormack is also Chairman of the Board of Directors.
Item 11. Executive Compensation
Compensation of Management
No executive officers have been paid compensation since December 31, 1993.
Compensation due to the President for management services provided through
RAMCO, Inc. has been accrued as a loan from RAMCO to the company. No
compensation was accrued for any executive officer during the years ended
December 31, 1997, and 1998. In 1999, unpaid compensation due of $30,000 was
accrued. Previously, unpaid compensation of $30,000 was accrued in 1996 and
$90,000 was accrued in 1995.
The Company adopted a Stock Option Plan (the "Plan") on March 18, 1981 which
was
approved by the shareholders on May 28, 1981 and further amended on October 30,
1987, and approved by the shareholders in June 1988. The purpose of the Plan
is
to advance the interest of the Company and shareholders by affording to
employees an opportunity to acquire or increase their proprietary interest in
the Company by the grant to such employees of options.
Options granted pursuant to the Plan shall be options to purchase shares of the
Company's Common Stock, $.001 par value. Subject to adjustments described in
the Plan the aggregate number of Common Shares which may be issued upon the
exercise of options granted cannot exceed 7,500,000 Common Shares.
There were no Common Shares acquired through the exercise of options granted by
the Company to its executive officers during the fiscal years ended December
31,
1998, 1997 and 1996 and to all executive officers as a group.
Options for 100,000 Common Shares were exercised by a terminating employee in
1988. No stock options were exercised during the years ended December 31,
1991,
1990, 1989, 1987 and 1986. In February 1985, the Board of Directors
accelerated
the vesting period to make all options granted prior to December 31, 1984 fully
exercisable.
The Plan is administered by a standing Compensation and Stock Option Committee
of the Board of Directors. The Compensation and Stock Option Committee met in
1994 and issued stock options listed in Note 7.
Prior to 1999, the members of the Compensation and Stock Option Committee were
15
<PAGE>
Messrs. Lawrence O'Donnell and Sidney Stoller.
Management believes that the terms of the transactions described were as
favorable to the Company as could have been arranged with unaffiliated parties.
Compensation of Directors
Directors of the Company who are employees receive no special compensation for
serving as Directors or for their attendance at Board or Committee meetings.
Company policy is to pay non-employee Directors a fee of $480, or stock
equivalents, per day for Board and Committee meetings, except that if a
committee meeting is held in conjunction with a Board meeting there is no
compensation for the committee meeting. Since December 31, 1992 no Directors
fees were accrued or paid.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of December 31, 1999 certain information
with
respect to all stockholders known by the Company to be beneficial owners of
more
than five percent of its outstanding Common Stock, and all officers and
directors of the Company as a group.
Name and Address of Shares Owned Percent of
Beneficial Owner Beneficially Class
Richard A. McCormack 10,067,503 17.1% (1)
8155 Paseo del Ocaso
La Jolla, CA 92037
A. Philip Bray 6,719,573 11.4%
1912 Piper Ridge Court
Walnut Creek, CA 94596
All Officers and 19,328,944 32.8%
Directors as a Group
(1) Includes 857,000 shares held of record by RAMCO, In. a corporation wholly-
owned by Richard A. McCormack.
Item 13. Certain Relationships and Related Transactions
Not applicable.
16
<PAGE>
PART IV
Item 14. Exhibits Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
(1) Financial Statements
The financial statements of Thermal Energy Storage, Inc. are included in a
separate section of this report beginning on Page F-1.
(b) Reports on Form 8-K
No reports have been filed on Form 8-K during the year ended
December 31, 1999.
(c) Exhibits
3a Articles of Incorporation of the Company incorporated by reference to
Exhibit 2.1 to the Company's Registration Statement on Form S-18, dated
September 21, 1979, Registration No. 2-65548, (hereinafter "1979 Form s-18).
3b By Laws of the Company incorporated by reference to Exhibit 2.2 of the
Company's 1979 Form S-18.
3c Form of Common Share Purchase Warrant, issued by the Company to certain
Underwriters for 600,000 Common Shares incorporated by reference to 1979 Form S-
18.
10a Cross License Agreement, dated March 2, 1979 by and between Kay
Laboratories, Inc. and the Company incorporated by reference to Exhibit 11.1(d)
of the Company's 1979 Form S-18.
