As filed with the Securities and Exchange Commission on October
10, 1997
Registration No.333-21613
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3 TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------
THERMOENERGY CORPORATION
(Name of Small Business Issuer as Specified in Its Charter)
Arkansas 9999 71-00659511
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification
Organization) Code Number)
------------------------
THERMOENERGY CORPORATION
323 Center Street, Suite 1300
Little Rock, Arkansas, 72201
(501) 376-6477
(Address and Telephone Number of Principal Executive
Offices and Address of Principal Place of Business
or Intended Principal Place of Business)
------------------------
P.L. MONTESI
President
ThermoEnergy Corporation
323 Center Street, Suite 1300
Little Rock, Arkansas, 72201
(501) 376-6477
(Name, Address, and Telephone Number of Agent for Service)
Copies to:
Jay H. Lindy, Esq. Gary Barket, Esq. Alan I. Annex, Esq.
Waring Cox, PLC Davidson Law Firm, Ltd. Camhy Karlinsky &
50 North Front St., 724 Garland St. Stein LLP
Suite 1300 Little Rock, AR 72201 1740 Broadway, 16th Fl.
Memphis, TN 38103 (501) 374-9977 New York, NY 10019
(901) 543-8000 (501) 374-5917 (212) 977-6600
(901) 543-8030 (212) 977-8389
---------------------
Approximate Date of Proposed Sale to the Public: As soon as
practicable after the effective date of this Registration
Statement.
If any of the Securities being registered in this form are to
be offered, on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933, check the following box. /x/
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. /
/
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount Offering Aggregate Amount of
Securities to be to be Price per Offering Registration
Registered Registered Unit (1) Price (1) Fee
- ----------------------
<S> <C> <C> <C> <C>
Series A Common Stock,
$.001 par value(2) 1,694,999 $3.30(1) $5,593,497 $1,695.00
Redeemable Series 1
Common Stock Purchase
Warrants(3) 1,694,999 $0.10 $1,269,500 $513.64
Redeemable Series 2
Common Stock Purchase
Warrants(4) 1,694,999 $0.10 $169,500 $513.64
Series A Common Stock
issuable on exercise
of Redeemable Series
1 Common Stock
Purchase Warrants(5) 1,694,999 $3.96 $6,712,196 $2,034.00
Series A Common Stock
issuable on exercise
of Redeemable Series
2 Common Stock
Purchase Warrants(6) 1,694,999 $6.60 $11,186,993 $3,390.00
Representative's
Warrants(7) 120,000 $.0001 $12 $(8)
Series A Common Stock
issuable upon exercise
of Representative's
Warrant(9) 120,000 $3.96 $475,200 $144
Redeemable Series 1
Common Stock Purchase
Warrants issuable upon
exercise of
Representative's
Warrants(9) 120,000 $.12 $14,400 $4.36
Redeemable Series 2
Common Stock Purchase
Warrants issuable upon
exercise of
Representative's
Warrants(9) 120,000 $.12 $14,400 $4.36
Series A Common Stock
issuable upon exercise
of Series 1 Warrants
issuable upon exercise
of Representative's
Warrants(9) 120,000 $3.96 $475,200 $240.00
Series A Common Stock
issuable upon exercise
of Series 2 Warrants
issuable upon exercise
of Representative's
Warrants 120,000 $6.60 $792,000 $240.00
Total $25,602,886 $7,758.45(11)
</TABLE>
(1) Estimated sales for purposes of computing the registration fee
pursuant to Rule 457(a).
(2) Includes 180,000 shares of Series A Common Stock which the
Underwriters have the option to purchase to cover over-allotments,
if any. Also includes 314,999 shares of Series A Common Stock sold
to holders of bridge financing notes, not for cash, but for
conversion of their debt to equity at the conversion rate of $3.18
of principal and accrued interest for one share of Series A Common
Stock.
(3) Includes 314,999 Redeemable Series 1 Common Stock Purchase
Warrants sold to holders of bridge financing notes, not for cash,
but for conversion of their debt to equity at the conversion rate
of $3.18 of principal and accrued interest for one Series 1
Warrant.
(4) Includes 314,999 Redeemable Series 2 Common Stock Purchase
Warrants sold to holders of bridge financing notes, not for cash,
but for conversion of their debt to equity at the conversion rate
of $3.18 of principal and accrued interest for one Series 2
Warrant.
(5) Reserved for issuance upon exercise of Redeemable Series 1
Common Stock Purchase Warrants.
(6) Reserved for issuance upon exercise of Redeemable Series 2
Common Stock Purchase Warrants.
(7) To be issued to the Representative of the Underwriters at the
Closing.
(8) No fee required.
(9) Reserved for issuance upon exercise of Representative's
Warrants.
(10)Pursuant to Rule 416, this Registration Statement also relates
to an indeterminate number of additional shares as may be issued as
a result of anti-dilution provisions of the Representative's
Warrants and the Redeemable Common Stock Purchase Warrants.
(11)$10,823.24 has previously been paid pursuant to Rule 457(a).
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to
said Section 8(a), may determine.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION, DATED OCTOBER , 1997
----
THERMOENERGY CORPORATION
/ LOGO /
1,200,000 Shares of Series A Common Stock
1,200,000 Redeemable Series 1 Common Stock Purchase Warrants and
1,200,000 Redeemable Series 2 Common Stock Purchase Warrants
ThermoEnergy Corporation, an Arkansas corporation ("Company"),
hereby offers ("Offering") 1,200,000 shares of Series A Common
Stock, par value $.001 per share ("Common Stock" or "Series A
Common Stock"), 1,200,000 Redeemable Series 1 Common Stock Purchase
Warrants ("Series 1 Warrants") and 1,200,000 Redeemable Series 2
Common Stock Purchase Warrants ("Series 2 Warrants"). The Common
Stock, the Series 1 Warrants and the Series 2 Warrants are
sometimes hereinafter together referred to as the "Securities".
The Series 1 Warrants and the Series 2 Warrants are sometimes
hereinafter together referred to as the "Warrants." Until the
completion of this Offering, the Common Stock, the Series 1
Warrants and the Series 2 Warrants offered hereby may only be
purchased together as a unit ("Unit") on the basis of one share of
Common Stock, one Series 1 Warrant and one Series 2 Warrant, but
will trade separately immediately after this Offering. Each Series
1 Warrant entitles the registered holder thereof to purchase one
share of Common Stock at an initial exercise price of $3.96 per
share [120% of the public offering price per share], subject to
adjustment, at any time commencing _____, 1998 until _____, 2002.
Commencing _____, 1998, the Series 1 Warrants are subject to
redemption by the Company, in whole but not in part, at $.05 per
Warrant on 30 days' prior written notice provided that the average
closing bid price of the Common Stock as reported on the OTC
Bulletin Board equals or exceeds $6.60 per share [200% of the
public offering price per share] (subject to adjustment under
certain circumstances) for any 20 trading days within a period of
30 consecutive trading days ending on the fifth trading day prior
to the date of the notice of redemption. Each Series 2 Warrant
entitles the registered holder thereof to purchase one share of
Common Stock at an initial exercise price of $6.60 per share [200%
of the public offering price per share], subject to adjustment, at
any time commencing _____, 1998 until _____, 2002. Commencing
_____, 1998, the Series 2 Warrants are subject to redemption by the
Company, in whole but not in part, at $.05 per Warrant on 30 days'
prior written notice provided that the average closing bid price of
the Common Stock as reported on the OTC Bulletin Board equals or
exceeds $9.90 per share [300% of the public offering price per
share] (subject to adjustment under certain circumstances) for any
20 trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of the notice of
redemption. See "Description of Securities".
Concurrently with this Offering, the Company is registering for
resale on behalf of certain securityholders ("Selling
Securityholders") 314,999 shares of Series A Common Stock ("Selling
Securityholders' Shares"), 314,999 Series 1 Warrants and 314,999
Series 2 Warrants (collectively, "Selling Securityholders'
Warrants"), and the shares underlying such Selling Securityholders'
Warrants ("Selling Securityholders' Warrant Shares"). The Selling
Securityholders' Shares and Selling Securityholders' Warrants are
to be issued to the Selling Securityholders in connection with a
private placement to occur prior to the close of this Offering.
See "Private Placement." The Selling Securityholders' Shares and
Selling Securityholders' Warrants are not part of this underwritten
Offering. Further, all Selling Securityholders' Shares are the
subject of a "lock-up" agreement whereby holders of Selling
Securityholders' Shares are prohibited from selling or otherwise
disposing of the Selling Securityholders' Shares for a period of
180 days following the date of this Prospectus without the prior
written consent of the Representative. The Company will not
receive any proceeds from the sale of the Selling Securityholders'
Shares and Selling Securityholders' Warrants by such Selling
Securityholders. However, the Company will receive proceeds from
the exercise, if any, of the Selling Securityholders' Warrants.
See "Use of Proceeds," "Description of Securities," "Concurrent
Registration of Securities," "Private Placement", "Selling
Securityholders" and "Underwriting."
Prior to this Offering, there has been no public market for
the Securities and there can be no assurance that such a market
will develop after the completion of this Offering or, if
developed, that it will be sustained. It is anticipated that the
initial public offering price of the Common Stock will be $3.50 per
Unit, which is $3.30 per share and $0.10 per Warrant. The public
offering price of the Common Stock and the Warrants, and the
exercise price and other terms of the Warrants have been determined
by negotiation between the Company and National Securities
Corporation and does not necessarily reflect the Company's assets,
book value, performance or other generally accepted criteria of
value. See "Risk Factors" and "Underwriting". It is expected that
Common Stock, the Series 1 Warrants and the Series 2 Warrants will
be traded on the OTC Bulletin Board.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK
FACTORS" BEGINNING ON PAGE 9 AND "DILUTION ON PAGE 21."
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Discount and Proceeds to
Price to Public Commission (1) the Company (2)
--------------- -------------- ---------------
<S> <C> <C> <C>
Per Share $3.30 $0.33 $3,564,000
Per Series 1 Warrant $.10 $0.01 $108,000
Per Series 2 Warrant $.10 $0.01 $108,000
Total(3) $4,200,000 $420,000 $3,780,000
</TABLE>
(1) Excludes additional compensation to be received by National
Securities Corporation, the representative (the "Representative")
of the several underwriters ("Underwriters"), in the form of (i) a
nonaccountable expense allowance of 3% of the gross proceeds to the
Company and (ii) sale to the Representatives for nominal
consideration of warrants ("Representative's Warrants") to purchase
up to 120,000 shares of Common Stock and/or 120,000 Series 1
Warrants and/or 120,000 Series 2 Warrants. In addition, the
Company has agreed to indemnify the Underwriters against certain
liabilities. See "Underwriting".
(2) Before deducting expenses of this Offering payable by the
Company, estimated at $_____, which includes the nonaccountable
expense allowance described in Note 1 above.
(3) The Company has granted to the Underwriters an option,
exercisable within 45 days after the date of this Prospectus, to
purchase up to 180,000 additional shares of Common Stock and/or
180,000 Series 1 Warrants and/or 180,000 Series 2 Warrants on the
same terms and conditions as set forth above, solely to cover
overallotments, if any ("Overallotment Option"). The Overallotment
Option may be exercised to purchase shares of Common Stock or
Warrants or any combination thereof. If the Overallotment Option
is exercised in full, the total Price to Public, Underwriting
Discount and the Proceeds to the Company will be $____, $____, and
$____, respectively. See "Underwriting".
The Securities are being offered by the Underwriters on a firm
commitment basis, subject to prior sale, when, as and if delivered
to and accepted by the Underwriters and subject to approval of
certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel
or modify this Offering and to reject any order in whole or in
part. It is expected that delivery of the Securities will be made
against payment at the offices of National Securities Corporation,
1001 Fourth Avenue, Seattle, Washington, on or about ,
1997.
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is , 1997
---------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS, ON THE OTC BULLETIN BOARD OR OTHERWISE, WHICH
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE
COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN
CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE THE
SECURITIES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish its stockholders with annual
reports containing financial statements audited and reported upon
by its independent certified public accountants after the end of
each fiscal year, and make available such other periodic reports as
the Company may deem to be appropriate or as may be required by
law. Reports and other information filed by the Company may be
inspected and copied at the public reference facilities of the
Commission in Washington, D.C., and copies of such material can be
obtained from the Public Reference Section of the Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.,
20549 at prescribed rates.
[LEGEND]
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been
filed with the Securities and Exchange Commission. These securities
may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This prospectus
shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any
State in which such offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of
any such state.
[GOES ON SIDE OF COVER PAGE]<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified by, and must be read in
conjunction with, the more detailed information and financial
statements and notes thereto appearing elsewhere in this
Prospectus. Unless otherwise indicated, all share and per share
information in this Prospectus gives effect to the Company's two,
four-to-one reverse stock splits approved by shareholders on March
2, 1994 and December 12, 1996, and does not give effect to (i) any
exercise of the Overallotment Option, (ii) the issuance of up to
1,200,000 shares of Common Stock upon exercise of the Series 1
Warrants, (iii) the issuance of up to 1,200,000 shares of Common
Stock upon exercise of the Series 2 Warrants, (iv) the issuance of
up to 1,200,000 shares of Common Stock, 1,200,000 Series 1 Warrants
and 1,200,000 Series 2 Warrants upon exercise of the
Representative's Warrants, (v) the issuance of up to 240,000 shares
of Common Stock upon exercise of Series 1 Warrants and Series 2
Warrants underlying the Representative's Warrants, and (v) the
issuance of up to 1,328,999 shares of Common Stock upon exercise of
warrants outstanding as of the date of this Prospectus ("Series B
Warrants"). See "Underwriting" and "Shares Eligible for Future
Sale".
The Company
ThermoEnergy Corporation ("Company") is a development stage
company involved in the marketing and development of certain
environmental technologies primarily used for solving waste water
problems. These technologies include two chemical processes known
as the Sludge-To-Oil Reactor System (STORS[TM]) and Nitrogen
Removal (NitRem[TM]). The third technology, a dual-shell pressure
balance vessel, known as the Dual-Shell Reactor[TM] ("DSR"), is the
unique reactor equipment in which the STORS and NitRem chemistries
are conducted (STORS, NitRem and DSR are referred to collectively
as the "Technologies"). The Company's application of STORS and
NitRem through the use of a STORS-DSR, NitRem-DSR, or a combination
of both types of equipment, are designed to eliminate damaging
organic and nitrogenous contaminants, respectively, from municipal
and industrial waste streams. See "Business".
The Company is the exclusive worldwide licensee for the
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 or NitRem-DSR) 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. The Company's
business strategy is based upon entering 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. The Company is currently negotiating project-specific
working arrangements with Foster Wheeler Environmental Corporation.
The Company also has joint marketing arrangements with Roy F.
Weston, Inc., Dan Cowart, Inc., and Mitsui & Co. (U.S.A.), Inc. and
plans to enter project specific working arrangements when such
projects are identified and funding is obtained. The Company has
not generated any operating revenues or any profits. See "Business
- - Strategic Corporate Relationships", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Financial Statements.
The Company currently has two projects to demonstrate the
Technologies and is in the process of negotiating a third. The
Company will not be required to make capital contributions to any
such projects, and the Company will not receive any revenues or
earnings from these demonstration projects. The Company will be
reimbursed for administrative and operating costs from the two
demonstration projects underway and is negotiating similar
arrangements for the third 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 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. The NitRem DSR unit
was delivered to the project site, Radford Army Ammunition Plant,
Radford, Virginia, in June 1997, and began operations July 21,
1997. TRIES holds the contract with the Department of Defense,
Department of Army, and the Company has subcontracted with TRIES
for the project. See "Business - Nitrogen Removal Demonstration -
United States Department of the Army Program".
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 Public Works. The purpose of the New York
Agreement is to allow the City of New York to evaluate the
Company's nitrogen removal processes, including but not limited to
NitRem, 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 this demonstration project.
Pursuant to the New York Agreement, Foster Wheeler Environmental
Corporation will manage this demonstration project which is
scheduled to begin in October 1997. The Company's role in this
demonstration project will be limited to providing the Technologies
and consulting on project design. This will be the first
collaborative effort between the Company and Foster Wheeler
Environmental Corporation to demonstrate NitRem. See "Business -
Nitrogen Removal Demonstration - New York City Project".
In September 1996, a $3,000,000 federal matching grant was
appropriated by Congress to be used by the San Bernardino Valley
Water District ("SBVWD") for the design, construction and operation
of a large-scale STORS wastewater treatment demonstration facility.
The terms of the grant require SBVWD to provide matching funds for
this demonstration project. Assuming the negotiations have been
completed between the Company and SBVWD for construction of this
project, the Company anticipates this demonstration facility will
have a through-put capacity equal to or greater than 75% of the
wastewater treatment facilities currently operating within the
United States. The Company anticipates that it will be responsible
for the design and installation, and will subcontract for the
construction and operation of the SBVWD demonstration facility.
See "Risk Factors-Dependence on Strategic Corporate Relationships;
EPA Discretion and Uncertainty of Technologies to Achieve Results"
and "Business - STORS Demonstration".
Although the Company believes that it will be able to enter
into working arrangements with additional strategic partners and if
the demonstration projects are successful, be awarded sales and/or
service contracts for the Technologies, there can be no assurance
that the Company's efforts will result in additional working
arrangements, demonstration project contracts, or commercial
contract awards. Even if such contracts are awarded, neither
STORS nor NitRem nor the DSR have ever been utilized on a large-scale basis,
and there is no assurance that any of STORS, NitRem or
the DSR will perform successfully on a large-scale basis or that
they will be profitable to the Company. See "Risk Factors - No
Assurance of Additional Collaborative Agreements, Licenses or
Project Contracts, Commercialization of Technologies".
The principal executive offices of the Company are located at
323 Center Street, Suite 1300, Little Rock, Arkansas, 72201, and
its telephone number is (501) 376-6477.
<PAGE>
The Offering
Securities Offered 1,200,000 shares of Common Stock,
1,200,000 Redeemable Series 1 Common
Stock Purchase Warrants and 1,200,000
Redeemable Series 2 Common Stock
Purchase Warrants.
Terms of Series 1 Warrants Each Series 1 Warrant entitles the
holder thereof to purchase, at any
time commencing _____, 1998 until
_____, 2002, one share of Common
Stock at a price of $3.96 per share
[120% of the public offering price
per share], subject to adjustment.
Commencing _____, 1998, the Warrants
are subject to redemption by the
Company, in whole but not in part, at
$.05 per Warrant on 30 days' prior
written notice provided that the
average bid price of the Common Stock
as reported on OTC Bulletin Board
equals or exceeds $6.60 per share
[200% of the public offering price
per share], subject to adjustment,
for any 20 trading days within a
period of 30 consecutive trading days
ending on the fifth trading day prior
to the date of the notice of
redemption. See "Description of
Securities".
Terms of Series 2
Warrants Each Series 2 Warrant entitles the
holder thereof to purchase, at any
time commencing _____, 1998 until
_____, 2002, one share of Common
Stock at a price of $6.60 per share
[200% of the public offering price
per share], subject to adjustment.
Commencing _____, 1998, the Warrants
are subject to redemption by the
Company, in whole but not in part, at
$.05 per Warrant on 30 days' prior
written notice provided that the
average bid price of the Common Stock
as reported on OTC Bulletin Board
equals or exceeds $9.90 per share
[300% of the public offering price
per share], subject to adjustment,
for any 20 trading days within a
period of 30 consecutive trading days
ending on the fifth trading day prior
to the date of the notice of
redemption. See "Description of
Securities".
Securities outstanding prior
to the Offering (1) 3,402,968 shares of Series B Common
Stock and 1,378,999 Series B
Warrants.
Securities to be outstanding
after the Offering
(1)(2)(3)(4) 1,514,999 shares of Series A Common
Stock, 1,514,999 Series 1 Warrants,
1,514,999 Series 2 Warrants,
3,463,568 shares of Series B Common
Stock and 1,378,999 Series B
Warrants.
Use of Proceeds The Company intends to apply the net
proceeds of this Offering to fund
working capital and general corporate
purposes; other current liabilities;
strategic alliances and technology
demonstrations; research and
development; and repayment of bridge
financing. See "Use of Proceeds".
Proposed OTC Bulletin Board Symbols :
Series A Common Stock . . . . . . THMO
Series 1 Warrants . . . . . . . . THMO.W1
Series 2 Warrants . . . . . . . . THMO.W2
(1) Stockholders of the Company have approved two, four-to-one
reverse stock splits which have been implemented as of the date of
this Prospectus. The amounts described in this Prospectus are
after implementation of the two reverse stock splits. The average
exercise price of the Series B Warrants is $2.84.
(2) Assumes the issuance of 60,600 shares of Series B Common Stock
upon completion of this Offering to certain persons who loaned the
Company money during the period December 1996 through June, 1997,
each shall receive 1,000 shares of Series B Common Stock for every
$10,000 loaned to the Company, not to exceed, in the aggregate,
60,600 shares.
(3) Does not include 505,000 options for Series B Common Stock
granted to certain officers and directors of the Company under the
Company's 1997 Stock Option Plan.
(4) Includes Securities issued in the Private Placement. See
"Private Placement".
Summary Risk Factors
An investment in the Securities offered hereby involves a high
degree of risk and should be made only by investors who can afford
the loss of their entire investment. Such risk factors include,
among others, limited operating history, historical net losses and
continued expected future losses, going concern disclosure in
independent auditor's report, no assurance of collaborative
agreements, licenses or project contracts, no assurance that the
Technologies can be commercialized, need for additional financing,
broad discretion in application of proceeds and no assurance of a
public trading market. See "Risk Factors" beginning on page 9.
Summary Financial Data
The summary financial data included in the following table as
of September 30, 1996, for the five year period ended September 30,
1996 and for the period cumulative during the development stage
through September 30, 1996, are derived from the Financial
Statements appearing elsewhere herein. The summary financial data
as of June 30, 1997, for the nine months ended June 30, 1996 and
1997 and for the period cumulative during the development stage
through June 30, 1997 are unaudited and, in the opinion of
management, include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of such
data. Financial data for the nine months ended June 30, 1997 are
not necessarily indicative of the results of operations to be
expected for the entire year. The summary financial data should be
read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial
Statements and notes thereto appearing elsewhere herein.