10b Contract to Supply Equipment and Services dated August 28, 1986 by and
between Pacific Gas and Electric and the Company incorporated by reference to
Exhibit 10(b) to the Company's Annual Report on Form 10-K dated December 31,
1987 (hereinafter "1987 10-K").
10c Contract to Supply Equipment and Services, dated April 28, 1987 by and
between Southern California Edison and the Company incorporated by reference to
Exhibit 10(c) to the Company's 1987 10-K.
10d Stock Purchase Agreement effective July 20, 1987 by and Renewable
resource Systems, Inc. and the Company, incorporated by reference to Exhibit
10.6 to the Company's Form 8-K dated September 17, 1987.
10e Consulting Agreement between the Company and Sidney Stoller, Director,
incorporated by reference to Exhibit 10(c) to the Company's 1987 10-K.
10f Settlement Agreement between Company and RRSI and Philip Bray
incorporated by reference to Exhibit 10(f) to the Company's 1989 10-K.
17
<PAGE>
28a U.S. Patent No. 4,696,338, incorporated by reference to Exhibit 28(a)
to
the Company's 1987 10-K.
28b U.S. Patent Application Serial No. 07/176,934 incorporated by reference
to Exhibit 28(b) to the Company's 1987 10-K.
18
<PAGE>
THERMAL ENERGY STORAGE, INC.
SIGNATURES
Pursuant to the requirement 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.
THERMAL ENERGY STORAGE, INC.
Registrant
Richard A. McCormack, President
_____________________________ _________________________________________
Date Richard A. McCormack
President and Principal Executive Officer
_____________________________ _________________________________________
Date Sidney M. Stoller
Director
_____________________________ _________________________________________
Date A. Philip Bray
Director
<PAGE>
THERMAL ENERGY STORAGE, INC.
STATEMENTS OF LOSS AND ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999, 1997 AND 1996
(Unaudited)
(Amount in thousands, except per share data)
1999 1998 1997
REVENUES
Contract services $84 $135 $281
COST OF REVENUES
Contract services 87 116 292
Gross profit (loss) (3) (19) (11)
OPERATING EXPENSES
Research and development 0 0 0
Selling, general and administrative 35 29 16
Total operating expenses 35 29 16
Income (Loss) from operations (38) (10) (27)
Other Income 3 6 5
NET LOSS (35) (4) (22)
Accumulated deficit-beginning of period (4,764) (4,760) (4,738)
Accumulated deficit-end of period (4,799) (4,764) (4,760)
LOSS PER COMMON SHARE ($0.001) ($0.000) ($0.000)
See Accompanying Notes to Financial Statements
F-1
<PAGE>
THERMAL ENERGY STORAGE, INC.
BALANCE SHEET
AT DECEMBER 31, 1999 AND 1998
(Unaudited)
(Amount in thousands)
1999 1998
ASSETS
CURRENT ASSETS
Cash $ 23 $ 1
Accounts receivable 0 25
Inventories 1 1
Prepaid expenses and deposits 2 2
Total current assets 26 29
PROPERTY AND EQUIPMENT, at cost 109 109
Less - Accumulated depreciation (109) (109)
TOTAL ASSETS $ 26 $ 29
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 26 $ 24
Accrued payroll 131 101
Payable to officers and affiliates 568 569
Total current liabilities 726 694
SHAREHOLDERS' DEFICIT
Preferred stock, par value $.10 per share;
30,000,000 shares authorized; none issued 0 0
Common stock, par value $.001 per share;
110,000,000 shares authorized;
58,931,289 shares issued and outstanding
at 1998 and 1999 59 59
Additional paid-in capital 4,040 4,040
Accumulated deficit (4799) (4,764)
Total shareholders' deficit (700) (665)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 26 $ 29
Note: Totals reflect effects of rounding
See Accompanying Notes to Financial Statements
F-2
<PAGE>
THERMAL ENERGY STORAGE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
(Amounts in thousands)
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from Operations $ (35) $ (4)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities
Depreciation 0 0
DECREASE (INCREASE) FROM CHANGES
Accounts receivable 25 (6)
Prepaid expenses and deposits 0 0
INCREASE (DECREASE) FROM CHANGES
Accounts payable 2 (35)
Payable to officers and affiliates 30 40
Net cash provided (used) by operating activities (22) (5)
CASH FLOW FROM INVESTING ACTIVITIES 0 0
CASH FLOW FROM FINANCING ACTIVITIES 0 0
NET INCREASE (DECREASE) IN CASH 22 (5)
Cash and cash equivalents at beginning of year 1 6
Cash and cash equivalents at end of year $ 23 $ 1
See Accompanying Notes to Financial Statements
F-3
<PAGE>
Notes to Financial Statements
Note 1. Organization and Nature of Operations
Thermal Energy Storage, Inc needs to raise additional funding to sustain
operations until the Company becomes self-sustaining through the sale of its
thermal energy storage (TES) systems or funding of its freeze desalination
development. The Company has sought to align itself or merge with a
financially
strong company with compatible business interests. Since 1994 the Company has
discussed possible mergers, acquisitions, and affiliations with several
suitable
companies. Management believes that the company can pursue a strategic
alliance
with another firm only after it has been able to complete its desalination
testing successfully and has found a substitute clathrate former for both the
desalination technology and the thermal storage technology.