Statement of Operations:
<TABLE>
<CAPTION>
Cumulative
during
development
stage through
Year Ended September 30 September 30,
----------------------------------------------- --------------
1992 1993 1994 1995 1996 1996
<S> <C> <C> <C> <C> <C> <C>
Operating
Revenues $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Operating
Expenses 0 0 0 0 0 0
General and
Administra-
tive 533,284 1,195,722 721,496 756,3415 20,364 4,834,502
Payments
under
Licenses 33,000 0 48,500 123,000 0 627,266
-------- --------- -------- -------- ------- ----------
Loss from
Operations (566,284) (1,195,722) (769,996) (879,341) (520,364) (5,461,768)
Interest
Income 15,972 1,908 2,714 2,391 6,942 60,785
Interest
Expense (12,439) (14,107) (145) (20,048) (38,199) (140,418)
--------- --------- -------- -------- -------- -----------
Net Loss $562,751)$(1,207,921)$(767,427)$(896,998)$(551,621) $(5,541,401)
========== =========== ========= ========= ========= ===========
Net loss
per
share (1) $(.15) $(.32) $(.20) $(.24) $(.15) $(1.50)
Cash
Dividends
paid $0 $0 $0 $0 $0 $0
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Nine Months during development
Ended stage through
June 30, June 30,
----------------------- -----------------
1996 1997 1997
<S> <C> <C> <C>
Operating Revenues $ 0 $ 0 $ 0
Operating Expenses 0 0 0
General and Administrative 361,521 652,398 5,486,900
Payments under Licenses 0 0 627,266
---------- ---------- ----------
Loss from Operations (361,521) (652,398) (6,114,166)
Interest Income 4,961 9,361 70,146
Interest Expense (26,273) (57,573) (197,991)
---------- ---------- ----------
Net Loss $ (382,833) $ (700,610) $(6,242,011)
========= ========= ==========
Net loss per share (1) $(.10) $(.18) $(1.68)
Cash Dividends paid $ 0 $ 0 $ 0
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1997
------------------ ----------------------------
Actual As Adjusted(2)
<S> <C> <C> <C>
Working capital
(deficit) $(1,805,242) $(2,641,181) $2,522,530
Total assets 173,333 422,878 3,050,269
Total liabilities 1,867,575 2,817,730 523,274
Stockholders'
equity (deficit) (1,694,242) (2,394,852) 2,526,995
</TABLE>
- ---------------------
(1) Net loss per share is calculated on the basis of the weighted average
shares of Series B Common Stock outstanding, after giving effect to the
implementation of the two, four-to-one reverse stock splits approved by the
stockholders on March 2, 1994 and December 12, 1996, for each period presented.
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.
(2) Gives effect to the initial application of the estimated net proceeds
from this Offering. See "Use of Proceeds".
<PAGE>
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk and should be made only by investors who can afford the loss of their
entire investment. Prospective investors should carefully review and consider
the following risk factors described below, in addition to the information
included elsewhere in this Prospectus.
Limited Operating History; Net Losses; Future Losses; Initial Commercialization
Stage; Going Concern Disclosure in Independent Auditors' Report
The Company's limited operating history has consisted primarily of
development of the Technologies, conducting laboratory tests, and planning
on-site tests and demonstrations. The Company is subject to all of the business
risks associated with a new enterprise, including, but not limited to, risks of
unforeseen capital requirements, failure to achieve market acceptance, failure
to establish business relationships, and competitive disadvantages as against
larger and more established companies. At September 30, 1996 and June 30, 1997,
the Company had an accumulated stockholders' deficit of $(1,694,242) and
$(2,394,852), respectively, and a working capital deficit of $(1,805,242) and
$(2,641,181), respectively. The Company also made advances to management and
related accrued period interest payments of $223,365 and $18,499, respectively,
as of June 30, 1997. Additionally, as of June 30, 1997, the Company had
outstanding indebtedness in an aggregate principal amount of $606,000 at an
interest rate of 10% per annum and $735,000 at an interest rate of 6.63% per
annum, all of which is owed to shareholders. Approximately $1.0 million of such
loans shall be converted to Units in the Private Placement and the balance of
such loans shall be repaid from the proceeds of this Offering. See "Use of
Proceeds" and "Private Offering".
The Company anticipates that it will continue to incur significant
operating losses through 1997 and may incur additional losses thereafter,
depending upon (i) its ability to consummate collaborative working arrangements
or sub-licenses with third parties which provide revenue and (ii) the operation
and financial success of any projects which the Company and its potential
working partners may be awarded. The Company has had no operating revenues to
date, and there can be no assurance as to when or whether it will be able to
commercialize the Technologies. The Technologies have never been utilized on
a large-scale basis, and there can be no assurance that either STORS or NitRem
will (i) perform successfully on a large-scale commercial basis or (ii) will be
profitable to the Company. The Company's ability to operate its business
successfully will depend on a variety of factors, many of which are outside the
Company's control, including: competition, contract awards, cost and
availability of raw material supplies, changes in governmental initiatives and
requirements, changes in EPA and other regulatory requirements, and the costs
associated with equipment repair and maintenance. The report of the independent
auditors with respect to the Company's financial statements included in this
Prospectus includes a "going concern" paragraph indicating that the Company's
significant operating losses and the need for substantial capital to
commercialize the Technologies raise substantial doubt about the Company's
ability to continue as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
Financial Statements.
Need for Additional Financing
The Company's future capital requirements could vary significantly and will
depend on certain factors, many of which are not within the Company's control.
These include the existence and terms of any collaborative arrangements; the
success of the ongoing development and testing of the Technologies; the large
scale demonstration of the Technologies as a viable alternative for both waste
water minimization and remedial services; the nature and timing of obtaining
project contracts and required permits; and the availability of financing.
The Company may not be able to enter into favorable business collaborations
and might therefore be required to bid upon projects itself. If such bids were
successful, the Company would be required to make significant expenditures on
personnel and capital equipment which would require significant financing in
amounts substantially in excess of the net proceeds of this Offering. If this
is the case, then the Company will need to seek project financing and/or new
capital in addition to the net proceeds of this Offering in order to meet its
obligations. The unavailability of such new financing would have a material
adverse effect on the business of the Company. In addition, the Company's lack
of operational experience, the lack of completed, successful demonstration
projects, and limited capital resources could make it difficult, if not highly
unlikely, to successfully bid on major commercial projects. In such event, the
Company's business development could be limited to process removal of waste
water from smaller commercial and industrial sites with significantly lower
potential for profit. See "Risk Factors - Engineering Risks".
In addition, the expansion of the Company's business will require the
commitment of significant capital resources toward the hiring of technical and
operational support personnel and the building of equipment to be used for
on-site test demonstrations. The possibility exists that the Company may be
required to provide matching funds for the project(s) (e.g., the EPA sometimes
requires a five percent (5%) matching funds contribution to the project from the
grant recipient). If this is the case then the Company will need a substantial
influx of new capital in addition to the net proceeds of this Offering, to meet
the required obligation. The capital needed to construct and operate a
demonstration facility is projected to be between $2,000,000 and $4,000,000 for
a NitRem demonstration facility, and between $5,000,000 and $7,000,000 for a
STORS/NitRem demonstration facility. The unavailability of such new capital
would have a material adverse effect on the business of the Company.
In the event the Company is presented with one or more significant
projects, individually or in conjunction with collaborative working partners,
it will be required to seek project financing and/or new capital in addition to
the net proceeds of this Offering in order to take advantage of such
opportunities. There can be no assurance that such financing will be available
or, if available, that the terms of such financing will be acceptable and
favorable to the Company. Such financing, if available, may require the Company
to issue additional equity which may cause substantial dilution to shareholders.
If additional financing is not available, the Company may be required to delay,
scale back or eliminate certain of its research and development programs, to
relinquish rights to certain of its Technologies, or to license third parties
to commercialize Technologies that the Company would otherwise seek to develop
itself, any of which would have a material adverse effect on the business of the
Company. To the extent the Company raises additional capital by issuing equity
securities, the holdings of shareholders will be diluted. See "Use of Proceeds"
and "Management's Discussion and Analysis of Results of Operations - Liquidity
and Capital Resources."
No Assurance of Additional Collaborative Agreements, Licenses or Project
Contracts, Commercialization of Technology
The Company's business strategy is based upon entering into collaborative
working relationships with established engineering and environmental companies,
or formal joint venture agreements relative to the application of STORS and
NitRem as enabling technologies for specified industries or markets. The
Company currently is collaborating with Foster Wheeler Environmental Corporation
to construct a nitrogen removal demonstration project for the City of New York
at no cost to the City of New York and is negotiating with Foster Wheeler
regarding the possible construction of a STORS demonstration project for SBVWD.
The Company has also contracted with TRIES to be the lead sub-contractor on a
nitrogen removal demonstration project to be delivered to the Radford Army
Ammunition Plant. However, neither the Company nor any of its prospective
working partners are currently negotiating any other specific project contracts.
There is no assurance that the Company will enter into definitive project
arrangements or joint venture agreements with its prospective working partners
or others, or that such agreements, if entered into, will be on terms and
conditions that are sufficiently favorable to the Company to enable it to
generate profits. See "Business - Strategic Corporate Relationships".
In the event 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. There
is no assurance that the Company will be able to enter into such third-party
license arrangements or that such license arrangement will produce any income
to the Company. In addition, any project contract which may be awarded to the
Company and/or any of its joint working partners may be curtailed, delayed,
redirected or eliminated at any time. Problems experienced on any specific
project, or delays in the implementation and funding of projects, could
materially adversely affect the Company's business and financial condition. See
"Business - Competition and Proprietary Information".
Uncertainty of Market Acceptance
Many prospective users of the Technologies have already committed
substantial resources to more conventional forms of environmental technologies,
including incineration, plasma arc, molten metal, molten salt, chemical
neutralization, catalytic electro chemical oxidation, supercritical water
oxidation, land filling, land application, and composting. The Company's growth
and future financial performance will depend on demonstrating to prospective
collaborative partners and users the advantages of STORS and NitRem, coupled
with the DSR, over alternative technologies. There can be no assurance that the
Company and its prospective collaborative partners will be successful in this
effort. It is anticipated that the environmental remediation and
decontamination market will decline over an extended period, as past
environmental degradation is corrected, and as the private and public sectors
limit further pollution through the prohibition on the production and use of a
broad range of hazardous materials and through the modification and improved
efficiency of varied manufacturing processes. See "Business - Competition and
Proprietary Information".
Dependence on Strategic Corporate Relationships; EPA Discretion and Uncertainty
of Technologies to Achieve Results
The Company believes that its joint working arrangements will limit the
Company's participation in projects to (i) providing the Technologies, (ii)
providing technical support relevant to the design of STORS, NitRem and/or the
DSR portion of the project(s) and (iii) operating the system. The Company
anticipates subcontracting for the manufacture and delivery of the DSR system
for certain projects. The Company anticipates receiving no revenues from its
demonstration projects and may be required to bear a portion of the operating
costs. Accordingly, the profitability of each project and the Company's
financial success will be largely dependent upon the abilities and financial
resources of the parties collaborating with the Company. Although the Company
has entered into certain working arrangements with Foster Wheeler Environmental
Corporation, Roy F. Weston, Inc., Dan Cowart, Inc., and Mitsui & Co. (U.S.A.),
Inc., there can be no assurance that any of these working arrangements will
result in the Company being awarded sales and/or service contracts,
demonstration project contracts, or commercial contracts. See "Business -
Strategic Corporate Relationships".
In September 1996, a $3,000,000 federal matching grant was appropriated by
Congress to be used by the San Bernardino Valley Water District ("SBVWD") for
the design, construction and operation of a large-scale STORS wastewater
treatment demonstration facility. The terms of the grant require SBVWD to
provide matching funds for this demonstration project. Assuming the
negotiations have been completed between the Company and SBVWD for construction
of this project, the Company anticipates this demonstration facility will have
a through-put capacity equal to or greater than 75% of the wastewater treatment
facilities currently operating within the United States. The Company
anticipates that it will be responsible for the design and installation, and
will subcontract for the construction and operation of the SBVWD demonstration
facility. However, there is no assurance that the Company will enter into a
definitive project arrangement with SBVWD, or that such arrangement, if entered
into, will be on terms and conditions that are sufficiently favorable to the
Company to enable it to generate profits. Further, the $3,000,000 federal
matching grant appropriation is currently being administrated by the
Environmental Protection Agency ("EPA"), District 8, San Francisco office. The
EPA maintains discretionary control of the disbursement of this $3,000,000
grant. If the EPA redirects this grant for the demonstration of the STORS
technology in an EPA district or municipality other than San Bernardino, the
Company will have to contract with such municipality for the grant to be used
in funding a full-scale STORS demonstration project in such other municipality.
There is no assurance that if the EPA redirects the grant to a municipality
other than San Bernardino, the Company will successfully contract with such
municipality to participate in the demonstration project.
Part of the proceeds of this Offering will be employed to promote the
Technologies as provided for under the Company's license agreement with Battelle
("License Agreement"). Failure of the STORS and/or NitRem technologies to
achieve results will adversely affect the Company's results of operations. Once
a demonstration project has been 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 nor NitRem or the
DSR have ever been utilized on a large-scale commercial basis, and there is no
assurance that the Technologies will perform successfully on a large-scale
commercial basis or that they will be profitable to the Company. There can also
be no assurance that either STORS, NitRem or the DSR will not be superseded by
other competing technologies. See "Risk Factors - Commercialization of
Technologies beyond Test Stage". See "Business" and "Interest in Management and
Others in Certain Transactions - Relationship with Battelle".
Disposition of By-Products
There are three end-products resulting from the STORS process; water,
comprising approximately 70% of the total; light oil, approximately 20%; and a
char, comprising 10%. The water is subsequently processed through the NitRem
portion of the system, removing the nitrogen/ammonia fraction, then discharged,
meeting or exceeding existing or proposed regulatory requirements. The oil is
siphoned off, collected and shipped off-site to a potential end user. The char
is dewatered, grouted into a cement mixture and landfilled with the daily grit
and screenings (materials screened out prior to the treatment process, such as
sticks, stones, etc.). The only other end-product is a small amount of air
emissions that vents heat generated by the STORS process, containing CO2, and
other trace elements that are below existing or proposed regulatory emission
limits. Since the Company cannot predict whether there will be any changes to
the regulatory requirements, if any, affecting the disposal of these
end-products, there can be no assurance that any such regulatory changes
will not
affect the economics of the process by imposing stricter regulatory standards,
therefore adversely affecting the Company's ability to commercialize STORS. See
"- Regulatory Compliance".
Engineering Risks
Even if the Technologies' processes are determined to be applicable for
commercial use, the DSR, designed by Battelle, may have to be technically
altered in size to accommodate larger throughput in order to handle the
increased flow of a commercial client. In order to determine the necessity of
such technical alterations the kinetic data from the demonstration facility(ies)
must be analyzed to determine reaction times (i.e., the length of time a waste
material must remain in the reactor before the necessary chemical reaction
occurs) and through-put capacity. If technical alterations are deemed necessary
it is currently anticipated that certain engineering innovations which will not
have been incorporated into the STORS or NitRem demonstration units will be
utilized. There can be no assurance that these innovations will prove
successful.
The engineering alternative to incorporating this technical adjustment of
the size of the reactor is to build a number of smaller capacity units that are
equivalent to one or two large capacity units. (For example, if a commercial
client has a waste flow of 300 dry tons per day (dtd), the Company could build
ten 30 dtd units instead of two 150 dtd units, since the smaller units would be
more closely sized to the demonstration reactor size utilized in a demonstration
project, thereby decreasing the engineering risk(s) associated with a large
scale-up). However, there can be no assurance that this alternative will prove
economically feasible or operationally sound.
The Company intends to engage the services of an engineering firm with
sufficient experience and skill to design, engineer and fabricate both the
demonstration and commercial size STORS or NitRem facilities should the Company
secure the capital to fund a demonstration facility. Such engineering expertise
is readily available (at a cost) from third-party engineering firms familiar to
the Company. There can be no assurance that the Company will have sufficient
funds to engage third-party firms for demonstration and commercialization of the
Technologies. See "Business".
Battelle Licenses
The Company has entered into a license agreement with Battelle which grants
to the Company certain rights to make, use and sell the STORS and NitRem
processes ("License Agreement"). When new applications for NitRem were
developed by Battelle, the Company entered into additional agreements with
Battelle to expand the applicable license fields for NitRem. Under the terms
of the License Agreement, Battelle may terminate the Company's license at any
time on or after January 31, 1998, if commercialization of either the STORS-DSR
or NitRem-DSR has not been achieved by that date. "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. In addition, subsequent agreements expanding the
license fields for NitRem 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 specific license fields in the amount of $5,000
for the preceding calendar year. While the Company currently has three
demonstration projects planned, there can be no assurance (i) that any one of
the demonstration projects will be successful or (ii) that a successful
demonstration project will lead to commercialization of the Technologies
sufficient to meet the requirements of the License Agreement or the minimum
royalty requirements for the expanded field licenses for NitRem. Termination
by Battelle of either the License Agreement and/or subsequent expanded field
licenses will have an adverse effect on the Company's ability to continue
operations. See "Certain Relationships and Related Transactions - Relationship
with Battelle".
Competition and Technological Alternatives
The Company has an exclusive license with Battelle for the development and
practice of the STORS and NitRem technologies worldwide (except for STORS in
Japan) as developed by Battelle ("License Agreement"). Even though the DSR is
patented, unless and until some aspect of the aqueous phase destruction of
nitrates, ammonia and amines is patented, neither Battelle nor the Company can
exclude others who independently obtain information concerning similar processes
or technologies from using the same processes in the commercial disposal of
sewage sludge and nitrogen removal. Battelle may terminate the License
Agreement on or after January 31, 1998, if commercialization of the licensed
process has not been achieved by that date. In addition, there is competition
from numerous large, well-established and well-capitalized waste disposal firms,
currently competing in markets which the Company hopes to penetrate
successfully. As described herein, Battelle and the Company are aware that a
Japanese company was engaged in STORS research with Battelle prior to the
Company's relationship with Battelle exclusive to Japan. See "Business - the
STORS Process" and "Interest of Management and Others in Certain Transactions -
Relationship with Battelle". The Company has had limited experience in
marketing STORS and NitRem and has a small sales and marketing organization,
whereas other participants in both the private and public sectors include
several large domestic and international companies and numerous small companies,
many of whom have substantially greater financial and other resources and more
manufacturing, marketing and sales experience than the Company. Any one or more
of the Company's competitors or other enterprises not presently known to the
Company may develop technologies which are superior to STORS and NitRem or other
technologies utilized by the Company. To the extent that the Company's
competitors are able to offer more cost-effective process removal alternatives,
the Company's ability to compete could be materially and adversely affected.
See "Business - Competition and Proprietary Information".
Unpredictability of Patent Protection and Proprietary Technology
The Company's success depends, in part, on its ability to obtain additional
patents, protect the patents which it owns, maintain trade secrecy protection
and operate without infringing on the proprietary rights of third parties. The
Company does not currently own the patents, but uses them under a series of
License Agreements between the Company and Battelle dated as of July 31, 1991,
and subsequent amendments ("License Agreement"). There can be no assurance that
the Company will develop additional proprietary technology that is patentable,
that any patents issued and used by the Company will provide the Company with
competitive advantages or will not be challenged by third parties or that
patents of others will not have an adverse effect on the Company's ability to
conduct its business. Furthermore, there can be no assurance that others will
not independently develop similar or superior technologies, duplicate any of the
Company's STORS or NitRem processes, or design around the patented STORS or
NitRem process. It is possible that the Company may need to acquire licenses
to, or to contest the validity of, issued or pending patents of third parties
relating to STORS or NitRem. There can be no assurance that any license
acquired under such patents would be made available to the Company on acceptable
terms, if at all, or that the Company would prevail in any such contest. In
addition, the Company could incur substantial costs in defending itself in suits
brought against the Company on its patents or in bringing patent suits against
other parties.
In addition to patent protection, the Company also relies on trade secrets,
proprietary know-how and technology which it seeks to protect, in part, by
confidentiality agreements with its prospective working partners and
collaborators, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known or be independently discovered by others. See
"Business - Competition and Proprietary Information".
Environmental Regulations; Regulatory Compliance
The sewage sludge disposal and municipal waste water industries have
experienced severe regulatory pressures which has had a direct effect upon the
ability of sewage disposal and municipal waste water and nitrogen removal
clients (e.g., cities, counties, and disposal districts) to forecast costs.
Within the last five years, the EPA has published regulations designed to
enforce certain federal laws (Clean Air Act, Clean Water Act, Ocean Dumping Act,
etc.) to protect the environment. The Company believes, based on limited tests,
that the STORS and NitRem technologies meet or exceed current regulatory and
statutory emission, disposal and water discharge standards. There can be no
assurance that compliance with laws and regulations will continue in light of
current regulatory efforts. In addition, the Company believes that it is
currently in compliance with all applicable federal environmental regulations,
if any, with respect to the DSR. There may be further efforts to impose more
stringent environmental impact limitations relating to disposition of sewer
sludge, nitrogen removal and other wastes. Laws and regulations may be changed
and therefore there can be no assurance of compliance with future laws and
regulations. See "- Disposition of By-Products".
Operational Risks
The Company does not have, nor does it anticipate having for some
indeterminable period of time, persons employed by it who are capable of
operating installations of either the STORS or NitRem process on a day-to-day
basis. If and when the commercial operation is built, then the Company will
engage the services of operational employees. Therefore, operational risks
include the requirement that the Company engage the services of a reputable
operating firm with adequate financial resources, technical skills and a
demonstrated history of success in environmental waste management to operate the
STORS/NitRem facilities in domestic and foreign markets if and when
commercialization is achieved. While the Company has conducted preliminary
talks with operating entities it deems qualified to provide such operating
skills, there can be no assurance that such entities will be willing to enter
into satisfactory operating agreements with the Company. See "Business -
Strategic Corporate Relationships".
Dependence on Key Management, Other Personnel and Battelle
The Company is dependent on the efforts of its senior management and
engineering staff including Dennis Cossey, Chairman of the Board and Chief
Executive Officer, P.L. Montesi, President, and upon completion of this
Offering, Alex Fassbender, PE, Executive Vice President/Engineering and
Technology, and Gary Barket, Senior Vice President and General Counsel. The
proceeds of key man life insurance policies on the lives of such individuals may
not be adequate to compensate the Company for the loss of any such individuals.