Without additional funding, or merger with a financially strong company, the
Company may be unable to market its products and may terminate its business.
For the last four years, the Company has been funded in part by RAMCO, a
company
wholly owned by the Company's president, who for three of those years has
served
without compensation. RAMCO has notified the Company that it does not intend
to
continue such support of the Company's activities beyond 2000. It is therefore
likely that the Company will cease operations if a new funding source is not
found.
In October, 1993 the Company was awarded a $103,000 participatory contract from
the US Department of Interior, Bureau of Reclamation (BuRec), to perform a
feasibility study to determine if the technology was suitable for the
desalination of sea water. Known as "freeze desalination", a clathrate system
has the potential to be a more efficient desalination system than reverse
osmosis systems currently in use. The study, completed in April 1995,
theoretically verified the technical feasibility of the clathrate desalination
process and showed that this system has the potential to compete with other
desalination systems now in commercial use.
In October 1995 the Company received a follow-on participatory contract for
$450,000 to build a small clathrate desalination demonstration plant to be
located at the Natural Energy Laboratory of Hawaii. Certain costs associated
with obtaining the follow-on contract and funding for the $178,000
participatory
share, were paid by RAMCO since the Company does not have sufficient in kind
funds to meet the funding requirements. This contract was completed in
September 1998. The company has sought, and expects to receive, follow on
funding from BuRec as discussed under "Marketing".
In March 1999, the company received a support agreement from BuRec for
additional research into clathrate formers and for development testing of a key
subsystem of the desalination system. This work is largely completed and
completion of the work and final report is expected in the first half of 2000.
F-4
<PAGE>
Note 2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern; they do not include adjustments relating to
the recoverability of recorded asset amounts and classification of assets and
liabilities that would be necessary should the Company be unable to continue as
a going concern. The going concern basis might not be appropriate since the
Company has required additional funds in the form of loans from the President's
solely owned consulting company to sustain operations. As of December 31, 1999
its current liabilities exceeded its current assets and total liabilities
exceeded its total assets.
Inventories
Inventories, which are stated at the lower of cost (first-in, first-out) or
market, are entirely composed of purchased parts as of December 31, 1999.
Property and equipment
Depreciation is provided using the straight line method over the estimated
useful lives of the related property, as follows:
Machinery and equipment 3-7 years
Furniture and fixtures 5-10 years
Accrued payroll and related taxes
Accrued payroll of $131,326 consists of accrued compensation due to the
Company's President as of December 31, 1999.
Revenue and cost recognition for contract services
Revenues from fixed-price contracts are recognized as they are earned,
recognized
on the basis of costs incurred during the period plus the fee earned.
Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools
and repairs. Selling, general and administrative costs are charged to expense
as incurred.
Note 3. Loss Per Share
Computation of loss per share was based on the 58,931,289 Common shares
outstanding in 1999. Common share equivalents (stock purchase warrants and
stock options) have not been included in the calculation of net loss per common
share because the effect would be insignificant for 1999 and 1998.
F-5
<PAGE>
Note 4. Related Party Transactions
The Company's President is the President and sole shareholder of RAMCO, which
is
a holder of the Company's equity securities. At various times RAMCO has
advanced the Company both cash and services that have been accrued as loans by
the Company.