The Company intends to hire additional executive personnel and believes that its
success will depend upon its ability to hire and retain such additional
employees. 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 or NitRem demonstration facility, for the
conducting of laboratory analysis and characterization of various waste streams
to be processed through a STORS or NitRem unit, to collect and analyze process
equipment and performance data generated during a STORS and/or NitRem
demonstration test, and for on-going research and development of the STORS 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 upon
completion of this Offering, it will be able to reduce its dependence on
Battelle's supervision over the design and implementation of the STORS 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. The loss of the
services of Battelle or of any one or more of such persons may have a material
adverse effect on the Company. See "Use of Proceeds", "Management - Employee
Agreements" and "Interest of Management and Others in Certain Transactions -
Relationship with Battelle".
The Company's future success will depend in large part upon its ability to
attract and retain skilled scientific, management, operational and marketing
personnel. The Company faces competition for hiring such personnel from other
companies, government entities and other organizations. There can be no
assurance that the Company will continue to be successful in attracting and
retaining such personnel. See "Management".
Broad Discretion in Application of Proceeds
Approximately 75% of the net proceeds of this Offering has been allocated
for working capital and general corporate purposes. In addition, approximately
11% of the net proceeds of this Offering has been allocated for proposed
collaborative ventures, research and development for which the Company has no
binding agreements as of the date of this Prospectus. Accordingly, the Company
will have broad discretion as to the application of a significant portion of the
net proceeds of this Offering. The intended use of approximately 22% of the net
proceeds includes: expenditures regarding formation of strategic alliances
and/or joint ventures, including additional personnel, professional fees and
administrative overhead, as well as costs associated with technology
demonstrations for new applications and/or fields of use; payment of current
liabilities of the Company as of June 30, 1997 for consulting, legal,
professional and accounting fees and other general obligations of the Company,
including $100,000 to the officers for back pay accumulated since 1994; legal
and audit expenses; and costs associated with the acquisition, testing and
patenting of new technologies or testing of current technologies for different
uses and/or applications, including ammonia reduction process, and clean coal
process. See "Use of Proceeds".
No Dividends
The Company has never paid any dividends on its Common Stock, and has no
plans to pay dividends on its Common Stock in the foreseeable future. See
"Dividend Policy".
Potential Adverse Effect on Market Price of Securities from Future Sales of
Common Stock
In addition to the restrictions on transferability placed upon holders of
Series B Common Stock, all shares of Series B Common Stock currently outstanding
are "restricted securities" under Rule 144 promulgated under the Securities Act
of 1933, as amended (the "Securities Act"). Under Rule 144, subject to certain
restrictions, 3,402,968 shares of Series B Common Stock would be eligible for
sale 90 days after the date of this Prospectus, however, all 3,402,968 shares
are subject to the Series B restrictive terms of the class. Additionally, an
aggregate of 1,328,999 shares of Series B Common Stock issuable upon the
exercise of the Series B Warrants and 60,600 shares of Series B Common Stock to
be issued to certain noteholders of the Company also will be restricted
securities upon purchase and will be eligible for sale under Rule 144 one year
after purchase. The Company and the officers, directors and certain
stockholders of the Company have agreed with the Underwriters that they will
not, without the prior written consent of the Representatives, offer, sell,
contract to sell or otherwise dispose of any shares of Series B Common Stock or
any securities convertible into, or exchangeable or exercisable for shares of
Series B Common Stock, with limited exceptions, for a period of at least 12
months from the date of this Prospectus. Officers, directors, owners of 5% or
more of Series B Common Stock and their affiliates own 2,182,102 shares of
Series B Common Stock (includes all Series B Warrants). Upon completion of the
Offering, officers, directors, owners of 5% or more of Series B Common Stock and
their affiliates will own 2,289,415 shares of Series B Common Stock (including
all Series B Warrants) and 63,579 shares of Common Stock from the Private
Placement (does not include 63,579 Series 1 Warrants and 63,579 Series 2
Warrants also received in Private Placement). See "Private Placement". Shares
of Common Stock issued in the Private Placement are subject to a lock-up
agreement with the Representative prohibiting, without the prior written consent
of the Representative, the sale or transfer of such Common Stock for a period
of 180 days following the date of this Prospectus. Sales of substantial amounts
of Series B Common Stock or Common Stock in the public market could adversely
affect the market price of the Common Stock. See "Principal Stockholders" and
"Shares Eligible for Future Sale".
Future sales of Series B Common Stock by stockholders (including option and
warrant holders) under Rule 144 of the Securities Act, or through outstanding
registration rights granted to the holders of the Representative's Warrants,
could have an adverse effect on the market prices of the Securities. The
Company has agreed not to, directly or indirectly, issue, agree or offer to
sell, transfer, assign, distribute, grant an option for purchase or sale of,
pledge, hypothecate or otherwise encumber or dispose of any beneficial interest
in such securities for a period of 12 months following the date of this
Prospectus without the prior written consent of the Representative. In
addition, as described above, holders of Series B Common Stock are restricted
from selling or otherwise disposing of their shares for 12 months following the
date of this Prospectus without the consent of the Representative and
noteholders receiving Common Stock in the Private Placement are subject to a
lock-up agreement with the Representative prohibiting, without the prior written
consent of the Representative, the sale or transfer of such Common Stock for a
period of 180 days following the date of this Prospectus. Also, all officers
and directors of the Company have entered into a 12 month lock-up agreement with
the Representative, prohibiting sales of any Company securities by such officers
and directors for 12 months following the date of this Prospectus without the
consent of the Representative. However, when the Series B Common Stock
restrictions on transferability are eliminated after expiration of the Lock-Up
Period (as defined in "Description of Securities - Common Stock"), the Series
A and Series B classification of Common Stock shall be removed. Sales of
substantial amounts of Common Stock or the perception that such sales could
occur could adversely affect prevailing market prices for the Securities. See
"Description of Securities" and "Shares Eligible for Future Sale".
No Assurance of Public Trading Market; Arbitrary Determination of Public
Offering Price; Possible Volatility of Common Stock
Prior to this Offering, there has been no public market for the Series B
Common Stock or the Securities, and there can be no assurance that an active
trading market for any of the Series B Common Stock or the Securities will
develop or, if developed, be sustained after the Offering. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources." The public offering prices of
the Securities
offered hereby and the terms of the Warrants have been arbitrarily determined
by negotiations between the Company and the Representative, and do not
necessarily bear any relationship to the Company's assets, book value, results
of operations or any other generally accepted criteria of value. Among the
factors considered in such negotiations were prevailing market conditions, the
history of and prospects for the industry in which the Company competes, an
assessment of the Company's technology and management, the prospects of the
Company, its capital structure, the market for initial public offerings and
market prices of similar securities of comparable publicly-traded companies. No
particular weight was given to any one factor over another. See "Underwriting".
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performances of
specific companies. Announcements of new technologies and changing policies and
regulations of the federal government and state governments and other external
factors, as well as potential fluctuations in the Company's financial results,
may have a significant impact on the prices of the Securities.
Penny Stock Classification
The trading price of the Common Stock is less than $5.00 per share and,
therefore, trading in the Common Stock will be subject to the requirements of
Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Under such rule, broker/dealers who recommend such
low-priced securities to persons other than established customers and accredited
investors must satisfy special sales practice requirements, including a
requirement that they make an individualized written suitability determination
for the purchaser and receive the purchaser's written consent prior to the
transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of
1990 also requires additional disclosure in connection with any trades involving
a stock defined as a penny stock (generally, according to recent regulations
adopted by the Commission, any equity security not traded on an exchange or
quoted on Nasdaq that has a market price of less than $5.00 per share, subject
to certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith. Such requirements could severely limit the market
liquidity of the Common Stock and the Warrants and the ability of purchasers in
this Offering to sell their securities in the secondary market.
Dilution
Purchasers of the Units in this Offering will experience an immediate and
substantial dilution of $2.79 per share, or approximately 84.5%, in the net
tangible book value of the shares of Common Stock purchased by them in this
Offering. Additional dilution to future net tangible book value per share may
occur upon exercise of outstanding stock options and warrants (including the
Warrants and the Representative's Warrants) and may occur, in addition, if the
Company issues additional equity securities in the future. As a result, new
investors will bear substantially all of the risks inherent in an investment in
the Company. See "Dilution" and "Certain Relationships and Related
Transactions".
Potential Adverse Effect on Market Price of Securities from Issuance of
Preferred Stock
The Company is authorized by its amended and restated Articles of
Incorporation to issue a maximum of 10,000,000 shares of Preferred Stock, in one
or more series and containing such rights, privileges and limitations, including
voting rights, conversion privileges and/or redemption rights, as may, from time
to time, be determined by the Board of Directors of the Company. Such preferred
stock could have voting and conversion rights that adversely affect the voting
power of the holders of Common Stock, or could result in one or more classes of
outstanding securities that would have dividend, liquidation or other rights
superior to those of Common Stock. Issuance of such preferred stock may have
an adverse effect on the then prevailing market price of the Common Stock and
Warrants. See "Description of Securities".
Speculative Nature of the Warrants; Possible Redemption of Warrants
The Warrants do not confer any rights of Common Stock ownership on their
holders, such as voting rights or the right to receive dividends, but rather
merely represent the right to acquire shares of Common Stock at a fixed price
for a limited period of time. Specifically, commencing _____, 1998, holders of
the Series 1 Warrants may exercise their right to acquire Common Stock and pay
an exercise price of $3.96 per share [120% of the public offering price per
share], subject to adjustment upon the occurrence of certain dilutive events,
until _____, 2002, after which date any unexercised Series 1 Warrants will
expire and have no further value. Additionally, commencing _____, 1998, holders
of the Series 2 Warrants may exercise their right to acquire Common Stock and
pay an exercise price of $6.60 per share [200% of the public offering price per
share], subject to adjustment upon the occurrence of certain dilutive events,
until _____, 2002, after which date any unexercised Series 2 Warrants will
expire and have no further value. Moreover, following the completion of this
Offering, the market value of the Warrants is uncertain and there can be no
assurance that the market value of the Warrants will equal or exceed their
initial public offering price. There can be no assurance that the market price
of the Common Stock will ever equal or exceed the exercise price of the
Warrants, and consequently, whether it will ever be profitable for holders of
the Warrants to exercise the Warrants.
Commencing _____, 1998, the Series 1 Warrants are subject to redemption at
$.05 per Warrant on 30 days' prior written notice provided that the average
closing bid price of the Common Stock as reported on OTC Bulletin Board equals
or exceeds $6.60 per share [200% of the public offering price per share] for any
20 trading days within a period of 30 consecutive trading days ending on the
fifth trading day prior to the date of the notice of redemption. Additionally,
commencing _____, 1998, the Series 2 Warrants are subject to redemption at $.05
per Warrant on 30 days' prior written notice provided that the average closing
bid price of the Common Stock as reported on OTC Bulletin Board equals or
exceeds $9.90 per share [300% of the public offering price per share] for any
20 trading days within a period of 30 consecutive trading days ending on the
fifth trading day prior to the date of the notice of redemption. If the Warrants
are called for redemption, holders of the Warrants will lose their rights to
exercise the Warrants after the expiration of the 30-day notice period. Upon
receipt of a notice of redemption, holders would be required to: (i) exercise
the Warrants and pay the exercise price at a time when it may be disadvantageous
for them to do so, (ii) sell the Warrants at the then-prevailing market price,
if any, when they might otherwise wish to hold the Warrants, or (iii) accept the
redemption price which is likely to be substantially less than the market value
of the Warrants at the time of redemption. In the event that holders of the
Warrants elect not to exercise their Warrants upon notice of Redemption, the
unexercised Warrants will be redeemed prior to exercise, and the holders thereof
will lose the benefit of the appreciated market price of the Warrants, if any,
and/or the difference between the market price of the underlying Common Stock
as of such date and the exercise price of such Warrants, as well as any possible
future price appreciation in the Common Stock. See "Description of Securities -
Warrants".
Current Prospectus and State Blue Sky Registration Required to Exercise Warrants
The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants and such shares have been registered, qualified,
or deemed to be exempt under the securities or "blue sky" laws of the state of
residence of the exercising holder of the Warrants. There can be no assurance
that the Company will be able to have all of the shares of Common Stock issuable
upon exercise of the Warrants registered or qualified on or before the exercise
date and to maintain a current prospectus relating thereto until the expiration
of the Warrants. The value of the Warrants may be greatly reduced if a current
prospectus covering the Common Stock issuable upon the exercise of the Warrants
is not kept effective or if such Common Stock is not qualified or exempt from
qualification in the states in which the holders of the Warrants reside. Until
completion of this Offering, the Common Stock and the Warrants may only be
purchased together on the basis of one share of Common Stock and one Warrant,
but the Warrants will be separately tradeable immediately after this Offering.
In the event investors purchase the Warrants in the secondary market or move to
a jurisdiction in which the shares underlying the Warrants are not registered
or qualified during the period that the Warrants are exercisable, the Company
will be unable to issue shares to those persons desiring to exercise their
Warrants unless and until the shares are qualified for sale in jurisdictions in
which such purchasers reside, or an exemption from such qualification exists in
such jurisdictions, and holders of the Warrants would have no choice but to
attempt to sell the Warrants in a jurisdiction where such sale is permissible
or allow them to expire unexercised. See "Description of Securities -
Warrants".
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered hereby,
at an assumed public offering price of $3.30 per share of Common Stock, $.10 per
Series 1 Warrant and $.10 per Series 2 Warrant, after deduction of underwriting
discounts and other estimated offering expenses are estimated to be
approximately $3,425,000 (approximately $3,977,100 if the Underwriters'
Overallotment Option is exercised in full). The Company intends to utilize such
net proceeds as follows:
<TABLE>
<CAPTION> Approximate
Percentage
Approximate of Net
Dollar Amount Proceeds
<S> <C> <C>
Working Capital and
General Corporate Purposes $2,580,000 75%
Other Current Liabilities(1) 384,000 11
Strategic Alliances and Technology
Demonstrations(2) 240,000 7
Research and Development(3) 125,000 4
Repayment of Bridge Financing (4)(5) 100,000 3
---------- -------
$3,429,000 100%
</TABLE>
(1) Represents payment of current liabilities after offsetting approximately
$242,000 of advances to officers and related accrued interest against deferred
compensation payable pursuant to the 1991 Board of Directors resolution which
provided for the right of offset of the Company as of June 30, 1997 for
consulting, legal, professional and accounting fees (not prior audit fees) and
other general obligations of the Company, including $100,000 to the officers for
back pay accumulated since 1994.
(2) Includes expenditures regarding formation of strategic alliances and/or
joint ventures, including additional personnel, professional fees and
administrative overhead, as well as costs associated with technology
demonstrations for new applications and/or fields of use.
(3) Costs associated with the acquisition, testing and patenting of new
technologies or testing of current technologies for different uses and/or
applications, including ammonia reduction process, and clean coal process.
(4) Represents repayment of loans from persons not converting in the Private
Placement. See "Private Placement". The amount of bridge loans to the Company
is approximately $1,341,000 plus interest as of June 30, 1997, including
$606,000 to repay 12 noteholders who advanced loans to the Company since
December 1996, and $735,000 to repay loans from certain shareholders. The notes
for $606,000 have a term of the earlier of December 31, 1997 or three days after
the closing of a public offering. The notes for $735,000 have a term of 48
months. However, certain holders of notes with aggregate principal and
interest of approximately $1,001,655 have agreed to convert the principal
balance owed and interest due into shares of Common Stock, Series 1 Warrants and
Series 2 Warrants at a conversion rate of $3.18 of principal and interest for
one Unit (a 10% discount from the public offering price of the Units). The
Common Stock issued to such noteholders will be subject to a lock-up agreement
with the Representative prohibiting sales or transfers of such Common Stock for
180 days following the date of this Prospectus without consent of the
Representative. The Company has included approximately $1,001,655 received upon
the above described conversion in calculating proceeds to the Company from this
Offering. See "Description of Securities - Common Stock, Series B Common
Stock", "Private Placement", "Concurrent Registration of Securities", and
"Selling Securityholders". In addition, on July 25, 1997, an aggregate
principal and interest of $391,192 owed to one noteholder was converted into
shares of Series B Common Stock at a conversion rate of $2.00 of principal and
interest for one share of Series B Common Stock. See "Certain Relationships and
Related Transactions."
(5) The Company will not receive any proceeds from the sale of the Selling
Securityholders' Shares and Selling Securityholders' Warrants by such Selling
Securityholders. However, the Company will receive proceeds from the exercise,
if any, of the Selling Securityholders' Warrants. See "Private Placement",
"Concurrent Registration of Securities", and "Selling Securityholders".
The Company believes that the net proceeds of this Offering will be
sufficient to meet its cash, operational and liquidity requirements for a
minimum of 12 months after the date of this Prospectus. While the initial
allocation of the net proceeds of this Offering represents the Company's best
estimates of their use, the amounts actually expended for these purposes may
vary significantly from the specific allocation of the net proceeds set forth
above, depending on numerous factors, including changes in the general economic
and/or regulatory climate, and the progress and development of potential
collaborative working arrangements. However, there can be no assurance that the
net proceeds of this Offering will satisfy the Company's requirements for any
particular period of time. Without additional financing, the Company will be
unable to carry out its business plan beyond such 12 month period. No assurance
can be given that such additional financing will be available on terms
acceptable to the Company, if at all. The inability of the Company to obtain
such additional financing will have a materially adverse effect on the Company's
business. See "Risk Factors - Need for Additional Financing." Pending specific
allocation of the net proceeds of this Offering, the net proceeds will be
invested in short-term, investment grade, interest-bearing securities of the
United States Government.
DIVIDEND POLICY
The Company has never declared or paid cash dividends, and does not intend
to pay any dividends in the foreseeable future on its shares of Common Stock.
Earnings of the Company, if any, are expected to be retained for use in
expanding the Company's business. The payment of dividends is within the
discretion of the Board of Directors of the Company and will depend upon the
Company's earnings, if any, capital requirements, financial condition and such
other factors as are considered to be relevant by the Board of Directors from
time to time.
CAPITALIZATION
The following table sets forth (a) the actual capitalization of the Company
as of June 30, 1997, and (b) the capitalization as adjusted giving effect to the
sale by the Company of the Securities offered hereby (at an assumed public
offering price of $5.30 per share of Common Stock, $.10 per Series 1 Warrant and
$.10 per Series 2 Warrant, and net of estimated offering expenses and
underwriting discounts), and the initial application of the estimated net
proceeds therefrom. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Description of Securities." This table should be read
in conjunction with the Company's Financial Statements and the notes thereto
which are included elsewhere in this Prospectus.
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------
Actual As Adjusted
-------------- --------------
<S> <C> <C>
Short Term Debt:
Notes payable to stockholders
See Note 2 of Notes to
Financial Statements Unaudited) $1,341,000 $0
========== ==========
Shareholder's Equity:
Preferred stock, $.001 par
value; authorized 10,000,000
shares; no shares outstanding $ 0 $0
Common stock, $.001 par value:
Series A, authorized 10,000,000
shares; no shares issued or
outstanding; 1,293,047 shares
issued and outstanding,
as adjusted(1): $ 0 1,515
Series B Common stock (2);
authorized 65,000,000 shares;
3,241,201 shares issued and
3,157,372 shares outstanding;
3,547,397 (2)(3)(4) shares
issued and 3,463,568 shares
(2)(3)(4) outstanding,
as adjusted 3,241 3,547(1)
Additional paid-in capital 3,843,918 8,763,944
Accumulated deficit (6,242,011) (6,242,011)
Total stockholders' equity (deficit) (2,394,852) 2,526,995
Total capitalization $(2,394,852) $2,526,995
============ ===========
</TABLE>
(1) Includes 314,999 shares of Common Stock converted from short
term debt to equity. See "Use of Proceeds" -- Note 5.
(2) Reflects the Company's two, four-to-one reverse stock splits.
(3) Includes 60,600 shares of Series B Common Stock issuable to
noteholders of bridge loans made during the period from December
1996 through June 1997 upon completion of this Offering.
(4) Includes 195,596 shares of Series B Common Stock issued to a
noteholder who converted short-term debt to equity and 50,000
shares of Series B Common Stock issued to such noteholder for an
additional capital contribution to the Company. See "Use of
Proceeds" -- Note 5.
DILUTION
At June 30, 1997, the Company's negative net tangible book
value was $(2,394,852). The net tangible book value of the Company
is the tangible assets less total liabilities. After giving effect
to the sale by the Company of the Securities offered hereby, at an
assumed public offering price of $3.30 per share of Common Stock,
$.10 per Series 1 Warrant and $.10 per Series 2 Warrant (and after
deducting estimated underwriting discounts and offering expenses),
and the initial application of the estimated net proceeds
therefrom, the pro forma net tangible book value of the Company as
of June 30, 1997 would have been approximately $2,526,995, or $.51
per share. This represents an increase in net tangible book value
per share of $1.27 to the Company's existing stockholders and an
immediate dilution of $2.79 per share to new stockholders
purchasing Units in this Offering. The following table illustrates
this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed public offering
price per share $3.30
Negative net tangible
book value per share
before the Offering(1) $(.76)
Increase per share
attributable to
payments by new
stockholders $1.27
Pro forma net tangible
book value per share
after the Offering $.51
-----
Dilution per share to
new stockholders $2.79
=====
</TABLE>
- ---------------------
(1) Reflects the effect of the two, four-to-one reverse stock
splits approved by stockholders March 2, 1994 and December 12,
1996.
The following table sets forth, as of June 30, 1997, the
number of shares of Series B Common Stock purchased from the
Company by its existing stockholders, after giving effect to the
two, four-to-one reverse stock splits approved by stockholders on
March 2, 1994 and December 12, 1996 and the number of shares of
Common Stock to be purchased by investors in this Offering at an
assumed initial public offering price of $3.30 per share, the total
consideration paid and to be paid to the Company, and the average
price paid per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
-------------------- --------------------- Average Price
Number Percent Amount Percent per Share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
New investors 1,200,000 27% 3,960,000 63% $3.30
Existing stock-
holders(1) 3,217,972 73 2,373,129(2) 37% $.74
---------- ------- --------- --------- --------
Total 4,417,972 100% 6,333,129 100%
</TABLE>
- --------------------
(1) Includes shares of Series B Common Stock outstanding and 60,600
shares of Series B Common Stock to be issued to noteholders of
bridge loans made to the Company during the period from December
1996 through June 1997, upon completion of the Offering. Does not
include 195,596 shares of Series B Common Stock issued to a
noteholder who converted short-term debt to equity and 50,000
shares of Series B Common Stock issued to such noteholder for an
additional capital contribution to the Company. See "Certain
Relationships and Related Transactions".