In 1998 RAMCO advanced the Company $40,000 with a balance due of $503,554 as of
December 31, 1998. In 1997 RAMCO advanced the Company $38,161 with a balance
due of $463,554 as of December 31, 1997. In 1996 RAMCO charged the company
$30,000 for services and advanced the company $58,942, with a balance due of
$425,393 as of December 31, 1996. In 1995 RAMCO charged the Company, but was
not paid, $90,000 for services and advanced the Company $14,950 with a balance
due of $336,450 as of December 31, 1995. In 1994 RAMCO did not charge the
Company for services and advanced the Company $22,302 with a balance due of
$231,500 as of December 31, 1994. In 1993 RAMCO did not charge the Company for
services and was repaid $9,174 with a balance of $209,198 as of December 31,
1993. In 1992 RAMCO charged the Company, but was not paid, $90,000 for
services, and advanced the Company $24,632 with a balance due as of December
31,
1992 of $218,372. In 1991 RAMCO charged the Company $90,000 for services and
was paid $21,737 with a balance due as of December 31, 1991 of $103,740. In
1990 RAMCO charged the Company $90,000 for management services and was paid
$72,924 with a balance due as of December 31, 1990 and 1989 of $35,477 and
$18,401, respectively. In 1990, 1991, 1992 and 1995, the Company's President
provided his service to the Company through the RAMCO affiliate, an arrangement
approved by the Company's Board of Directors in 1990. RAMCO charged the
Company
$5,237 and $5,765 during 1986 and 1987 respectively, for travel, secretarial
and
engineering services of which $5,539 was outstanding at December 31, 1988. It
was anticipated that the balance owed RAMCO of $43,598 would be paid at the
rate
of $7,500 per month commencing January 1, 1989 in lieu of equivalent salary
which will be accrued and paid from Company profits in accord with an agreement
requested by the Company's President and approved by the Company's Board of
Directors. No such payments were made in 1989 nor did the President receive
any
cash for salary in 1989. RAMCO lent the Company funds at various times
throughout 1989. From 1983 to 1985, RAMCO loaned the Company a total of
$123,517 on an interest free basis of which $7,500 was repaid in 1983, $9,022
in
1985, $5,000 in 1987, and $63,936 in 1988.
In order for the Company to qualify to receive a BuRec contract, in 1995 RAMCO
agreed to fund up to $178,000 of the participatory BuRec contract until another
funding source can be obtained. RAMCO is the holder of a patent application
for
a clathrate-based desalination system and has agreed to cross-license the
technology, as embodied in the patent application and any developments through
completion of the BuRec contract, to TESI on a world-wide, royalty-free basis,
in perpetuity. Additionally, RAMCO has agreed to assign all its rights to the
desalination technology to the Company upon reimbursement of expenditures and
amounts owed RAMCO by the Company.
Note 5. Revenues
A substantial portion of the Company's revenues were derived from a limited
number of customers. In 1999 one customer accounted for 100 percent of
F-6
<PAGE>
revenues. In 1998 and 1997 two customers accounted for 100 percent of
revenues.
In 1996, 1995 and 1993 one customer accounted for 100 percent of revenues.
There were no revenues in 1994.
Note 6. Common Shares and Warrants
On September 17, 1987, the Company entered into a common stock purchase
agreement (the "Agreement") with Renewable Resource Systems, Inc. (RRSI) of
Menlo Park, California. On July 20, 1987 the Company sold 3,000,000 Common
Shares at a price of $.05 per share for $150,000 cash and during September
through December 1987 sold an additional 6,375,000 Common Shares at $.13 1/3
per
share for $850,000 cash.
In October 1989 RRSI informed the Company that they were terminating their
business in the U.S. and intended to use their holdings in the Company to
satisfy their contractual agreements with certain key employees. As a result
of
a negotiation between RRSI, the Company and Mr. A. Philip Bray (former CEO of
RRSI and subsequent to the year ending December 31, 1991 a Company Board
Member), and in return for a release of obligations and liabilities among the
Company RRSI and two (then current) Company Board Members employed by RRSI, it
was agreed that the Company would issue a warrant to purchase up to 2,280,427
Common Shares at a price of $.13 1/3 per share, exercisable for a period of 5
years commencing October 15, 1989 and RRSI would return 3,000,000 of its shares
to be canceled by the Company. The canceled shares formed the basis of a non-
dilutive Private Placement completed by the Company in February 1990. Mr. Bray
received the remainder of the Common Shares held by RRSI and the RRSI warrant
to
purchase up to 2,280,427 Common Shares at $.13 1/3 per share. Mr. Bray also
assumed RRSI's 40 percent guarantee obligation on the $50,000 bank loan. In
1990 Mr. Bray lent the Company $15,000 in working capital.
In connection with the sale of Common Shares to RRSI and in consideration of
other services rendered, in 1987 the Company issued to a consultant 500,000
Common Shares valued at $.03 per share. The consultant, Sidney M. Stoller,
also become a member of the Board of Directors. On December 14, 1987, the
Company entered into an agreement with Mr. Stoller under which he could acquire
warrants for the purchase of up to 300,000 shares of the Company's Common
Shares
at an exercise price of $.1333 per share, and as of December 31, 1988 Mr.
Stoller had acquired warrants to purchase 300,000 Common Shares. The warrants
were issued in exchange for consulting services to be provided through December
1988 and expire two years from completion of such services. The consulting
contract was extended through December 31, 1992. During 1990 Mr. Stoller
acquired warrants to purchase an additional 300,000 Common Shares. The Board
of
Directors directed that the exercise price be established at $.03 per share.
Common Shares reserved for issuance on the exercise of warrants and options as
of December 31, 1998 are as follows (excluding subsequently expired warrants):
Description Shares Reserved
Warrants 4,830,047
Non-qualified stock options 350,000
Incentive stock options (Note 7) 7,400,000
12,580,047
F-7
<PAGE>
Note 7. Stock Options
Pursuant to a stock plan approved by the Company's stockholders in June 1988,
the Company reserved 7,500,000 Common Shares (100,000 Shares were purchased in
1988 pursuant to this plan leaving 7,400,000 Shares reserved). The plan
provides for the granting of both incentive stock options and non-qualified
stock options to purchase Common Shares at prices not less than the fair market
value at the date of grant as determined by the Compensation and Stock Option
Committee of the Board of Directors. The period for the exercise of each
option
granted is five years from the date of grant of an incentive stock option and
ten years from the date of the grant of a non-qualified stock option. Options
to purchase 1,000,000 and 150,000 Common Shares were forfeited in 1992 and
1989.
In 1990 the Company granted an option to purchase 100,000 Common Shares at
$.065
per share to an employee who subsequently terminated employment, in exchange
for
future services to be rendered relating to technology transfer.
In 1994 and 1995, the Company granted an option to purchase shares at $.03 per
share, in exchange for assistance relating to financial, administrative,
stockholder and marketing services as follows:
Mr. Lawrence O'Donnell 200,000 shares
Mr. William Jankowski 200,000 shares
Mrs. Virginia Paul 200,000 shares
Mrs. Bernice King 100,000 shares
Mrs. Debbie Smith 100,000 shares
Mr. Richard Andersen 200,000 shares
In 1995 the Board of Directors reestablished the option price to $0.005 for the
1,000,000 shares outlined.
Note 8. Income Taxes and Net Operating Losses
The Company has unexpired net operating loss carry-forwards of approximately
$1,737,000 as of December 31, 1999, available to reduce future federal taxable
income. The carry-forwards are shown in the following tabulation:
Loss carry- Year of
forward amount expiration
$206,000 2000
$23,000 2001
$403,000 2002
$463,000 2003
$226,000 2004
$105,000 2006
$114,000 2007
$18,000 2009
$69,000 2010
$84,000 2011
$22,000 2012
$4,000 2013
F-8
<PAGE>
In December 1987, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 96, "Accounting for Income Taxes".
Because the Company has significant net operating loss carry-forwards and no
material differences between book income and taxable income, implementation of
SFAS No. 96 is not expected to have a material effect on the Company's reported
financial position and results of operations.
Note 9. Commitments and Contingencies
The Company has no other undisclosed commitments or contingencies.
Note 10. Equipment Warranties and Claims
There are no pending or threatened lawsuits against the Company.
Note 11. Going Concern
As shown in the accompanying financial statements, as of December 31, 1999 the
Company's current liabilities exceeded its current assets by $700,000. Those
factors create an uncertainty about the Company's ability to continue as a
going
concern. The ability of the Company to continue as a going concern is
dependent
on its success in obtaining working capital and increasing revenues. The
Company plans on obtaining working capital through performance on contracts and
potential merger with a company with complementary products. The financial
statements do not include any adjustment that might be necessary if the Company
is unable to continue as a going concern.
F-9
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0
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