(2) Attributes no value to Warrants.
The following table sets forth on a pro forma basis the number
of shares of Series B Common Stock purchased from the Company by
its existing stockholders, the number of shares of Common Stock to
be purchased by investors in this Offering at an assumed initial
public offering price of $3.30 per share and the Common Stock to be
issued in the Private Placement, the total consideration paid and
to be paid to the Company, and the average price paid per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
-------------------- --------------------- Average Price
Number Percent Amount Percent per Share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
New investors 1,514,999 30% 4,961,655 63% $ 3.28
Existing
stockholders(1) 3,463,568 70 2,864,321(2) 37% $ .83
---------- ------- --------- --------- --------
Total 4,978,567 100% 7,825,976 100%
</TABLE>
- ---------------------
(1) Also includes 195,596 shares of Series B Common Stock issued
to a noteholder who converted short-term debt to equity and 50,000
shares of Series B Common Stock issued to such noteholder for an
additional capital contribution to the Company. See "Certain
Relationships and Related Transactions".
(2) Attributes no value to Warrants.
Summary Financial Data
The summary financial data included in the following table as
of September 30, 1996, for the five year period ended September 30,
1996 and for the period cumulative during the development stage
through September 30, 1996, are derived from the Financial
Statements appearing elsewhere herein. The summary financial data
as of June 30, 1997, for the nine months ended June 30, 1996 and
1997 and for the period cumulative during the development stage
through June 30, 1997 are unaudited and, in the opinion of
management, include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of such
data. Financial data for the nine months ended June 30, 1997 are
not necessarily indicative of the results of operations to be
expected for the entire year. The summary financial data should be
read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial
Statements and notes thereto appearing elsewhere herein.
Statement of Operations:
<TABLE>
<CAPTION>
Cumulative
during
development
stage through
Year Ended September 30 September 30,
----------------------------------------------- --------------
1992 1993 1994 1995 1996 1996
<S> <C> <C> <C> <C> <C> <C>
Operating
Revenues $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Operating
Expenses 0 0 0 0 0 0
General and
Administra-
tive 533,284 1,195,722 721,496 756,3415 20,364 4,834,502
Payments
under
Licenses 33,000 0 48,500 123,000 0 627,266
-------- --------- -------- -------- ------- ----------
Loss from
Operations (566,284) (1,195,722) (769,996) (879,341) (520,364) (5,461,768)
Interest
Income 15,972 1,908 2,714 2,391 6,942 60,785
Interest
Expense (12,439) (14,107) (145) (20,048) (38,199) (140,418)
--------- --------- -------- -------- -------- -----------
Net Loss $562,751)$(1,207,921)$(767,427)$(896,998)$(551,621) $(5,541,401)
========== =========== ========= ========= ========= ===========
Net loss
per
share (1) $(.15) $(.32) $(.20) $(.24) $(.15) $(1.50)
Cash
Dividends
paid $0 $0 $0 $0 $0 $0
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Nine Months during development
Ended stage through
June 30, June 30,
----------------------- -----------------
1996 1997 1997
<S> <C> <C> <C>
Operating Revenues $ 0 $ 0 $ 0
Operating Expenses 0 0 0
General and Administrative 361,521 652,398 5,486,900
Payments under Licenses 0 0 627,266
---------- ---------- ----------
Loss from Operations (361,521) (652,398) (6,114,166)
Interest Income 4,961 9,361 70,146
Interest Expense (26,273) (57,573) (197,991)
---------- ---------- ----------
Net Loss $ (382,833) $ (700,610) $(6,242,011)
========= ========= ==========
Net loss per share (1) $(.10) $(.18) $(1.68)
Cash Dividends paid $ 0 $ 0 $ 0
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1997
------------------ ---------------------------------
Actual As Adjusted(3)
------------ --------------
<S> <C> <C> <C>
Working capital
(deficit) $(1,805,242) $(2,641,181) $2,522,530
Total assets 173,333 422,878 3,050,269
Total liabilities 1,867,575 2,817,730 523,274
Stockholders'
equity (deficit) (1,694,242) (2,394,852) 2,526,995
</TABLE>
- -------------------
(1) Net loss per share is calculated on the basis of the weighted
average shares of Common Stock outstanding, after giving effect to
the implementation of the two, four-to-one reverse stock splits
approved by the stockholders on March 2, 1994 and December 12,
1996, for each period presented. 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.
(2) Gives effect to the initial application of the estimated net
proceeds from this Offering. See "Use of Proceeds".
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
ThermoEnergy Corporation ("Company") is a development stage
company involved in the marketing and development of certain
environmental technologies primarily used for solving waste water
problems. These technologies include two chemical processes known
as the Sludge-To-Oil Reactor System (STORS[TM]) and Nitrogen
Removal (NitRem[TM]). The third technology, a dual-shell pressure
balance vessel, known as the Dual-Shell Reactor[TM] ("DSR"), is the
unique reactor equipment in which the STORS and NitRem chemistries
are conducted (STORS, NitRem and DSR are referred to collectively
as the "Technologies"). The Company's application of STORS and
NitRem through the use of a STORS-DSR, NitRem-DSR, or a combination
of both types of equipment, are designed to eliminate damaging
organic and nitrogenous contaminants, respectively, from municipal
and industrial waste streams.
The Company is the exclusive worldwide licensee for the
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 or NitRem-DSR) 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. The Company's
business strategy is based upon entering 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. The Company is currently negotiating project-specific
working arrangements with Foster Wheeler Environmental Corporation.
The Company also has joint marketing arrangements with Roy F.
Weston, Inc., Dan Cowart, Inc., and Mitsui & Co. (U.S.A.), Inc. and
plans to enter project specific working arrangements when such
projects are identified and funding is obtained. The Company has
not generated any operating revenues or any profits. The Company
currently has two projects to demonstrate the Technologies: a
nitrogen removal test facility in New York City and a demonstration
project to evaluate nitrogen removal at the TRIES project, Radford
Army Ammunition Plant in Radford, Virginia. In addition, the
Company is in the process of negotiating a STORS demonstration
facility for the San Bernardino Valley Water District. The Company
will not be required to make capital contributions to any such
projects and the Company will not receive any revenues or earnings
from these demonstration projects. The Company will be reimbursed
for administrative and operating costs from the two demonstration
projects underway and is negotiating similar arrangements for the
third demonstration project.
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 plans to use the net proceeds from the Offering to
satisfy the cash requirements for its operations for the next
eighteen months. 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 its technologies.
Over the next twelve months, the Company expects to add the
following personnel: (i) two executives to senior management; (ii)
seven engineering, technical and sales positions; and (iii) three
clerical positions.
The overall goal of the Company is to successfully complete a
demonstration project for STORS and/or NitRem through all of the
projects and strategic working arrangements discussed above.
Management plans to utilize these demonstration facilities to
expand the visibility of the Company in the municipal, industrial,
Department of Defense and Department of Energy markets. A
successful demonstration project is the single most important
business factor in the implementation of the Company's plan of
operation.
The Company anticipates that the Offering will enable the
Company to complete the Radford Army Ammunition Plant and the New
York City demonstration projects. The Company believes that such
projects, if successful, will allow the Company to generate income
through the commercialization of the Technologies.
Results of Operations
Nine months ended June 30, 1997 compared to nine months ended
June 30 1996.
For the nine months ended June 30, 1997, the Company incurred
a net loss of $700,610 as compared to $382,833 for the nine months
ended June 30, 1996.
General and administrative expenses and travel expenses
increased during the period ended June 30, 1997 compared to June
30, 1996 due to the Company's efforts in pursuing equity capital
and selected projects. Interest expense also increased between the
same two periods due to the increase in notes payable to
stockholders.
Year ended September 30, 1996 compared to year ended
September 30, 1995 and year ended September 30, 1995 compared to
year ended September 30, 1994
The net losses for the periods presented resulted primarily
from salaries and other administrative expenses, contractual
obligations to Battelle Memorial Institute Pacific Northwest
Laboratories, travel expenses and professional fees. The decrease
in general and administrative expenses during the year ended
September 30, 1996 compared to the same period of the prior year
was due primarily to the concentration of the Company's efforts in
pursuing selected projects and conserving cash. The increase in
general and administrative expenses during the year ended September
30, 1995 compared to the same period of the prior year was due
primarily to fees for the Company's outside financial advisory
firm. General and administrative expenses were reduced in 1995 and
1994 by approximately $20,000 in each year as a result of a cost
reimbursement Letter Subcontract with the United States Department
of Defense.
Payments under licenses increased during the year ended
September 30, 1995 due primarily to the $75,000 license fee more
fully described in Note 7 of Notes to Financial Statements.
Travel and entertainment expenses decreased during the years
ended September 30, 1996 and 1995 compared to the prior year due to
the concentration of the Company's efforts in pursuing selected
projects and conserving cash. Interest expense for the years ended
September 30, 1996 and 1995 was attributable to the Company's notes
payable to stockholders, which are more fully described in Note 4
of Notes to Financial Statements.
Liquidity and Capital Resources
During the year ended September 30, 1996, the Company used
$257,166 of cash in operations compared to $506,809 in 1995 and
$628,233 in 1994. 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.
During 1996 and 1995, the Company met its liquidity needs
primarily from borrowings from stockholders (see Note 4 of Notes to
Financial Statements). During 1994, the Company met its liquidity
needs from sales of warrants for Series B Common Stock to
stockholders and from available cash.
Management plans to meet the Company's liquidity needs during
the year ending September 30, 1997 with proceeds from the sale of
additional stock through this Offering.
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.
The Company believes that the net proceeds from this Offering
will be sufficient to meet its cash, operation and liquidity
requirements for a minimum of 18 months after the date of this
Prospectus. The Company has allocated $240,000 of the net proceeds
of this Offering for the funding of proposed collaborative
ventures. These costs include, but are not limited to, salaries
and benefits of personnel, equipment design and procurement costs,
costs of leasing or otherwise obtaining additional operating
facilities, analytical and other testing costs, professional fees,
insurance, marketing and other administrative expenses. As of the
date of this Prospectus, the Company has not determined the
specific amount of net proceeds of the Offering to be applied to
any of the proposed collaborative ventures because the Company is
currently in negotiations with such proposed venture partners,
involving, among other issues, the level of its proposed funding
commitment. See "Use of Proceeds" and "Business/Strategic
Corporate Relationships".
Recent Pronouncements of the Financial Accounting Standards Board
The Financial Accounting Standards Board has issued Statements
of Financial Accounting Standard Statements No. 121, "Accounting
for Long Lived Assets" and No. 123, "Accounting and Disclosure of
Stock-Based Compensation." Statement No. 121 is effective for
years beginning after December 15, 1995. The effect of adoption of
Statement No. 121 will not have a material effect on the Company's
financial statements. Statement No. 123 is effective for years
beginning after December 15, 1995. Since the adoption of the
Company's Stock Option Plan, which was approved by the Board of
Directors on January 3, 1997, is subject to stockholder approval,
management has not made a determination of the impact of Statement
No. 123 on the Company's financial statements.
Net Operating Losses
The Company has net operating loss carry forwards as of
September 30, 1996, of approximately $4,400,000 which expire in the
years 2003 through 2011. 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
$1,685,000 has been established to offset any benefit from the net
operating loss carry forward as it cannot be determined when or if
the Company will be able to utilize the net operating losses. See
Note 5 of Notes to Financial Statements.
Impact of Inflation
Although inflation has slowed 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 cost 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.<PAGE>
BUSINESS
The Company was incorporated in Arkansas on January 19, 1988,
under the name Innotek Corporation, at the direction of the Board
of Directors and majority shareholders of American Fuel and Power
Corporation ("AFP"). In 1986, AFP executed an agreement with
Battelle concerning development of the STORS and NitRem
technologies. However, since AFP's primary business was motor fuel
additives and industrial lubricants, AFP sublicensed the
technologies 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 entered a license
agreement with Battelle Memorial Institute which supersedes the
previous agreement between Battelle and AFP. On December 12, 1996
the Company changed its name from Innotek Corporation to
ThermoEnergy Corporation. (See Certain Relationships and Related
Transactions).
The Company is the exclusive worldwide (except STORS in Japan)
licensee for certain environmental technologies developed by
Battelle. These technologies are primarily aimed at solving waste
water problems for broad-based markets. These technologies include
two chemical process technologies known as the Sludge-To-Oil
Reactor System (STORS[TM]) and Nitrogen Removal (NitRem[TM]). The
third technology, a dual-shell pressure balance vessel, known as
the Dual-Shell Reactor[TM] ("DSR"), is the unique reactor equipment
in which the STORS and NitRem chemistries are conducted
(collectively, STORS, NitRem and DSR are referred to as the
"Technologies"). The Company's applications of the Technologies
eliminate damaging organic and nitrogenous contaminants from
municipal and industrial waste streams.
STORS is a thermochemical process that converts raw undigested
municipal sewage sludge (biosolids) into a useable fuel oil similar
to diesel fuel. Management believes that integrating the
Technologies into the design of municipal sewage sludge treatment
and processing facilities results in (i) an environmentally
responsible treatment of sewage sludge and (ii) cost efficiencies
as a result of lower capital and operating costs for these
treatment and processing facilities. The introduction of STORS into
the municipal waste water processing industry will not only allow
municipal operators to meet or exceed regulatory standards, but
should also drastically reduce ordinary or conventional capital and
operating costs for treatment facilities.
NitRem is a hydrothermal process, similar in operation to
STORS, applied to processing solely aqueous waste streams. When
operating in conjunction with STORS, NitRem can process waste water
to near drinking water standards, allowing for the recovery and
reuse of this valuable resource. In addition, NitRem, operating as
a stand alone technology, can convert virtually any hazardous or
non-hazardous aqueous waste stream containing nitrogenous compounds
(nitrates, nitrites, amines and ammonia) into an environmentally
safe and acceptable form. NitRem's compact design is ideal for
small mobile processing units, opening up an additional markets.
Since the waste is processed and treated on-site, the waste
generator is not susceptible to long-term liabilities associated
with off-site waste processing or storage (e.g. landfilling).
Both the STORS and NitRem process chemistries are conducted in
the patented reactor-within-a-reactor equipment, the DSR, licensed
by the Company from Battelle. Management believes that the unique
design of the DSR provides STORS and NitRem with an advantage over
competing technologies. See "Competition and Proprietary
Information".
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 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
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.
According to the Environmental Business Journal's ("EBJ"),
Annual Industry Overview, Vol. IX, April, 1996, the U.S.
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.
Although the Company can neither predict its share of the
capital expenditures for improvements by the water and waste
facilities market, nor predict the growth in such market, the
Company believes that such improvements and growth could include
the Technologies if the Company is able to 1) successfully complete
one or more of the demonstration projects discussed below and 2)
execute on its marketing plan.
From a competitive standpoint, the lower capital requirements
for a STORS/NitRem waste water treatment facility make it an
attractive option for municipalities, such as New York City and San
Bernardino. 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.
The Company's business strategy is 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. The Company is
currently negotiating project-specific working arrangements with
Foster Wheeler Environmental Corporation. The Company also has
joint marketing arrangements with Roy F. Weston, Inc., Dan Cowart,
Inc., and Mitsui & Co. (U.S.A.), Inc. and plans to enter project
specific working arrangements when such projects are identified and
funding is obtained. See "Business - Strategic Corporate
Relationships".
The Company currently has two projects to demonstrate the
Technologies and is in the process of negotiating a third. The
Company will not be required to make capital contributions to any
such projects and the Company will not receive any revenues or
earnings from these demonstration projects. The Company will be
reimbursed for administrative and operating costs from the two
demonstration projects underway and is negotiating similar
arrangements for the third 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. The NitRem DSR unit was delivered to the project site,
Radford Army Ammunition Plant, Radford, Virginia, in June 1997,
began operations July 21, 1997. The first phase of the DoD RAPP
test was concluded on September 5, 1997. The second phase of the
test will begin at the discretion of DoD RAPP personnel and will
process additional hazardous waste streams as identified by the
Dept. of the Army. TRIES holds the contract with the DoD,
Department of Army, and the Company has subcontracted with TRIES
for the project. See "Business - Nitrogen Removal Demonstration -
United States Department of the Army Program".
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 Public Works. 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.
Pursuant to the New York Agreement, Foster Wheeler Environmental
Corporation will manage this demonstration project which is
scheduled to begin in October 1997. The Company's role in this
demonstration project will be limited to providing the
Technologies, design and installation of the facility. This will
be the first collaborative effort between the Company and Foster
Wheeler Environmental Corporation to demonstrate this nitrogen
removal process. See "Business - Nitrogen Removal Demonstration -
New York City Project".
In September 1996, a $3,000,000 federal matching grant was
appropriated by Congress 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. The
terms of the grant require SBVWD to provide matching funds for this
demonstration project. Assuming the negotiations have been
completed between the Company and SBVWD for the construction of
this project, the capacity for this demonstration will have a
through put capacity equal to or greater than 75% of the wastewater
treatment facilities currently operating within the United States.
The Company anticipates that it will be responsible for the design
and installation and will subcontract for the construction and
operation of the SBVWD demonstration facility. However, there is
no assurance that the Company will enter into a definitive project
arrangement with SBVWD, or that such arrangement, if entered into,
will be on terms and conditions that are sufficiently favorable to
the Company to enable it to generate profits. See "Risk Factors -
Dependence on Strategic Corporate Relationships; EPA Discretion and
Uncertainty of Technologies to Achieve Results" and "Business -
STORS Demonstration".
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 nor NitRem nor the DSR
have ever been utilized on a large-scale commercial basis, and
there is no assurance that either STORS, NitRem or the DSR 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 or the DSR will not be superseded by
other competing technologies. See "Risk Factors -
Commercialization of Technologies beyond Test Stage".
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. On July 16,
1997, the Company entered into a nonbinding Letter of Intent with
the Underwriters, an NASD member, broker-dealer, with respect to
the Offering. The corporate offices of the Company are located at
323 Center Street, Suite 1300, Little Rock, Arkansas, 72201. The
Company's telephone number is (501) 376-6647.
GENERAL OPERATIONS
The Company is engaged in the development of STORS, a
thermochemical process for converting sewer sludge to fuel, NitRem,
the process of aqueous phase destruction of nitrates, nitrites,
ammonia in amines, and the DSR. 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.
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
developer of the 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 all research for the Company.
The License Agreements with Battelle grant ThermoEnergy an
exclusive license to make, use and/or sell the 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 and the direct sales of DSR
equipment. Pursuant to the terms of the License Agreements, the
Company has 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. If the Company cannot complete a full
scale demonstration facility, the License Agreement will terminate
unless the Company is able to renegotiate an extension. 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 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.
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).
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.
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.
Throughput capacity is determined by reactor size. The
demonstration projects will determine the optimum reactor size
which the Company anticipates to be between one to two million
gallons per day per reactor. Thereafter, the volume of the waste
stream will determine the number of reactors necessary for either
a STORS or NitRem processing facility.
The Company does not currently possess the technical,
operational or financial resources necessary to construct or
operate STORS or NitRem facilities at either a demonstration or
commercial facility level. The Radford Army Ammunition Plant and
the New York City demonstration projects are funded by the U.S.
Army and Foster Wheeler, respectively. The Company anticipates
that the San Bernardino Project will be funded by the U.S. EPA.
Consequently, the Company's future operations will 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 or
NitRem technologies. The Company will use the proceeds from the
Offering, in part, to hire the engineering and technical staff
necessary to fulfill the Company's role in the demonstration
projects. No facilities have yet been built, outside Japan, that
employ either STORS or NitRem on a commercial basis. (See "Recent
Developments".) Until large-scale demonstration facilities have
been constructed and operated for a period of time sufficient to
produce reliable operating data, it is not possible to accurately
estimate capital needs for a STORS or NitRem facility and such
capital needs can only be approximated at plus or minus 20% by an
engineering firm with experience and expertise in the chemical
processing industry. Therefore, the Company believes that in order
to prove the commercial feasibility of the STORS and NitRem
technologies, a large-scale demonstration facility must be sited,
constructed and operated successfully. For this reason, the
Company has actively promoted the STORS technology since 1988 and
the NitRem technology since 1991 with the dual goal of convincing
either a United States governmental agency or private industry to
fund a full scale demonstration facility of either one or both
technologies. See "STORS Demonstration" and "Nitrogen Removal
Demonstration".
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
SBVWD demonstration projects scheduled for the fourth quarter 1997.
RECENT DEVELOPMENTS
The Company plans to continue its commercialization efforts
during the next fiscal year for both the STORS and NitRem
technologies within their target markets, i.e., municipal waste
water treatment and hazardous waste disposal markets respectively.
The Company is not required to make capital contributions to the
projects listed below 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
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.
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 gpd 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 ThermoEnergy and Battelle in such a project and participate by
contracting to have a STORS system located at one of its waste
water treatment facilities. San Bernardino, California has been
identified by the Company as a "host" city.
ThermoEnergy has met with various local, state and federal
officials in California in an effort to locate funding for a full-scale STORS
demonstration facility. In May of 1996, ThermoEnergy
and Battelle representatives met with city officials at San
Bernardino Valley Water District ("SBVWD") to discuss siting of a
$6,000,000 full-scale STORS demonstration project in the San
Bernardino area. The SBVWD agreed to host the project and is aware
that matching funds for the federal government grant is required.
Subsequently, the United States House and Senate approved, in PL
104-204, September 26, 1996, a $3,000,000.00 federal matching 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. Assuming the negotiations have been
completed between the Company and SBVWD for the construction of
this project, the Company anticipates this demonstration plant will
have a throughput capacity equal to or larger than 75% of currently
operating waste water treatment facilities within the United
States. The Company anticipates that it will be responsible for
the design and installation, and will subcontract for the
construction and operation of the demonstration facility.
The EPA continues to maintain discretionary control over the
disbursement of the $3,000,000 federal matching 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 DEMONSTRATION
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.
To sell a full-scale commercial NitRem system to a
municipality, industrial or military client, the Company must first
demonstrate the viability of the process at full scale. The
Company has initiated two such demonstration facilities which are
scheduled to begin operation in the first quarter of 1997.
United States Department of the Army Program
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 demonstration unit is
planned for the Radford Army Ammunition Plant, in Radford,
Virginia. The project plans for this $5,000,000 NitRem
demonstration project have been completed and been 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 operations July
21, 1997. Under the Company's supervision, this demonstration
facility will be 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.
The first phase of the DoD RAPP test was concluded on September
5, 1997. The second phase of the test will begin at the discretion
of DoD RAPP personnel and will process additional hazardous waste
streams as identified by the Dept. of the Army.
New York City Project
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. The
demonstration facility will be managed by Foster Wheeler
Environmental Corporation. The unit, designed as a mobile unit, is
scheduled to begin operation in October 1997 and conclude not less
than 150 consecutive calendar days, nor more than 200 consecutive
calendar days from the start date.
ThermoEnergy will provide the technology and, in conjunction
with Battelle, assist in the design, engineering and operation of
the New York City Nitrogen Removal demonstration facility. Foster
Wheeler Environmental Corporation will finance, design, build and
manage the overall demonstration project. In addition, should New
York City decide to use the Company's technologies in a large-scale
commercial project, the Company anticipates that Foster Wheeler
will be the prime contractor for the design, construction and
installation of equipment for the project facility and the Company
will provide design assistance, deliver the Technologies and
oversee the operations of the project.
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 U.S. 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.
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. If no
project contracts have been signed by March 28, 1998, the
exclusivity of the contract can be terminated by either party upon
one month's written notice and, thereafter, DCI's rights to the
Technologies in Georgia and Florida would become nonexclusive. The
Company in conjunction with Battelle, is developing 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 April 1996, the Company entered into a non-binding
Memorandum of Understanding with Roy F. Weston, Inc. ("Weston") of
West Chester, Pennsylvania, which may be terminated by either
company upon written notice to the other. Weston is an engineering
firm which participates in the development of large scale civil
engineering projects. The purpose of the memorandum is to provide
a preliminary framework for the joint pursuit by the companies of
business opportunities for the application of the Technologies.
The memorandum contemplates that Weston will provide engineering,
construction management, installation, operations and maintenance
services in connection with such projects, while the Company will
provide the Technologies at a reasonable fee no greater than the
Company's most favored licensees. The memorandum incorporates by
reference a Proprietary Information Agreement dated August 22,
1995, previously signed by the parties pursuant to which each
company has agreed to maintain in confidence all proprietary
information furnished by the other.
In October 1996, the Company entered into a non-binding
Memorandum of Understanding ("MOU") with Foster Wheeler
Environmental Corporation and Mitsui & Co. (U.S.A.), 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, on 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.
COMPETITION AND PROPRIETARY INFORMATION
In seeking to introduce STORS as an alternative sewage sludge
disposal technology to incineration, land filling, composting or
land application, the Company will compete with major waste
disposal companies, environmental technology companies and foreign
waste disposal interests. Land filling, the most common disposal
practice in the United States, while permissible, has been affected
by enactment of EPA Regulations on land disposal restrictions
promulgated under of the Solid Waste Disposal Act and the Resource
Conservation and Recovery Act of 1976, as amended (40CFR268).
Composting is the process whereby sewage sludge is cured over a
lengthy period and mixed with wood chips or a similar substance for
use as a fertilizer. This process requires vast amounts of space.
Land application is the process of spraying wet sludge over an area
after the sludge has been processed by a waste water plant. This
process is not a disposal method that will gain wide use or
acceptance. Incineration is the second most common disposal
practice in the United States and is, on average, the most
expensive disposal practice in the United States because of its
initial capital requirements and operating expense. The future of
sludge incineration in the United States has been adversely
affected by the Clean Air Act. The conventional disposal
manufacturers and operators with whom the Company must compete have
in many cases long-established ties to the sewage sludge disposal
industry and have proven disposal methodologies. Many such
companies also have research and development budgets, marketing
staffs and financial and other resources which far surpass the
resources of the Company. There can be no assurance that such
competitors will not attempt to develop and introduce similar
disposal technologies. None of the Company's identified
competitors have, to the Company's knowledge, achieved significant
commercial acceptance with similar technologies.
Management believes it can offer competitive alternatives to
POTWs using STORS. The STORS thermochemical process is conducted
in a closed reactor (DSR) thereby alleviating the necessity of
transporting the sludge and exposing the sludge to the ambient air.
In addition to the actual disposal technologies, there are
other competitive factors to be considered by POTWs in savings
comparing sludge disposal processes, such as present and future
compliance probability, maturity of process technology, political
and public acceptance, capital cost, required space and expected
lifetime. Management believes POTWs' major considerations in
selecting disposal technologies is not just of the operating cost
of the process itself, but the total operating costs of the entire
waste water treatment processing facility. As a result, the
Company believes its processes are unique among sludge treatment
technologies because the Technologies eliminate the need for
biological sludge treatment, both digestion and
nitrification/denitrification, allowing facilities to be designed
and built meeting standards regulator at a dramatically lower cost.
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.
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.
Although the Company has an exclusive License Agreement with
Battelle for the STORS technology, STORS is not a patentable
technology. The Japanese company which originally sponsored the
Battelle STORS research has continued its own research in STORS
technology for the Japanese market.
The Company has the rights to two process patents for the
NitRem process, one patent for a combined STORS/NitRem process, one
patent for the Dual-Shell Reactor System, and one patent for a
pumping system to feed sludge into the STORS reactor.
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 and NitRem 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 and NitRem 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 conducted several tests on DoD wastes utilizing the
NitRem pilot plant located at Battelle Pacific Northwest
Laboratory, in Richland, Washington. As a result of these tests,
Company management is currently collaborating with Foster Wheeler
Environmental Corporation to pursue contracts with DoD to dispose
of (i) munition 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
radionuclides 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, include 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 form one or more 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 and
NitRem are ongoing and are generally conducted by Battelle. The
Company conducted no research and development activities for the
Company for the nine months ended June 30, 1997. Payment under
licenses expenditures for the Company were $0, $123,000, and
$48,500 for the years ended September 30, 1996, 1995, and 1994,
respectively.
ENVIRONMENTAL MATTERS
Congress recently passed the Clean Drinking Water Act, 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. 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.
Employees
As of June 30, 1997, the Company had a total of 2 employees,
both full-time: the Chairman and Chief Executive Officer and the
President. Both 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.
Properties
The Company leases approximately 1200 square feet of space in
Little Rock, Arkansas from an unaffiliated third party under a
month to month lease, which the Company uses as its principal
executive offices. In the event such lease is 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.
Legal Proceedings
There are no pending material legal proceedings to which the
Company or its properties are subject.
<PAGE>
MANAGEMENT
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:
<TABLE>
<CAPTION>
NAME AGE(1) POSITION
<S> <C> <C>
Dennis C. Cossey 51 Chairman of the Board,
Chief Executive Officer,
Secretary and Director
Primo L. Montesi 62 President and Director
Alexander G. Fassbender 42 Executive Vice President/
Engineering and Technology(2)
Gary P. Barket 50 Senior Vice President and
General Counsel(2)
Louis J. Ortmann, DDS 60 Director
J. Donald Phillips 63 Director
Andrew T. Melton 50 Director
Dr. Paul A. Loeffler 50 Director
Jerald H. Sklar 60 Director
</TABLE>
- ----------------
(1) As of June 30, 1997.
(2) Positions will be assumed upon completion of this
Offering.
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 U.S. 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.
Alexander G. Fassbender will serve as Executive Vice
President/Engineering and Technologies. Prior to joining the
Company, Mr. Fassbender was Manager of Technology Commercialization
at Battelle Pacific Northwest Laboratories. He has held various
positions with Battelle since 1976. Mr. Fassbender received his
B.S. (Chemical Engineering) in 1976 from the University of
California, Berkley, his MBA in 1980 and his M.S. (Chemical
Engineering) in 1988.
Gary P. Barket will serve as Senior Vice President and General
Counsel to the Company. Mr. Barket received his J.D. degree from
the University of Arkansas in 1971 and has been both a partner with
the Davidson Law Firm, Ltd. in Little Rock, Arkansas, and outside
counsel to the Company since 1990. Mr. Barket also serves on the
Board of Directors of the Little Rock Port Authority.
Louis J. Ortmann, DDS, currently is a Director of Louis J.
Ortmann Dental Clinic, Inc. Dr. Ortmann has been practicing
dentistry for the last 30 years. Dr. Ortmann has served as a
Director of the Company since September 1991.
J. Donald Phillips is an insurance executive in Little Rock,
Arkansas, and currently National Sales Manager for Citizen's
Fidelity Insurance Corporation, an Arkansas-based insurance
company. Mr. Phillips has been employed by Citizen's Fidelity
Insurance Corporation since November 1989. Mr. Phillips has served
as Director of the Company since November 1990.
Andrew T. Melton is a vice president with Merrill Lynch
Capital Markets in Little Rock, Arkansas. He has served in this
position since 1995. Mr. Melton is also chief executive officer
and the principal shareholder of Solomon Financial, Inc., a company
he started in January, 1997, specializing in financing Canadian
imports to the U.S. 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.
Mr. Melton has served as a director of the Company since his
election 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 M.A. 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 B.A. 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,
L.P., which invests in operating businesses. Mr. Sklar has served
as a director of the Company since his election on September 5,
1997.
Election of Board of Directors
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 May 3, 1995 and will serve three year terms until May
1998 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 independency 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 has agreed for a period of five years after the
date of this Prospectus, if requested by the Representative, to use
its best efforts to nominate for election to the Company's Board of
Directors one person designated by the Representative. In
addition, the Representative may designate a person to receive all
notices of meetings of the Company's Board of Directors and all
other correspondence and communications sent by the Company to its
Board of Directors and to attend all such meetings of the Company's
Board of Directors. The Company has agreed to reimburse designees
of the Representative for their out-of-pocket expenses incurred in
connection with their attendance of meetings of the Company's Board
of Directors. No person has yet been designated by the
Representative to be nominated for election to the Company's Board
of Directors. See "Underwriting."
The Board of Directors has established three standing
committees. P.L. Montesi serves on the Executive Compensation
Committee and is its 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. The Compensation Committee will review and
administer the 1997 Stock Option Plan when funded and any Incentive
Stock Option plans, if any, when proposed and adopted. Donald
Phillips, Louis Ortmann and Jerald H. Sklar serve on the Audit
Committee. Donald Phillips is chairman of the Audit Committee.
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. Dennis Cossey, Donald Phillips and P.L. Montesi serve on
the Executive Committee, the chairman of which is Dennis Cossey.
The Executive Committee meets on a monthly basis or as deemed
necessary to oversee the operations of the Company.
Directors' Compensation
Except for the options granted in 1991 to J. Donald Phillips
to purchase 6,250 shares of Common Stock, Directors do not receive
any compensation for their service on the Board.
Executive Compensation
The following table sets forth the cash and non-cash
compensation paid by the Company for the years ended September 30,
1996, 1995 and 1994 to 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
<TABLE>
<CAPTION>
Annual Compensation
Name and -----------------------------
Principal Position Year Salary Bonus
- ------------------ ---- ----------- -----
<S> <C> <C> <C>
Dennis Cossey,
Chief Executive Officer and 1996 $110,777(1) --
Secretary 1995 $ 95,120(1) --
1994 $ 85,140
Primo L. Montesi, President 1996 $110,777(1) --
1995 $ 95,120(1) --
1994 $ 85,140
</TABLE>
(1) At September 30, 1995, of the $95,120 reported as
salaries to officers, $79,860 was accrued and not paid. All of the
reported amount at September 30, 1996 was accrued and not paid.
Employment Agreements
Upon completion of this Offering, Company will enter into a
five-year employment agreement with Dennis Cossey under which he
shall devote substantially all of his business and professional
time to the Company and its business development. Under such
agreement, Mr. Cossey shall receive an annual salary of $145,000
per annum.
Upon completion of this Offering, the Company will enter into
a five-year employment agreement with P.L. Montesi under which he
shall devote substantially all of his business and professional
time to the Company and its business development. Under such
agreement, Mr. Montesi shall receive an annual salary of $145,000
per annum.
Prior to completion of this Offering, Messrs. Cossey and
Montesi entered into employment agreements with the Company
providing 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 $16,678, $16,000 and $11,677 was accrued
during the years ended September 30, 1996, 1995 and 1994,
respectively, pursuant to the interest provisions of the
compensation agreements.
Upon completion of this Offering, the Company will enter into
a five-year employment agreement with Alex Fassbender under which
he shall devote substantially all of his business and professional
time to the Company and its business development. Under such
agreement, Mr. Fassbender shall receive an annual salary of
$130,000 per annum. Mr. Fassbender's duties and employment with
Battelle will terminate as of the date of this Prospectus.
Upon completion of this Offering, the Company will enter into
a five-year employment agreement with Gary Barket under which he
shall devote substantially all of his business and professional
time to the Company and its business development. Under such
agreement, Mr. Barket shall receive an annual salary of $120,000
per annum. Mr. Barket's duties and employment as a partner of the
Davidson Law Firm will terminate as of the date of this Prospectus.
Each of the employment agreements with Messrs. Barket and
Fassbender require the full-time services of such employees,
subject to permitted service with professional-related service
organizations and other outside activities that do not materially
interfere with the individuals' duties to the Company. The
agreements also contain covenants (a) restricting the employee from
engaging in any activities competitive with the business of the
Company during the term of such employment agreements, (b)
prohibiting the employee from disclosure of confidential
information regarding the Company, and (c) confirming that all
intellectual property developed by the employee and relating to the
business of the Company constitutes the sole property of the
Company. In addition, each of Messrs. Cossey and Montesi has
entered into a similar non-competition, non-disclosure and
intellectual property agreement with the Company.
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, and plans to apply for a $500,000
key man life insurance policy on the life of Mr. Fassbender and a
$250,000 policy on the life of Mr. Barket upon engagement of their
employment.
Limitation of Directors' and Officers' Liability and
Indemnification
The Company has included in its Amended and Restated By-laws
provisions to (i) eliminate the personal liability of its directors
and officers for monetary damages resulting from breaches of their
fiduciary duty (provided that such provisions do not eliminate
liability for breaches of the duty of loyalty, acts or omissions
not in good faith or which involve intentional misconduct or a
knowing violation of law, violations under Section 4-27-801 et seq
of the Arkansas Business Corporation Act of 1987 (the "Arkansas
Law"), or for any transaction from which the director and/or
officer derived an improper personal benefit), and (ii) indemnify
its directors and officers to the fullest extent permitted by the
Arkansas Law, including circumstances in which indemnification is
otherwise discretionary. The Company believes that these
provisions are necessary to attract and retain qualified persons as
its directors and officers.
Stock Options
On January 3, 1997, the Board of Directors approved the
Company's 1997 Stock Option Plan, subject to the approval by
holders of a majority of the holders of Common Stock. Such approval
was obtained at the Annual Meeting of Shareholders held on
September 5, 1997. The Plan provides that Officers and/or key
employees and non-employee Directors of the Company may receive
incentive Stock Options and Non-Qualified Stock Options to purchase
up to an aggregate of 750,000 shares of Company Series B Common
Stock. The Board of Directors awarded, effective upon completion
of this Offering, stock options under the Plan to certain key
executive officers the right to purchase an aggregate of 505,000
shares of Series B Common Stock, all of which provide for an
exercise price at the initial offering price per share. Stock
Options for 150,000 shares of Series B Common Stock were granted to
each Messrs. Cossey and Montesi, respectively, and are exercisable
at the rate of 33-1/3% of the number of options granted in each of
calendar years 1998 through 2000, inclusive, and unless
unexercised, expire ten (10) years from the date of the grant,
subject to prior termination in accordance with any applicable
stock agreements. Stock options for 100,000 shares of Series B
Common Stock were granted contingent upon completion of this
Offering to each Messrs. Fassbender and Barket, respectively, whose
employment will be effective upon completion of this Offering are
exercisable at the rate of 20% of the number of options granted in
each calendar year 1998 through 2002, inclusive, and unless
unexercised, expire ten (10) years from date of grant, subject to
prior termination in accordance with any applicable stock
agreements. In addition, the Plan provides 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.
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.<PAGE>
The following table lists information on stock options granted
to each of the Company's Executive Officers and Directors and to
all Executive Officers and Directors as a group. All of such stock
options were granted on January 3, 1997 effective upon completion
of the Offering, subject to shareholder approval obtained September
5, 1997, at the Annual Meeting of Shareholders. As of the date of
this Prospectus, none of such options have been exercised.
<TABLE>
<CAPTION>
Number of
Shares Percentage of
Underlying Type of Total Options Exercise
Name of Officer Options Option Granted Price
and Director Granted Granted Under Plan per
Share
- --------------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C>
Dennis C. Cossey 150,000 Qualified 29.7% (1)
P.L. Montesi 150,000 Qualified 29.7% (1)
Alexander Fassbender 100,000 Qualified 19.8% (1)
Gary P. Barket 100,000 Qualified 19.8% (1)
Five Non-Employee
Directors 5,000 Non-Qualified 1.0% (1)
All Executive
Officers and
Directors as a
Group(which would
be 9 persons) 505,000 100% (1)
</TABLE>
(1) Exercise price per share equals price of Common Stock in
Offering.
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; provided,
that for fiscal 1997, the following persons shall (subject to their
continued full-time employment with the Company) be entitled to
receive the following percentages of the bonus payments, if any,
payable in respect of fiscal 1997:
<TABLE>
<CAPTION>
Name of Participant Percentage of Available Bonus Pool
- ------------------- ----------------------------------
<S> <C>
Dennis C. Cossey 20%
P.L. Montesi 20%
Alexander Fassbender 15%
Gary P. Barket 15%
Other Employees 30%
</TABLE>
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.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the
date of this Prospectus with respect to (i) the beneficial
ownership of the Series B Common Stock of the Company by each
beneficial owner of more than 5% of the outstanding shares of
Series B Common Stock of the Company, each director, each executive
officer and all executive officers and directors of the Company as
a group, and (ii) the number of shares of Series B Common Stock
owned by each such person and group. Unless otherwise indicated,
the owners have sole voting and investment power with respect to
their respective shares.
<TABLE>
<CAPTION>
Percentage of
Number of Shares Outstanding
Shares -------------------------
Name and Address of Beneficially Before After
Beneficial Owner Owned (1)(2) Offering Offering
- ------------------------- ------------ -------- --------
<S> <C> <C> <C>
P.L. Montesi
22 Greenway Drive
Little Rock, AR 72212 332,334(3) 9.39 7.77
Dennis Cossey
11706 Pleasant Ridge Drive
Little Rock, AR 72212 310,674(4) 8.82 7.27
J. Donald Phillips
218 Belmont
No. Little Rock, AR 72216 6,250 * *
Louis J. Ortmann
3832 Victoria Road
Festus, MO 63028 44,254(5) 1.27 1.05
Andrew T. Melton
11825 Hinson Road
Suite 102
Little Rock, AR 72212 -- -- --
Dr. Paul A. Loeffler
128 Royal Oaks
Huntsville, TX 77340 -- -- --
Jerald H. Sklar
50 N. Front Street, Suite 1300
Memphis, TN 38103 88,215(6) 2.67 2.09
Alexander Fassbender
Battelle Pacific
Northwest Laboratories
Battelle Blvd.
Richland, WA 99352 625 *
All Officers and Directors
as a Group(9 Persons) 781,470(7) 22.13 18.54
Centerpoint Power
Corporation of VA
8228 Smithfield Road
Springfield, VA 22152 701,875(8) 16.85 14.27
Frank T. Rayner
P.O. Box 16532
Panama City, FL 32406 241,715(9) 6.95 5.73
Robert Trump
167 E. 61st Street
New York, NY 10021 644,595(10) 17.21 14.33
</TABLE>
- ---------------------
* 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. See "Description of Securities -- Common Stock."
(2) Computed based on the number of shares of Series B Common
Stock outstanding as of June 30, 1996. 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. All information assumes no exercise of
the Overallotment Option. See "Underwriting". 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 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)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. 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 Series B Warrants. Includes 6,500 shares of
Series B Common Stock to be received upon repayment of a January
1997 loan to the Company upon completion of the Offering. See
"Certain Relationships and Related Transactions". Also includes
50,000 shares of Series B Common Stock vesting, subject to
stockholder approval, under the Company's 1997 Stock Option Plan.
Also includes 23,901 shares of Common Stock to be received in the
Private Placement upon conversion of $76,005 of principal and
interest owed by the Company for bridge loans from Mr. Montesi.
Does not include 47,802 Warrants to be received by Mr. Montesi in
the Private Placement. Shares of Common Stock issued in the
Private Placement are subject to a lock-up agreement for a period
of 180 days. See "Description of the Securities."
(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 2,523 shares of Common Stock to be
received in the Private Placement upon conversion of $8,020 of
principal and interest owed by the Company for bridge loans from
Mr. Cossey. Does not include 5,046 Warrants to be received by Mr.
Cossey in the Private Placement. Shares of Common Stock issued in
the Private Placement are subject to a lock-up agreement for a
period of 180 days. See "Description of the Securities." Also
includes 50,000 shares of Series B Common Stock vesting, subject to
stockholder approval, under the Company's 1997 Stock Option Plan.
(5)Includes 1,250 shares of Series B Common Stock Dr. Ortmann
beneficially owns through Dr. Louis J. Ortmann Dental Clinic, Inc.,
Profit Sharing Plan. Also includes 23,927 shares of Common Stock
to be received in the Private Placement upon conversion of $76,085
of principal and interest owed by the Company for bridge loans from
Dr. Ortmann. Does not include 47,854 Warrants to be received by
Dr. Ortmann in the Private Placement. Shares of Common Stock
issued in the Private Placement are subject to a lock-up agreement
for a period of 180 days. See "Description of the Securities."
Also includes 7,600 shares of Series B Common Stock to be received
upon repayment of a June 1997 loan to the Company upon completion
of the Offering. Does not include shares owned by Dr. Ortmann's
wife: 26,563 shares of Series B Common Stock, Series B 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 to be received upon repayment of an August
14, 1997 loan to the Company upon completion of the Offering, and
21,227 shares of Series A Common Stock and 42,454 Warrants to be
received in the Private Placement upon the conversion of
approximately $67,500 of principal and interest, owed by the
Company for bridge loans from Mrs. Ortmann. Dr. Ortmann disclaims
beneficial ownership of the shares of Common Stock owned by his
wife. See "Certain Relationships and Related Transactions".
(6)Represents shares owned by Waring Cox, PLC.
(7)Does not include 5,000 share of Series B Common Stock to be
received upon exercise of options granted under the Company's 1997
Stock Option Plan to non-employee directors. Each non-employee
director of the Company received options for 1,000 shares of the
Company's Series B Common Stock, on September 5, 1997. These
options were granted under the Company's 1997 Stock Option Plan and
vest September 5, 1998. See "Management - Stock Options".
(8)Assumes the exercise of warrants by Centerpoint for 701,875
shares of Series B Common Stock.
(9)Includes 5,000 shares of Series B Common Stock to be received
upon repayment of a December 1996 loan to the Company. Also
includes 13,228 shares of Common Stock to be received in the
Private Placement upon conversion of $24,456 of principal and
interest owed by the Company for bridge loans from Mr. Rayner. Does
not include 16,826 Warrants to be received by Mr. Rayner in the
Private Placement. Shares of Common Stock issued in the Private
Placement are subject to a lock-up agreement for a period of 180
days. See "Description of the Securities."
(10)Includes a total of 282,822 warrants and 361,773 shares of
Series B Common Stock. This includes 392,168 warrants purchased at
par value exercisable at $8.00 per share within ten years of
(62,500 December 22, 1992; 125,000 April 1, 1993; 208,344 July 15,
1993) and does not include the exercise of warrants by Mr. Trump,
58,825 of which were exercised in August 1994. 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.
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.
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 62,500 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 __, 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.
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).
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 or
NitRem demonstration facility, for the conducting of laboratory
analysis and characterization of various waste streams to be
processed through a STORS or NitRem unit, to collect and analyze
process equipment and performance data generated during a STORS
and/or NitRem demonstration test, and for on-going research and
development of the STORS 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 upon completion of this Offering, it will be able to reduce
its dependence on Battelle's supervision over the design and
implementation of the STORS 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 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 U.S. Army,
Department of Defense for the Sam Houston State University, doing
business as, the Texas Regional Institute for Environmental Studies
("TRIES")/Army Redwater Project.
Rodman Grimm, President of Centerpoint, served on the Board of
Directors of the Company from March 2, 1994 until his resignation
December 28, 1996 (for personal reasons).
McKeown & Franz, Inc.
The Company entered into an agreement with McKeown & Franz,
Inc. ("MFI"), in March, 1992, a New York based environmental
services firm to assist in the promotion of its nitrogen removal
technology to the City of New York. MFI agreed to forego its
retainer in return for a success fee and an equity position in the
Company should an agreement to develop the nitrogen removal be
executed with the City of New York. According to the agreement,
MFI would be entitled to receive 9,375 shares of Common Stock, plus
an option to buy additional stock upon the Company's signing an
agreement with the City of New York for a city sponsored pilot
scale demonstration project. In May 1993, the Board of Directors
authorized the issuance of 9,375 shares of Series B Common Stock to
McKeown & Franz, Inc. pursuant to the terms of the March, 1992
contract in connection with MFI procuring the agreement with New
York City to host a full scale nitrogen removal demonstration
facility at the City's largest waste water facility. Due to the
lack of capital and the inability of the Company to form a
strategic alliance to move forward with the New York City project,
the Company has not acted on the original demonstration agreement
with the City of New York. However, in July of 1996, the Company
executed a no-cost test agreement with the City of New York
allowing the Company to demonstrate, on-site, the services and
capabilities of the nitrogen removal process. This demonstration
project will be the first joint project between the Company and
Foster Wheeler Environmental Corporation. Additional efforts by
MFI contributed to the Company obtaining such no-cost test
agreement. MFI is also in a position to receive additional
compensation based on a percentage of the overall capital cost of
the NitRem demonstration facility and the procurement of one or
more full scale facilities as part or all of New York City's
nitrogen disposal processes if MFI secures funding for such
projects.
Gerald Franz served as a director of the Company from March 2,
1994, to the expiration of his term, September 5, 1997.
Other Transactions
Mr. Montesi loaned the Company $65,000 in January of 1997, as
part of the Company's $606,000 bridge financing prior to this
Offering. Upon completion of the Offering, Mr. Montesi, in
addition to repayment of the loan with interest, will receive 6,500
shares of Series B Common Stock. Mr. Frank Rayner loaned the
Company $50,000 in December of 1996, as part of the Company's
$606,000 bridge financing prior to this Offering. Upon completion
of the Offering, Mr. Rayner, in addition to repayment of the loan
with interest, will receive 5,000 shares of Series B Common Stock.
Dr. Louis Ortmann loaned the Company $76,000 in June of 1997, as
part of the Company's $606,000 bridge financing prior to this
Offering. Upon completion of the Offering, Dr. Ortmann, in
addition to repayment of the loan with interest, will receive 7,600
shares of Series B Common Stock. In connection with the Private
Placement, Messrs. Montesi, Ortmann and Rayner have agreed to
convert $76,005, $76,085 and $40,065, respectively, of principal
and interest owed by the Company to each of them for bridge loans
at a conversion rate of $3.18 of principal and accrued interest for
one Private Placement Unit. In the Private Placement, Messrs.
Montesi, Ortmann and Rayner shall receive 23,927 Units, 23,901
Units, and 13,228 Units, respectively. See "Private Placement" and
"Concurrent Registration of Securities".
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 U.S. 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
In connection with the Offering, 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, and providing that any such
transactions also be approved by a majority of the Company's
disinterested outside directors, including one of the
Representative's designees so long as they are then serving on the
Company's Board of Directors. In addition, the Underwriting
Agreement contains certain restrictions on the Company involving
transactions with affiliates.
DESCRIPTION OF SECURITIES
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 June
30, 1997, there were no shares of Series A Common Stock issued and
outstanding, 3,241,201 shares of Series B Common Stock issued,
3,157,372 shares of Series B Common Stock outstanding and no shares
of Preferred stock issued and outstanding.
Common Stock
Reverse Stock Splits. In March 1994, the Board of Directors
of the Company recommended, and Shareholders approved, a reverse
split of the outstanding common stock on a four to one ratio ("1994
Reverse Split"). Under the terms, for every four shares owned by
a Shareholder on the record date, that Shareholder would own one
replacement share of common stock (rounded to the next highest
number in the event of fractional shares). The 1994 Reverse Split
was not implemented upon approval because of the financial
condition of the Company at that time.
On December 12, 1996, the Shareholders approved another
reverse split of the outstanding common stock on a four to one
ratio ("1996 Reverse Split") in anticipation of the Offering,
provided that for every four shares owned by a Shareholder on the
record date, that Shareholder would own one replacement share of
Common Stock (rounded to the next highest number in the event of
fractional shares).
As of March 5, 1997, the Company had implemented both the
1994 Reverse Split and the 1996 Reverse Split.
Series A Common Stock. Holders of Series A Common Stock shall
be entitled to all rights and privileges entitled to holders of
common shares under the Arkansas Business Corporation Act, except
as otherwise provided in the Amended and Restated Articles of
Incorporation. Holders of Series A Common Stock have the right
to cast one vote for each share held of record on any matter coming
before shareholders for vote. Holders of Series A Common Stock
have no preemptive rights or other right to subscribe for shares or
to convert shares of Series A Common Stock into other securities.
Holders of Series A Common Stock are entitled to receive such
dividends as may be declared by the Board from time to time from
funds legally available therefor and to share pro rata in any
distribution upon the liquidation of the Company. The designation
of Series A Common Stock shall be removed after the Lock-Up Period
(as described below), when shares of Common Stock shall no longer
be designated Series A or Series B, and the Company shall have only
one series of Common Stock. See "Description of Securities-Common
Stock--Series B Common Stock."
Holders of Series A Common Stock who received their shares by
converting bridge financing in connection with the Private
Placement shall be subject to a lock-up agreement with the
Representative prohibiting sales or transfers of such Series A
Common Stock for 180 days following the date of this Prospectus
without the consent of the Representative.
Series B Common Stock. Holders of Series B Common Stock shall
be entitled to all rights and privileges as holders of Series A
Common subject to the following restrictions on transfer ("Lock-Up
Period"): Series B Common Stock shall be converted to Series A
Common Stock commencing twelve (12) months (the "first year") after
the effective date of the registration statement filed with the
United States Securities and Exchange Commission resulting in gross
proceeds to the Company of $5,000,000 or more, and the average
closing bid price of the Series A Common Stock, as reported on
Nasdaq or such other exchange as the Company's stock may be traded,
equals or exceeds 120% of its initial public offering price for
twenty (20) consecutive trading days within a thirty-day (30)
period (the "trading test"). In the event the bid price of the
Company's Series A Common Stock twelve (12) months from the
effective date does not meet the trading test, then no more than
20% of the Series B Common Stock may be converted to Series A
Common Stock, on a pro rata basis, in any one quarterly calendar
period during twelve (12) month period following the first year, or
100% of the Series B Common Stock shall be converted to Series A
Common Stock when the trading test is met, whichever first occurs
and all shares will be transferable. At such time as all Series B
Common Stock has been converted to Series A Common Stock, the
separate class designations shall be removed as a matter of law.
Preferred Stock
The Company is authorized by its amended and restated Articles
of Incorporation to issue a maximum of 10,000,000 shares of
Preferred Stock, in one or more series and containing such rights,
privileges and limitations, including voting rights, conversion
privileges and/or redemption rights, as may, from time to time, be
determined by the Board of Directors of the Company. Preferred
Stock may be issued in the future in connection with acquisitions,
financings or such other matters as the Board of Directors deems to
be appropriate. In the event that any such shares of Preferred
Stock shall be issued, a Certificate of Designation, setting forth
the series of such Preferred Stock and the relative rights,
privileges and limitations with respect thereto, shall be filed
with the Secretary of State of the State of Delaware. The effect
of such Preferred Stock is that the Company's Board of Directors
alone, within the bounds and subject to the federal securities laws
and the Delaware Law, may be able to authorize the issuance of
Preferred Stock which could have the effect of delaying, deferring
or preventing a change in control of the Company without further
action by the stockholders and may adversely effect the voting and
other rights of holders of Common Stock. The issuance of Preferred
Stock with voting and conversion rights may also adversely affect
the voting power of the holders of Common Stock, including the loss
of voting control to others.
Warrants
Series 1 Warrants. The following is a brief summary of
certain provisions of the Redeemable Series 1 Stock Purchase
Warrants issued in connection with the Offering ("Series 1
Warrants"). Reference is made to the actual text of the Series 1
Warrant Agreement between the Company and ChaseMellon Shareholder
Services, L.L.C. (the "Warrant Agent"), a copy of which has been
filed as an exhibit to the Registration Statement of which this
Prospectus is a part, for a more complete description of the Series
1 Warrants. See "Additional Information."
Exercise Price and Terms. Each Warrant entitles the
registered holder thereof to purchase, at any time during the four
year period commencing one year after the date of this Prospectus,
one share of Common Stock at a price of $6.36 per share [120% of
the initial public offering price per share], subject to adjustment
in accordance with the anti-dilution and other provisions referred
to below. The holder of any Series 1 Warrant may exercise such
Series 1 Warrant by surrendering the certificate representing the
Series 1 Warrant to the Warrant Agent, with the subscription form
thereon properly completed and executed, together with payment of
the exercise price. Commencing one year after the date of this
Prospectus, the Series 1 Warrants may be exercised at any time in
whole or in part at the applicable exercise price until expiration
of the Series 1 Warrants. No fractional shares will be issued
upon the exercise of the Series 1 Warrants.
Adjustments. The exercise price and the number of shares of
Common Stock purchasable upon the exercise of the Series 1 Warrants
are subject to adjustment upon the occurrence of certain events,
including stock dividends, stock splits, combinations or
reclassifications of the Common Stock, or sale by the Company of
shares of its Common Stock or other securities convertible into
Common Stock (exclusive of options and shares under the Plan, and
other limited exceptions) at a price below the then-applicable
exercise price of the Series 1 Warrants. Additionally, an
adjustment would be made in the case of a reclassification or
exchange of Common Stock, consolidation or merger of the Company
with or into another corporation (other than a consolidation or
merger in which the Company is the surviving corporation) or sale
of all or substantially all of the assets of the Company, in order
to enable warrant holders to acquire the kind and number of shares
of stock or other securities or property receivable in such event
by a holder of the number of shares of Common Stock that might have
been purchased upon the exercise of the Series 1 Warrant.
Redemption Provisions. Commencing ______, 1998, the Series 1
Warrants are subject to redemption at $.05 per Warrant on 30 days'
prior written notice provided that the average closing bid price of
the Common Stock as reported on OTC Bulletin Board equals or
exceeds $6.60 per share [200% of the initial public offering price
per share] (subject to adjustment for stock dividends, stock
splits, combinations or reclassifications of the Common Stock), for
any 20 trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of the notice of
redemption. In the event the Company exercises the right to redeem
the Series 1 Warrants, such Series 1 Warrants will be exercisable
until the close of business on the business day immediately
preceding the date for redemption fixed in such notice. If any
Series 1 Warrant called for redemption is not exercised by such
time, it will cease to be exercisable and the holder will be
entitled only to the redemption price.
Transfer, Exchange and Exercise. The Series 1 Warrants are in
registered form and may be presented to the Warrant Agent for
transfer, or exercise at any time on or prior to their expiration
date five years from the date of this Prospectus, at which time the
Series 1 Warrants become wholly void and of no value. If a market
for the Series 1 Warrants develops, the holder may sell the Series
1 Warrants instead of exercising them. There can be no assurance,
however, that a market for the Series 1 Warrants will develop or
continue.
Modification of Warrants. The Company and the Warrant Agent
may make such modifications to the Series 1 Warrants as they deem
necessary and desirable that do not adversely affect the interests
of the warrantholders. The Company may, in its sole discretion,
lower the exercise price of the Series 1 Warrants for a period of
not less than 30 days on not less than thirty (30) days' prior
written notice to the warrantholders and the Representative.
Modification of the number of securities purchasable upon the
exercise of any Warrant, the exercise price and the expiration date
with respect to any Warrant requires the consent of two-thirds of
the warrantholders. No other modifications may be made to the
Series 1 Warrants, without the consent of two-thirds of the
warrantholders.
The Series 1 Warrants are not exercisable unless, at the time
of the exercise, the Company has a current prospectus covering the
shares of Common Stock issuable upon exercise of the Series 1
Warrants, and such shares have been registered, qualified or deemed
to be exempt under the securities laws of the state of residence of
the exercising holder of the Series 1 Warrants. Although the
Company will use its best efforts to have all of the shares of
Common Stock issuable upon exercise of the Series 1 Warrants
registered or qualified on or before the exercise date and to
maintain a current prospectus relating thereto until the expiration
of the Series 1 Warrants, there can be no assurance that it will be
able to do so.
The Series 1 Warrants are separately transferable immediately
upon issuance. Although the Securities will not knowingly be sole
to purchasers in jurisdictions in which the Securities are not
registered or otherwise qualified for sale, purchasers may buy
Series 1 Warrants in the aftermarket or may move to jurisdictions
in which the shares underlying the Series 1 Warrants are not so
registered or qualified during the period that the Series 1
Warrants are exercisable. In this event, the Company would be
unable to issue shares to those persons desiring to exercise their
Series 1 Warrants, and holders of Series 1 Warrants would have no
choice but to attempt to sell the Series 1 Warrants in a
jurisdiction where such sale is permissible or allow them to expire
unexercised.
Series 2 Warrants. The following is a brief summary of
certain provisions of the Redeemable Series 2 Stock Purchase
Warrants issued in connection with the Offering ("Series 2
Warrants"). Reference is made to the actual text of the Series 2
Warrant Agreement between the Company and ChaseMellon Shareholder
Services (the "Warrant Agent"), a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus
is a part, for a more complete description of the Series 2
Warrants. See "Additional Information."
Exercise Price and Terms. Each Series 2 Warrant entitles the
registered holder thereof to purchase, at any time during the four
year period commencing one year after the date of this Prospectus,
one share of Common Stock at a price of $6.60 per share [200% of
the initial public offering price per share], subject to adjustment
in accordance with the anti-dilution and other provisions referred
to below. The holder of any Series 2 Warrant may exercise such
warrant by surrendering the certificate representing the Series 2
Warrant to the Warrant Agent, with the subscription form thereon
properly completed and executed, together with payment of the
exercise price. Commencing one year after the date of this
Prospectus, the Series 2 Warrants may be exercised at any time in
whole or in part at the applicable exercise price until expiration
of the Series 2 Warrants. No fractional shares will be issued
upon the exercise of the Series 2 Warrants.
Adjustments. See "Series 1 Stock Purchase Warrants."
Redemption Provisions. Commencing ______, 1998, the Series 2
Warrants are subject to redemption at $.05 per Warrant on 30 days'
prior written notice provided that the average closing bid price of
the Common Stock as reported on OTC Bulletin Board equals or
exceeds $15.90 per share [300% of the initial public offering price
per share] (subject to adjustment for stock dividends, stock
splits, combinations or reclassifications of the Common Stock), for
any 20 trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of the notice of
redemption. In the event the Company exercises the right to redeem
the Series 2 Warrants, such Series 2 Warrants will be exercisable
until the close of business on the business day immediately
preceding the date for redemption fixed in such notice. If any
Series 2 Warrant called for redemption is not exercised by such
time, it will cease to be exercisable and the holder will be
entitled only to the redemption price.
Transfer, Exchange and Exercise. See "Series 1 Stock Purchase
Warrants."
Modification of Warrants. See "Series 1 Stock Purchase
Warrants."
Series B Warrants. Company warrants outstanding prior to the
Offering are designated as Series B Warrants ("Series B Warrants").
Series B Warrants for 701,875 shares of Series B Common Stock were
issued in March 1988 and April 1991 to Centerpoint Power
Corporation of Virginia pursuant to the terms of a substitute
general compensation and stock warrant agreement and amendments
thereto, between the Company and Centerpoint. Centerpoint may
exercise the warrant rights at any time, in whole, or in part until
April 22, 2001. The Purchase Price for the shares of stock is
$0.01 per share. In addition, these warrant rights contain a
"fairness" protection which prevents the warrants from being
diminished or diluted as a result of stock dividends, stock splits
or stock options which price and amount are both subject to
adjustment for stock splits or reverse stock splits.
Series B Warrants for 435,219 shares of Series B Common Stock
were issued prior to March 1994 to three individuals. Series B
Warrants for 461,965 shares of Series B Common Stock were issued
subsequent to 24 individuals in connection with the Company's
efforts to maintain operating capital. These Series B Warrants may
be exercised at any time, in whole or in part, within a five year
period form the date of issuance. The Purchase Price for the
shares of stock ranges from $0.60 per share to $0.90 per share,
which prices and amounts are each subject to adjustment for stock
splits and reverse stock splits. See "Description of Securities-Common
Stock-Series B Common Stock."
Transfer Agent and Registrar and Warrant Agent
The Transfer Agent and Registrar for the Common Stock and the
Warrant Agent for the Warrant is ChaseMellon Shareholder Services,
L.L.C., 2323 Bryan Street, Suite 2300, Dallas, Texas, 75201.
PRIVATE PLACEMENT
Certain holders of notes with aggregate principal and interest
of approximately $1,001,655 have agreed to convert, prior to the
close of this Offering, the principal balance owed and interest
due into shares of Series A Common Stock, Series 1 Warrants and
Series 2 Warrants at a conversion rate of $3.18 of principal and
interest for one Unit (a 10% discount from the public offering
price of the Units)("Private Placement"). The shares of Series A
Common Stock issued to such noteholders in the Private Placement
are subject to a lock-up agreement with the Representative
prohibiting sales or transfers of such Common Stock for 180 days
following the date of this Prospectus without consent of the
Representative. See "Concurrent Registration of Securities" and
"Selling Securityholders."
CONCURRENT REGISTRATION OF SECURITIES
Concurrently with this Offering, the Company is registering
314,999 shares of Series A Common Stock ("Selling Securityholders'
Shares"), 314,999 Series 1 Warrants and 314,999 Series 2 Warrants
(collectively, "Selling Securityholders' Warrants"), and the
shares underlying such Selling Securityholders' Warrants ("Selling
Securityholders' Warrant Shares"), at its expense, received by
certain noteholders ("Selling Securityholders") in the Private
Placement. See "Private Placement." The Selling Securityholders'
Shares and Selling Securityholders' Warrants are not part of this
underwritten Offering. Further, all Selling Securityholders'
Shares are the subject of a "lock-up" agreement whereby holders of
Selling Securityholders' Shares are prohibited from selling or
otherwise disposing of the Selling Securityholders' Shares for a
period of 180 days following the date of this Prospectus without
the prior written consent of the Representative. The Company will
not receive any proceeds from the sale of the Selling
Securityholders' Shares and Selling Securityholders' Warrants by
such Selling Securityholders. However, the Company will receive
proceeds from the exercise, if any, of the Selling Securityholders'
Warrants. See "Use of Proceeds," "Description of Securities" and
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have
3,463,568 shares of Series B Common Stock outstanding and 1,300,331
shares of Series A Common Stock outstanding, of which only the
1,100,000 shares of Series A Common Stock offered hereby (and the
1,100,000 Warrants) (1,265,000 shares and 1,265,000 Warrants if the
Overallotment Option is exercised) will be transferable without
restriction under the Securities Act. 200,331 shares of Series A
Common Stock issued in connection with the Concurrent Offering will
be transferable after 180 days from the date of the Prospectus.
The outstanding shares of Series B Common Stock, all of which are
owned by existing shareholders, are "restricted securities" (as
that term is defined in Rule 144 promulgated under the Securities
Act) which may be publicly sold only if registered under the
Securities Act or if sold in accordance with an applicable
exemption from registration, such as Rule 144. In general, under
Rule 144 as currently in effect, subject to the satisfaction of
certain other conditions, a person, including an affiliate of the
Company, who has beneficially owned restricted securities for at
least one year, is entitled to sell (together with any person with
whom such individual is required to aggregate sales), within any
three-month period, a number of shares that does not exceed the
greater of 1% of the total number of outstanding shares of the same
class, or, if the Common Stock is quoted on Nasdaq or another
national securities exchange, the average weekly trading volume
during the four calendar weeks preceding the sale. Sales under
Rule 144 are also subject to certain manner of sale provisions,
notice requirements, and the availability of current public
information regarding the Company. A person who has not been an
affiliate of the Company for at least three months, and who has
beneficially owned restricted securities for at least two years,
its entitled to sell such restricted shares under Rule 144 without
regard to any of the limitations described above.
No prediction can be made as to the effect that future sales
of Common Stock, or the availability of shares of Common Stock for
future sale, will have on the market prices of the Common Stock
prevailing from time to time. The Company, as well as all holders
of outstanding securities exercisable for or convertible into
Series B Common Stock (other than the Representative's Warrants),
by the terms of the Series B Common Stock, are prohibited from,
directly or indirectly, issuing, agreeing or offering to sell,
sell, transfer, assign, distribute, grant an option for purchase or
sale of, pledge, hypothecate or otherwise encumber or dispose of
any beneficial interest in such securities for a period of at least
12 months following the date of this Prospectus without the prior
written consent of the Representative. The sale or issuance, or
the potential for sale or issuance, of Common Stock after such 12-month period
could have an adverse impact on the market prices of
the Common Stock and/or the Warrants. Sales of substantial amounts
of Common Stock or the perception that such sales could occur could
adversely affect prevailing market prices for the Securities. See
"Underwriting."
SELLING SECURITYHOLDERS
An aggregate of 200,331 shares of Common Stock ("Selling
Securityholders' Shares"), 200,331 Series 1 Warrants and 200,331
Series 2 Warrants (collectively, "Selling Securityholders'
Warrants"), and the shares underlying such Warrants ("Selling
Securityholders' Warrant Shares"), which were issued to certain
holders of bridge financing notes ("Selling Securityholders") in
the Private Placement, are being registered herewith, at the
expense of the Company, for future sale by such Selling
Securityholders. See "Private Placement," "Concurrent Offering"
and "Shares Eligible for Future Sale." The Selling
Securityholders' Shares and Selling Securityholders' Warrants are
collectively referred to herein as "Selling Securityholders'
Securities".
The future sales of the Selling Securityholders' Securities
may depress the price of the Units and the Common Stock or Warrants
underlying the Units in any markets for such securities.
The following table sets forth information with respect to
persons for whom the Company is registering the Selling
Securityholders' Securities for resale to the public in the
Concurrent Offering. Ownership of the Common Stock, Series 1
Warrants and Series 2 Warrants by the Selling Securityholders after
this Offering will depend on the number of such securities sold by
each Selling Securityholder in the Concurrent Offering and if all
Selling Securityholders' Securities are sold in such Offering the
Selling Securityholders will own no Securities.
<TABLE>
<CAPTION>
Common Stock Series 1 Warrants
Number of
Series 1
Number of Warrants
Shares of Owned Prior
Common Stock to and
Owned Prior to Registered
and Registered Percent of in the Percent of
Selling in the Concurrent Class after Concurrent Class after
Securityholder Offering Offering Offering Offering
<S> <C> <C> <C> <C>
Peter K. Ahuna 6,831 * 6,831 *
Gerald Bobo 3,249 * 3,249 *
Dennis A. Boston,
Sr.(1) 3,467 * 3,467 *
John W. Chapman,
Jr.(2) 3,438 * 3,438 *
Henry C. Cooper 3,556 * 3,556 *
Dennis C. Cossey(3) 2,523 * 2,523 *
Robert P. Dorman(4) 3,453 * 3,453 *
Brian A. Dusseault 3,560 * 3,560 *
James E. Gibbs, Jr. 8,666 * 8,666 *
Harry Hutson (5) 19,578 1.3 19,578 1.3
Jacam Corporation 7,010 * 7,010 *
George Kajiwara 34,477 2.3 34,477 2.3
George Kajiwara
Insurance Agency,
Inc. Defined
Benefit Plan (6) 66,013 4.4 66,013 4.4
Joseph P. Masetta 3,568 * 3,568 *
Willoughby D.
Millard (7) 19,908 1.3 19,908 1.3
James Moffett(8) 3,524 * 3,524 *
Primo L. Montesi
(9) 23,901 1.6 23,901 1.6
Larry Mullett 3.282 * 3,282
*Elizabeth Ortmann
(10) 21,227 1.4 21,227 1.4
Louis J. Ortmann
(11) 23,927 1.6 23,927 1.6
Rev. William J.
Ortmann(12) 3,282 * 3,282 *
Frank Rayner(13) 13,228 * 13,228 *
Jack Roland 16,526 1.1 16,526 1.1
Robert Siragusa,
M.D. (14) 10,167 * 10,167 *
Douglass J. Wood
(15) 6,634 * 6,634 *
total 314,999 20.79% 314,999 20.79%
</TABLE>
<TABLE>
<CAPTION>
Number of
Series 2
Warrants
Owned Prior
to and
Registered in Percent of
the Concurrent Class after
Offering Offering
<S> <C> <C>
Peter K. Ahuna 6,831 *
Gerald Bobo 3,249 *
Dennis A. Boston,
Sr.(1) 3,467 *
John W. Chapman,
Jr.(2) 3,438 *
Henry C. Cooper 3,556 *
Dennis C. Cossey(3) 2,523 *
Robert P. Dorman(4) 3,453 *
Brian A. Dusseault 3,560 *
James E. Gibbs, Jr. 8,666 *
Harry Hutson (5) 19,578 1.3
Jacam Corporation 7,010 *
George Kajiwara 34,477 2.3
George Kajiwara
Insurance Agency,
Inc. Defined
Benefit Plan (6) 66,013 4.4
Joseph P. Masetta 3,568 *
Willoughby D.
Millard (7) 19,908 1.3
James Moffett(8) 3,524 *
Primo L. Montesi
(9) 23,901 1.6
Larry Mullett 3.282 *
Elizabeth Ortmann
(10) 21,227 1.4
Louis J. Ortmann
(11) 23,927 1.6
Rev. William J.
Ortmann(12) 3,282 *
Frank Rayner(13) 13,228 *
Jack Roland 16,526 1.1
Robert Siragusa,
M.D. (14) 10,167 *
Douglass J. Wood
(15) 6,634 *
total 314,999 20.79%
</TABLE>
________
* Less than 1%
(1) Held in joint tenancy with wife Joyce Boston.
(2) Held in joint tenancy with Monte Chapman and Kevin Chapman.
(3) Mr. Cossey is Chairman of the Board of Directors, Chief Executive Officer
and
Secretary of the Company.
(4) Held in joint tenancy with wife Bonnie K. Dorman.
(5) Held in joint tenancy with wife Janet Hutson.
(6) Held as trustee for the benefit of George Kajiwara.
(7) Held in joint tenancy with wife Linda M. Millard.
(8) Held in joint tenancy with wife Linda Moffett.
(9) Mr. Montesi is President and Director of the Company.
(10) Elizabeth Ortmann is the wife of Dr. Louis Ortmann, a Director of the
Company.
(11) Dr. Louis Ortmann is a Director of the Company.
(12) Father Ortmann is the brother of Dr. Louis Ortmann, a Director of the
Company.
(13) Mr. Rayner will beneficially own more than 5% of the outstanding shares of
the
Company after the Offering. See "Principal Stockholders".
(14) Held in joint tenancy with wife Susan Siragusa.
(15) Held in joint tenancy with wife Carolyn Wood.
Except as set forth in the table above, there are no material relationships
between any of the Selling Securityholders and the Company or any of its
predecessors or affiliates. The Selling Securityholders' Securities are not
being
underwritten by the Underwriter. All Selling Securityholders' Shares are the
subject of a "lock-up" agreement whereby holders of Selling Securityholders'
Shares
are prohibited from selling or otherwise disposing of the Selling
Securityholders'
Shares for a period of 180 days following the date of this Prospectus without
the
prior written consent of the Representative. See "Description of the
Securities."
Subject to these restrictions, the Company anticipates that sales of the
Selling
Securityholders' Securities may be effected from time to time in transactions
(which may include block transactions) in the over-the-counter market, in
negotiated transaction, or a combination of such methods of sale, at fixed
prices
that may be changed, at market prices prevailing at the time of sale, or at
negotiated prices. The Selling Securityholders may effect such transactions
by
selling the Selling Securityholders' Securities directly to purchasers or
through
broker-dealers that may act as agents or principals. Such broker-dealers may
receive compensation in the form of discounts, concessions or commissions
from the
Selling Securityholders for whom such broker-dealers may act as agents or to
whom
they sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The Selling Securityholders and any broker-dealers that act in
connection with
the sale of the Selling Securityholders' Securities as principals may be
deemed to
be "underwritten" within the meaning of Section 2(11) of the Securities Act
and any
commission received by them and any profit on the resale of such securities as
principals might be deemed to be underwriting discounts and commissions under
the
Securities Act. The Selling Securityholders may agree to indemnify any agent,
dealer or broker-dealer that participates in transaction involving sales of such
security against certain liabilities, including liabilities arising under the
Securities Act. The Company will not receive any proceeds from the sales of the
Selling Securityholders' Securities by the Selling Securityholders. Sales
of the
Selling Securityholders' Securities by the Selling Securityholders, or even the
potential of such sales, would likely have an adverse effect on the market price
of the Units, the Common Stock and the Warrants.
Under the Exchange Act, and the regulations thereunder, any person
engaged in
a distribution of the securities of the Company offered by this Prospectus
may not
simultaneously engage in market-making activities with respect to such
securities
of the Company during the applicable restricted period as set forth in
Regulation
M. In addition, and without limiting the foregoing, the Selling
Securityholders
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, the rules promulgated
under
Regulation M, in connection with transactions in such securities, which
provisions
may limit the timing of purchases and sales of such securities by the Selling
Securityholders.
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation is acting as the representative (among the Company and
the
Representative, the "Representative"), have severally agreed, subject to the
terms
and conditions of the Underwriting Agreement (the "Underwriting Agreement"), to
purchase from the Company, and the Company has agreed to sell to the
Underwriters
on a firm commitment basis the respective number of Units set forth
opposite their
names:
Number of
Underwriters Units
National Securities Corporation . . . .
Total . . . . . . . . . . . . . . 1,200,000
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by their
counsel
and various other conditions. The Underwriters are committed to purchase
all the
Units offered hereby, if any are purchased.
The Representative has advised the Company that the Underwriters propose
initially to offer the Securities to the public at the initial public offering
prices set forth on the cover page of this Prospectus and to certain dealers at
such prices less concessions not in excess of $3.30 per share and $.10 per
Warrant.
Such dealers may reallow a concession not in excess of $___ per share and
$___
per Warrant to other dealers. After this Offering, the public offering price,
concession and reallowance may be changed by the Representative.
The Representative has informed the Company that it does not expect
sales to
discretionary accounts by the Underwriters to exceed five percent of the
Securities
offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company
has also
agreed to pay to the Representative a non-accountable expense allowance equal to
3% of the gross proceeds derived from the sale of the Securities
underwritten, of
which $25,000 has been paid to date.
The Company has granted to the Underwriters an Overallotment Option
exercisable within 45 days of the date hereof, to purchase up to an additional
180,000 shares of Series A Common Stock and/or an additional 180,000 Series 1
Warrants and Series 2 Warrants at the initial public offering prices per
share and
per Warrant, respectively, offered hereby, less underwriting discounts and
the non-accountable expense allowance. Such option may be exercised only
for the purpose
of covering overallotments, if any, incurred in the sale of the Securities
offered
hereby. The Overallotment Option may be exercised to purchase Units (each
consisting of one share of Common Stock, one Series 1 Warrant and one Series 2
Warrant) and/or shares of Common Stock or Warrants or any combination
thereof. To
the extent such option is exercised in whole or in part, each Underwriter
will have
a firm commitment, subject to certain conditions, to purchase the number of
the
additional Securities proportionate to its initial commitment.
The Company and all officers, directors and stockholders of the Company and
all holders of any options, warrants or other securities convertible,
exercisable
or exchangeable for Common Stock have agreed not to directly or indirectly,
offer,
agree or offer to sell, transfer, assign, encumber, grant an option for the
purchase or sale of, pledge or otherwise dispose of any beneficial interest
in such
securities for a period of 12 months following the date of this Prospectus
without
the prior written consent of the Representative. An appropriate legend shall be
marked on the face of the certificates representing all such securities.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the Company
up to 120,000 shares of Common Stock and/or 120,000 Series 1 Warrants and/or
120,000 Series 2 Warrants (the "Representative's Warrants"). The
Representative's
Warrants are initially exercisable at a price of $3.96 per Unit [120% of the
initial offering price per Unit] and $__ per Warrant for a period of four years,
commencing _____, 1998 and are restricted from sale, transfer, assignment or
hypothecation for a period of one year from the date of completion of this
Offering, except to partners and officers of the Representative. The
Representative's Warrants provide for adjustment in the number of securities
issuable upon the exercise thereof as a result of certain subdivisions and
combinations of the Common Stock. The Representative's Warrants grant to the
holders thereof certain rights of registration for the securities issuable upon
exercise thereof.
The Company has agreed for a period of five years after the date of this
Prospectus, if requested by the Representative, to use its best efforts to
nominate
for election to the Company's Board of Directors one person designated by the
Representative. In the event that the Representative elects not to exercise
such
right, the Representative may designate a person to receive all notices of
meetings
by the Company's Board of Directors and all other correspondence and
communications
sent by the Company to its Board of Directors and to attend all such meetings of
the Company's Board of Directors. The Company has agreed to reimburse designees
of the Representative for their out-of-pocket expenses incurred in
connection with
their attendance of meetings of the Company's Board of Directors. No person has
yet been designated by the Representative to be nominated for election to the
Company's Board of Directors. See "Management."
Prior to this Offering, there has been no public market for the Series B
Common Stock or the Securities. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations-Liquidity and Capital Resources."
Consequently, the initial public offering prices of the Securities and the terms
of the Warrants have been determined by negotiation between the Company and the
Representative and do not necessarily bear any relationship to the Company's
asset
value, net worth, or other established criteria of value. Among the factors
considered in such negotiations were prevailing market conditions, the
history of
and prospects for the industry in which the Company competes, an assessment
of the
Company's technology and management, the prospects of the Company, its capital
structure, the market for initial public offerings and market prices of similar
securities of comparable publicly-traded companies.
The Company has agreed to appoint the Representative as the Company's agent
with respect to the solicitation of Warrants, if any solicitation agent is
retained
by the Company. Upon the exercise of any Warrants more than one year after the
date of this Prospectus, which exercise was solicited by the Representative, and
to the extent not inconsistent with the guidelines of the National
Association of
Securities Dealers, Inc. and the Rules and Regulations of the Commission, the
Company has agreed to pay the Representative a commission of five percent
(5%) of
the aggregate exercise price of such Warrants in connection with bona fide
services
provided by the Representative relating to any warrant solicitation
undertaken by
the Representative. However, no compensation will be paid to the Representative
in connection with the exercise of the Warrants if (a) the market price of the
Common Stock is lower than the exercise price, (b) the Warrants were held in a
discretionary account, or (c) the Warrants are exercised in an unsolicited
transaction where the holder of the Warrants has not stated in writing that the
transaction was solicited and has not designated in writing the
Representative as
soliciting agent. Unless granted an exemption by the Commission from its
Rule 101
under the Securities Act, the Representative and any soliciting
broker-dealers will
be prohibited from engaging in any market-making activities or solicited
brokerage
activities with regard to the Company's securities for the periods prescribed in
Rule 101 prior to any solicitation or the exercise of the Warrants until the
later
of such solicitation activity or the termination (by waiver or otherwise) of any
right the Representative or soliciting broker-dealers may have to receive a
fee for
the exercise of the Warrants following such solicitation. As a result, the
Representative and any soliciting broker-dealers may be unable to continue to
provide a market for the Common Stock or Warrants during certain periods
while the
Warrants are exercisable. If the Representative has engaged in any of the
activities prohibited in Rule 101 during the periods described above, the
Representative undertakes to waive unconditionally its rights to receive a
commission on the exercise of such Warrants.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize,
maintain or otherwise affect the market price of the Securities. Such
transactions
may include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid or purchase Common Stock or
Warrants for the purpose of stabilizing their respective market prices. The
Underwriters also may create a short position for the account of the
Underwriters
by selling more Securities in connection with the Offering than they are
committed
to purchase from the Company, and in such case may purchase Securities in the
open
market following completion of the Offering to cover all or a portion of
such short
position. The Underwriters may also cover all or a portion of such short
position
by exercising the Underwriters' Over-allotment Option referred to above. In
addition, the Representative, on behalf of the Underwriters, may impose "penalty
bids" under contractual arrangements with the Underwriters whereby it may
reclaim
from an Underwriter (or dealer participating in the Offering) for the account of
other Underwriters, the selling concession with respect to Securities that are
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Securities at a
level
above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken,
they may be discontinued at any time.
The foregoing is a summary of the principal terms of the agreements
described
above and does not purport to be complete. Reference is made to a copy of each
such agreement which are filed as exhibits to the Registration Statement of
which
this Prospectus is a part for a more complete description thereof.
See "Additional
Information."
LEGAL MATTERS
The validity of the issuance of the Securities offered hereby will be
passed
upon for the Company by the Davidson Law Firm, Little Rock, Arkansas, as
corporate
counsel to the Company in connection with this Offering. In addition, the
Company
has relied on Waring Cox, PLC, Memphis, Tennessee, as special counsel to the
Company in connection with certain legal matters in connection with this
Offering.
Certain legal matters in connection with this Offering will be passed upon
for the
Underwriters by Camhy Karlinsky & Stein LLP, New York, New York.
Waring Cox, PLC
owns 88,215 shares of Series B Common Stock, representing less than 2% of the
Company's outstanding common stock. Jerald H. Sklar, a director of the
Company, is
also a member of Waring Cox, PLC. Upon completion of this Offering, Gary
Barket,
a partner of the Davidson Law Firm, will become Senior Vice President and
General
Counsel of the Company.
EXPERTS
The financial statements of the Company included in this Prospectus and
in the
Registration Statement of which this Prospectus is a part have been audited
by Kemp
& Company, independent auditors, and Baird, Kurtz & Dobson, independent
auditors,
to the extent and for the periods set forth in the reports of such firms
contained
herein and in the Registration Statement of which this Prospectus is a part.
All
such financial statements have been included in reliance upon such reports given
upon the authority of such firms as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement on Form SB-2 (the
"Registration Statement") under the Securities Act with respect to the
Securities
offered hereby. This Prospectus, filed as a part of the Registration Statement,
does not contain certain information set forth in or annexed as exhibits to the
Registration Statement. For further information regarding the Company and the
Securities offered hereby, reference is made to the Registration Statement
and to
the exhibits filed as a part thereof, which may be inspected at the office of
the
Commission without charge or copies of which may be obtained there from upon
request to the Commission and payment of the prescribed fee. With respect to
each
contract, agreement or other document referred to in this Prospectus and
filed as
an exhibit to the Registration Statement, reference is made to such exhibit
for a
more complete description of the matter involved. The Commission also maintains
a Web site that contains reports, proxy and information statements and other
information regarding registrants, including the Company, that file
electronically
with the Commission at http://www.sec.gov.
The Registration Statement and such exhibits and schedules may be inspected
without charge at the public reference facilities maintained by the
Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Office of the Commission: New York Regional Office, 7 World Trade Center, 13th
Floor, New York, New York 10048, and Chicago Regional Office, Citicorp
Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may be obtained from the Public Reference Section of the Commission
at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
<PAGE> F-1
THERMOENERGY CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page Number
Report of Kemp & Company.......................................F-2
Report of Baird, Kurtz & Dobson...............................F-3
Balance Sheets as of September 30, 1996 and 1995..............F-4
Statements of Operations for the years ended
September 30, 1996,1995 and 1994
and cumulative during development stage
through September 30, 1996...................................F-5
Statements of Changes in Stockholders' Equity
(Deficit) for the periods ended September 30,
1988 through September 30, 1996..............................F-6
Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994 and
cumulative during development stage
through September 30, 1996..................................F-10
Notes to Financial Statements - September 30, 1996...........F-11
Balance Sheets as of June 30, 1997 (unaudited),
and September 30, 1996......................................F-23
Statements of Operations cumulative during
development stage through June 30, 1997
(unaudited), for the nine months ended June 30,
1997 and June 30, 1996 (unaudited) and for
the three months ended June 30, 1997 and June 30,
1996(unaudited)..............................................F-24
Statements of Changes in Stockholders' Equity
(Deficit) for the periods ended September 30,
1988 through September 30, 1996 and the nine
months ended June 30, 1997(unaudited).......................F-25
Statements of Cash Flows cumulative during
development stage through June 30, 1997
(unaudited) and for the three months
ended June 30, 1997 and June 30, 1996 (unaudited)..........F-29
Notes to Financial Statements - June 30, 1997
(unaudited).................................................F-30
<PAGE> F-2
Report of Independent Auditors
Board of Directors
ThermoEnergy Corporation
Little Rock, Arkansas
We have audited the accompanying balance sheets of ThermoEnergy Corporation,
formerly Innotek Corporation, (A Development Stage Company) as of September 30,
1996 and 1995, the related statements of operations and cash flows for each of
the
three years in the period ended September 30, 1996 and for the period cumulative
during development stage through September 30, 1996, and the related
statements of
changes in stockholders' equity (deficit) for each of the five years in the
period
ended September 30, 1996. 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 September 30, 1996, 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
September 30, 1996 and 1995, and the
results of its operations and its cash flows
for each of the
three years in the period ended September 30, 1996 and the period
cumulative
during development stage through September 30, 1996, 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
commercialize 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
December 4, 1996, except for Note 11,
as to which the date is March 5, 1997
<PAGE> F-3
Independent Accountants' Report
Board of Directors
Innotek Corporation
Little Rock, Arkansas
We have audited the
balance sheets of INNOTEK CORPORATION (A Development Stage
Company) as of September
30, 1991 and 1990 (not presented herein), 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 (not presented
herein) and
cumulative since inception, through September 30, 1991 (not presented
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion,
the financial statements referred to above present fairly, in
all material respects,
the financial position of INNOTEK CORPORATION (A Development
Stage Company) as of
September 30, 1991 and 1990, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1991 and
cumulative since inception through September 30, 1991 in conformity with
generally accepted accounting principles.
The financial statements have been prepared
assuming the Company will continue
as a going concern. The Company is in the development stage with no significant
revenues from
operations, and will likely require substantial capital to construct
and operate a demonstration facility to commercialize the technologies. These
conditions raise substantial doubt about its ability to continue as a going
concern.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ Baird, Kurtz & Dobson
Little Rock, Arkansas
December 11, 1991
<PAGE> F-4
THERMOENERGY CORPORATION
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30 September 30
1996 1995
<S> <C> <C>
Cash - Total Current Assets $ 62,333 $ 52,524
Advances to officers (Note 6) 96,200 62,200
Accrued interest receivable -
officers (Note 6) 9,138 2,196
Property and equipment, at cost:
Equipment 14,818 14,818
Furniture and fixtures 4,991 4,991
Less accumulated depreciation (14,147) (11,514)
---------- ----------
5,662 8,295
---------- ----------
$173,333 $125,215
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable (Note 6) $ 360,288 $ 270,622
Accrued expenses:
Salaries 364,314 159,720
Consulting fee (Note 7) 100,000 100,000
Other (Note 4) 92,513 70,563
----------- ----------
556,827 330,283
Deferred compensation (Note 6) 215,460 198,906
Notes payable to stockholders (Note 4) 735,000 473,365
----------- ----------
Total Current Liabilities 1,867,575 1,273,176
----------- ----------
Commitments and contingencies
(Notes 3, 7, 10 and 11):
Stockholders' equity (deficit)
(Notes 7 and 11):
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
- -- 3,241,201 shares, outstanding --
3,157,372 shares 3,241 3,241
Additional paid-in capital 3,843,918 3,838,578
Deficit accumulated during the
development stage (5,541,401) (4,989,780)
----------- -----------
(1,694,242) (1,147,961)
----------- -----------
$173,333 $125,215
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE> F-5
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
During
Development
Stage Through Year Ended September 30,
September 30, 1996 1996 1995 1994
<S> <C> <C> <C> <C>
Operating expenses:
General and administrative
(Note 2) $ 4,083,832 $ 423,959 $ 641,765 $ 548,387
Payments under licenses
(Note 3) 627,266 123,000 48,500
Travel and entertainment 750,670 96,405 114,576 173,109
------------- ---------- --------- ----------
5,461,768 520,364 879,341 769,996
------------- ---------- --------- ----------
Loss From Operations (5,461,768) (520,364) (879,341) (769,996)
------------- ---------- --------- ----------
Other income (expense):
Interest income (Note 6) 60,785 6,942 2,391 2,714
Interest expense (Note 4) (140,418) (38,199) (20,048) (145)
------------- ---------- --------- ----------
(79,633) (31,257) (17,657) 2,569
------------- ---------- --------- ----------
Net Loss $(5,541,401) $(551,621) $(896,998) $(767,427)
============= ========== ========== ==========
Per Common Share (Notes 1 and 11):
Loss From Operations $(1.48) $(.14) $(.23) $(.20)
Net Loss $(1.50) $(.15) $(.24) $(.20)
</TABLE>
See notes to financial statements.
<PAGE> F-6
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Periods Ended September 30, 1988 Through September 30, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During The
Common Paid-in Development
Stock Capital Stage Total
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE> F-7
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through September 30, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During The
Common Paid-in Development
Stock Capital Stage Total
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE> F-8
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through September 30, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During The
Common Paid-in Development
Stock Capital Stage Total
<S> <C> <C> <C> <C>
Issuance of warrants to
stockholders $ $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)
</TABLE>
<PAGE> F-9
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through September 30, 1996
<TABLE>
<CAPTION> Deficit
Accumulated
Additional During The
Common Paid-in Development
Stock Capital Stage Total
<S> <C> <C> <C> <C>
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)(Note 7) 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)
======== ========== ========================
</TABLE>
See notes to financial statements
<PAGE> F-10
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
During
Development
Stage Through Year Ended September 30,
September 30, 1996 1996 1995 1994
<S> <C> <C> <C> <C>
Operating activities
Net loss $ (5,541,401) $ (551,621) $ (896,998) $(767,427)
Items not requiring
(providing) cash:
Depreciation 14,147 2,633 3,038 4,364
Expenses funded by Common
Stock issuance 543,187 150,000
Other 3,341 3,341
Changes in:
Advances to officers (295,183) (34,000) (50,200) (12,000)
Other receivables (9,138) (6,942) (2,196) 44,880
Accounts payable 360,288 89,666 116,000 85,356
Accrued expenses 556,827 226,544 157,547 13,722
Deferred compensation 414,442 16,554 16,000 (469)
-------------------------- -----------------------
Net cash used in
operating activities (3,953,490) (257,166) (506,809)(628,233)
-------------------------- -----------------------
Investing activities:
Purchase of fixed assets (19,808) (679)
Other (3,341)
-------------- ------------
Net cash used in
investing activities (23,149) (679)
-------------- ------------
Financing activities:
Proceeds from issuance
of Common Stock and
warrants 2,620,562 5,340 109,760 282,001
Proceeds from notes
payable 989,609 261,635 473,365
Proceeds from convertible
debentures 475,000
Payments on notes payable (154,609)
Other 108,410 (50,000) 50,000
--------- -------- --------- --------
Net cash provided by
financing activities 4,038,972 266,975 533,125 332,001
--------- -------- --------- --------
Increase (decrease) in cash 62,333 9,809 26,316(296,911)
Cash, beginning of period 0 52,524 26,208 323,119
--------- -------- -------- --------
Cash, end of period $62,333 $62,333 $52,524 $26,208
======== ======== ======== ========
</TABLE>
<PAGE> F-11
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
Note 1: Organization and summary of significant accounting policies
Nature of business
ThermoEnergy Corporation, formerly Innotek Corporation, ("the
Company") was incorporated in January 1988, for the purpose of
marketing and developing certain environmental technologies. These
technologies include two chemical processes known as Sludge-to-Oil
Reactor System, or STORS, and Nitrogen Removal, or NitRem, both of
which were developed through a research project at Battelle
Memorial Institute Pacific Northwest Laboratories (Battelle) in
Richland, Washington. A third 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 and DSR are referred to collectively
as the "Technologies".
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 license. Management of the AFP division developing
the STORS technology became management of the Company concurrent
with the terms of the transfer. The licensee 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 (as restated for the two reverse stock splits discussed in
Notes 7 and 11), 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 or NitRem
demonstration facility, for the conducting of laboratory analysis
and characterization of various waste streams to be processed
through a STORS or NitRem unit, to collect and analyze process
equipment and performance data generated during a STORS and/or
NitRem demonstration test, and for on-going research and
development of the STORS and NitRem processes. The Company owns
the worldwide licensing rights to both STORS and NitRem, 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.
<PAGE> F-12
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount 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.
Property and equipment
Property and equipment are depreciated over the estimated useful
life of each asset. Depreciation is computed primarily using
accelerated methods.
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 after giving effect to the reverse stock splits
described in Notes 7 and 11. Stock options and warrants issued
within twelve months of the initial public offering filing date
(February 27, 1992, see Note 7) have been treated as outstanding
for all periods presented.
The weighted average number of common shares used in the loss per
share computations were 3,799,555, 3,776,113, 3,763,343, and
3,698,670 shares for the years ended September 30, 1996, 1995 and
1994 and cumulative since inception through September 30, 1996,
respectively.
Future application of accounting standards
During 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of". The adoption
of Statement No. 121 (required during the year ending September 30,
1997), which establishes accounting standards for the impairment of
long-lived assets and goodwill related to assets to be held and
used and long-lived assets to be disposed of, is not expected to
have a significant impact on the Company's financial statements.
<PAGE> F-13
Note 2: Government contract
A cost reimbursement Letter Subcontract was awarded to the Company
in connection with a red water waste project with the Department of
Defense. The terms of the contract provided for the reimbursement
of certain direct costs, including labor, associated with the
Company's participation in the project. During the years ended
September 30, 1996, 1995 and 1994, the Company was reimbursed for
approximately $4,000, $20,000 and $20,000, respectively, of general
and administrative expenses incurred in each year in connection
with the project. The reimbursements are accounted for as
reductions of the related expenses in the Statements of Operations.
Note 3: License and marketing agreements
The license agreements with Battelle permit the Company to
commercialize the Technologies with respect to municipal and
hazardous waste disposal. Payments under the terms of the license
agreements have been charged to operations.
The license agreements, which provide for payment of royalties to
Battelle from revenues generated using the Technologies, are
cancelable by Battelle on or after January 31, 1998, if
ThermoEnergy has not demonstrated the Technologies by that date.
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.
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.
<PAGE> F-14
Note 3: License and marketing agreements (continued)
The Company entered into the agreements referred to above 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 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.
Note 4: Notes payable
The Company executed notes payable to stockholders at various dates
during the years ended September 30, 1996 and 1995. The unsecured
notes mature four years from the date of issuance with interest at
a rate of 6.63%. 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. The notes payable have been classified as current
liabilities since management anticipates that they will be paid off
within one year (see Note 11). These transactions were executed in
connection with the authorization of the Board of Directors on
September 29, 1994 for the Company to borrow up to $735,000 by term
note for up to 48 months and to sell up to 187,500 warrants, at
$.08 per warrant for 187,500 shares of Common Stock, exercisable up
to 48 months from date of issuance (see Note 7).
Interest expense on notes payable to stockholders amounted to
$38,199 and $19,704 for the years ended September 30, 1996 and
1995, respectively. Accrued interest payable on notes payable to
stockholders (included in other accrued expenses in the
accompanying Balance Sheets, amounted to $57,903 and $19,704 at
September 30, 1996 and 1995, respectively. Interest paid during
the years ended September 30, 1995 and 1994 amounted to $344 and
$145, respectively. No interest was paid during the year ended
September 30, 1996.
Based on the borrowing rates currently available to the Company for
loans with similar terms, the fair value of notes payable
approximated the book value of such borrowings at September 30,
1996.
<PAGE> F-15
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
Note 5: Income Taxes
Effective October 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method to the
liability method 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. The
change had no effect on the financial statements since the Company
had incurred net operating losses since inception. 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 years ended September
30, 1996 and 1995 were increases of approximately $206,000 and
$356,000, respectively. The Company's deferred tax liabilities are
not significant.
Significant components of the Company's deferred tax assets as of
September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION> 1996 1995
<S> <C> <C>
Net operating loss carryforwards $1,685,000 $1,485,000
Deferred compensation 115,000 109,000
Capitalized costs for income tax
purposes 78,000 78,000
Other 35,000 35,000
----------- -----------
1,913,000 1,707,000
Valuation allowance for deferred
tax assets (1,913,000) (1,707,000)
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>
A reconciliation of income tax expense (credit) at the statutory
rate to income tax expense at the Company's effective rate is shown
below:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Computed at the statutory
rate (34%) $(187,551) $(304,979) $(260,925)
Increase in taxes resulting
from net operating loss
benefit not recognized 187,551 304,979 260,925
---------- ---------- ----------
Provision for income taxes $0 $0 $0
========== ========== ==========
</TABLE>
The Company has net operating loss carryforwards at September 30,
1996 of approximately $4,400,000 which expire in 2003 through 2011.
<PAGE> F-16
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30,1996
Note 6: Related party transactions
During the years ended September 30, 1996 and 1995 the Company
advanced an aggregate of $34,000 and $62,200 (net of $10,000 of
repayments), respectively, to its officers. The $96,200 of
advances outstanding at September 30, 1996 are due on demand with
interest at the average prime rate of a local bank. Interest income
on the advances amounted to $6,942 and $2,196 for the years ended
September 30, 1996 and 1995, respectively.
During the year ended September 30, 1995, an officer advanced an
aggregate of $20,000 to the Company. The advances, which did not
bear interest, were repaid, prior to September 30, 1995. See Note
7 for information concerning notes payable and other transactions
with stockholders.
During the years ended September 30, 1995 and 1994, the Company
paid approximately $15,000 and $45,000, respectively, in consulting
fees to a company associated with a member of the Board of
Directors. Fees payable to this company amounted to approximately
$96,000 and $65,000 at September 1996 and 1995, respectively, and
are included in accounts payable in the accompanying Balance
Sheets. See Note 7 for information concerning additional
transactions with this consulting firm. During the years ended
September 30, 1996 and 1995, the Company paid Battelle
approximately $5,000 and $59,000, respectively, for support
services. See Note 7 for information concerning the issuance of
the Company's Common Stock to Battelle during 1995.
During 1991, the Board of Directors adopted a resolution specifying
amounts of deferred compensation for the two officers of the
Company for services rendered prior to September 30, 1991. This
resolution provides that amounts due from officers may be offset
against accrued deferred compensation. Management anticipates that
the outstanding balance of advances to officers will be offset
against accrued deferred compensation upon completion of the
proposed public offering described in Note 11. 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 will accrue interest until payment. Deferred incentive
compensation aggregating $50,000 was approved by the Board of
Directors for the year ended September 30, 1993. No incentive
compensation was earned during the years ended September 30, 1996,
1995, and 1994. Compensation expense aggregating $16,678, $16,000,
and $11,677 was accrued during the years ended September 30, 1996,
1995, and 1994, respectively, pursuant to the interest provisions
of the compensation arrangements.
<PAGE> F-17
THERMOENERGY CORPORATION
(A Development Stage Corporation)
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
Note 6: Related party transactions (continued)
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.
Note 7: Common Stock
During 1992, the Company filed a registration statement with the
Securities and Exchange Commission for the sale of 125,000 shares
of Common Stock. The offering was conducted on a "best efforts"
basis primarily by directors, officers and employees of the
Company. The offering was terminated effective January 5, 1994.
A total of 93,129 shares were sold at a price of $16 per share and
6,438 shares were issued at $16 per share in satisfaction of notes
payable and related accrued interest.
In 1993, the Company issued 9,375 shares of Common Stock to a
consulting firm pursuant to a Service Agreement (the "Agreement")
dated March 1992. The Agreement provided for the payment of a fee
to the firm equal to 2.5% of the total capital cost of the New York
demonstration facility after completion of project funding from a
source produced by the firm. An accrual for this fee of $100,000
is included in the 1996 and 1995 Balance Sheets. The Agreement
also provided for payment to the consulting firm of a fee equal to
1.25% of the overall capital cost of a full-scale facility after
funding of such a project and for granting of options to buy up to
62,500 shares of the Company's Common Stock at $4 per share during
a two-year period upon signing of an agreement for such a project.
Success fees for producing a source of debt or equity financing are
also provided for in the Agreement.
During May 1995, a stockholder purchased 6,250 shares of Common
Stock at $8.00 per share and warrants for 6,250 shares of Common
Stock (exercise price of $8.00 per share) at a price equal to the
par value of the Company's Common Stock. The stockholder exercised
these warrants during June 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.
<PAGE> F-18
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
Note 7: Common Stock (continued)
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 395,844
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, 1995, a stockholder exercised warrants
for 3,677 shares at $13.60 per share.
In connection with the issuance of notes payable to stockholders
during the years ended September 30, 1996 and 1995 described in
Note 4, the Company sold warrants to stockholders for 66,744 and
120,756 shares, respectively, 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 $2.40 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
price for the warrants was adjusted to $2.00 due to the sale of
Common Stock in May 1995 described above.
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.
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.
<PAGE> F-19
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 placed in a Voting Trust and during
1993 began to be distributed to the AFP stockholders. The Company
owns 83,829 shares of its Common Stock previously included in the
Voting Trust pursuant to a 1990 settlement agreement with a former
AFP stockholder. These treasury shares have a zero cost basis.
The Company issued Common Stock options during 1991 to a member of
the Board of Directors to acquire 6,250 shares at $1.60 per share.
These options were exercised during 1993 and 1994.
On January 5, 1994, the Board of Directors adopted a resolution for
a four-to-one reverse stock split of the Company's Common Stock.
Stockholder approval for the reverse stock split was obtained on
March 2, 1994 annual meeting of the stockholders (see Note 11).
At September 30, 1996, approximately 1,633,500 shares of Common
Stock were reserved for future issuance under warrant agreements.
Note 8: Employee Stock Ownership Plan
The Company has adopted an Employee Stock Ownership Plan. However,
as of September 30, 1996, 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 nice inception. Additionally,
substantial capital will likely be required to commercialize 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, including, the sale of stock pursuant to a public
offering (see Note 11) and fees from projects involving the
Technologies.
The Company plans to use the net proceeds form the public offering
to satisfy the cash requirements for its operations for the next
eighteen months. Additional funds may be necessary in the 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. During the next twelve months,
the Company expects to add two executives to senior management,
seven engineering, technical and sales positions and three clerical
positions.
<PAGE> F-20
In the event that the public offering is not completed, management
would continue to raise capital through private placement
financings, sales of warrants and common stock. 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 and/or NitRem. 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 Note 3, the Company has entered into marketing
arrangements with third parties in order to pursue this business
strategy.
Note 10: Commitments
On July 26, 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 fora period of not less than 150
consecutive calendar days nor more than 200 consecutive calendar
days form the start-up of the demonstration. The Company will
provide the technology and, in conjunction with Battelle, assist in
the design, engineering and operation in the New York nitrogen
removal demonstration facility. Foster Wheeler will finance,
design, build and manage the overall demonstration project and will
jointly participate in a large-scale commercial nitrogen removal
project in the event that New York City elects to use the
technology.
Note 11: Subsequent Events
On October 23, 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. The letter of intent provides for the
underwriting on a firm commitment basis of approximately 1,600,000
shares of Series A Common Stock (as described more fully below) and
1,600,000 warrants redeemable for Series A Common Stock,
<PAGE> F-21
based upon no more than 3,500,000 shares of Common Stock and
1,600,000 warrants convertible to Common Stock outstanding
immediately prior to closing. The redeemable warrants entitle the
holder to acquire one share of Common Stock at a price per share
equal to 150% of the initial public offering price per share,
subject to adjustment. Commencing 12 months after the effective
date of a registration statement for the proposed offering, the
Company may redeem all, but not less than all, of the redeemable
warrants if specified conditions are met.
The letter of intent provides for a 10% underwriter's discount, an
over-allotment option, an expense allowance equal to 3% of the
gross proceeds of the offering, a financial advisory fee of $48,000
and five year warrants, exercisable at the beginning of the second
year after issuance, to purchase 10% of the aggregate principal
amount of Common Stock and warrants offered at $.0001 per warrant.
It also provides for restrictions on the disposition by
stockholders of Common Stock outstanding prior to the proposed
offering and for the underwriter to have the right to designate one
person for election to the Company's Board of Directors for a
period of five years.
In order to comply with the pre-conditions set forth in the letter
of intent, the Board of Directors approved a resolution for a four-to-one
reverse stock split of the Company's Common Stock in
addition to the four-to-one reverse stock split approved in 1994
(see Note 7). The Board of Directors also approved amendments to
the Company's Articles of Incorporation as follows: (1) To
authorize the designation of 10,000,000 shares as Series A Common
Stock and 65,000,000 shares of Series B Common Stock, which are
convertible to Series A Common Stock commencing 12 months after the
effective date of a registration statement for the proposed
offering subject to certain conditions, from the 75,000,000 shares
of $0.001 par value Common Stock authorized originally under the
Company's Articles of Incorporation; (2) To authorize the
designation of and reclassification of all shares of Common Stock
issued prior to the adoption of the proposed amendments to the
Articles of Incorporation to Series B Common Stock; and (3) To
change the name of the Company from Innotek Corporation to
ThermoEnergy Corporation. Stockholders' approval of these matters
was obtained on December 12, 1996 during a special stockholders'
meeting.
The reverse stock splits were implemented on March 5, 1997. All
numbers of common stock shares and per share data have been
restated to reflect the reverse stock splits.
During 1997, the Board of Directors approved a Stock Option Plan
which 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.
Implementation of the Plan is subject to approval by the
stockholders.
<PAGE> F-22
On December 9, 1996, the Board of Directors authorized the Company
to borrow from stockholders up to $500,000 to fund operations
through the completion of the proposed public offering. The terms
of the unsecured notes provide for maturities six months from the
date of execution or the closing of the proposed public offering,
whichever is sooner, with interest at a rate of 10%. The notes
also provide for the issuance of shares of Series B Common Stock to
the holders of the notes, in the ratio of one share for each $10
loaned to the Company, within six months from the date of execution
of the notes or the closing of the proposed public offering,
whichever is sooner. During December 1996 and January 1997, the
Company executed notes payable to stockholders under this
arrangement for an aggregate amount of $500,000. The Company is
committed to issue 50,000 shares of Series B Common Stock to the
holders of the notes.
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 but less than 15% of
net sales. The Board of Directors approved bonus payment
percentages for certain individual for fiscal 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.
<PAGE> F-23
THERMOENERGY CORPORATION
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1997 1996
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash 50,117 62,333
-------- --------
Total Current Assets 50,117 62,333
Advances to officers 223,365 96,200
Accrued interest receivable - officers 18,499 9,138
Deferred public offering expenses (Note 3) 126,432
Property and equipment, at cost:
Equipment 14,818 14,818
Furniture and fixtures 4,991 4,991
Less accumulated depreciation (15,344) (14,147)
-------- --------
4,465 5,662
-------- --------
422,878 173,333
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable 454,792 360,288
Accrued expenses:
Salaries 522,444 364,314
Consulting Fee 100,000 100,000
Other 170,464 92,513
-------- --------
792,908 556,827
Deferred compensation 229,030 215,460
Notes payable to stockholders (Note 2) 1,341,000 735,000
--------- ---------
Total Current Liabilities 2,817,730 1,867,575
--------- ---------
Stockholders' equity (deficit)(Note 3):
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 - 3,241,201 shares;
outstanding - 3,157,372 shares 3,241 3,241
Additional paid-in capital 3,843,918 3,843,918
Deficit accumulated during
the development stage (6,242,011) (5,541,401)
----------- -----------
(2,394,852) (1,694,242)
----------- -----------
422,878 173,333
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE> F-24
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
During
Development Nine Months Three Months
Stage Ended Ended
Through June 30, June 30,
June 30,
1997 1997 1996 1997 1996
----------- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Operating Expenses 4,603,585 519,753 300,533 125,596 78,619
General and Admin-
istrative Payments
under licenses 627,266
Travel and entertainment 883,315 132,645 60,988 32,762 18,174
--------- -------- -------- -------- --------
6,114,166 652,398 361,521 158,358 96,793
--------- -------- -------- -------- --------
Loss From Operations (6,114,166) (652,398) (361,521)(158,358) (96,793)
----------- --------- ------------------ --------
Other Income (Expense)
Interest Income 70,146 9,361 4,961 4,036 1,834
Interest Expense (197,991) (57,573) (26,273) (25,224) (8,796)
---------- --------- --------- -------- -------
(127,845) (48,212) (21,312) (21,188) (6,962)
---------- --------- --------- -------- -------
Net Loss (6,242,011) (700,610) (382,833)(179,546)(103,755)
=========== ======== ========= ======== ========
Per Common Share
(Notes 3 and 4)
Loss From Operations (1.65) (0.17) (0.10) (0.04) (0.03)
Net Loss (1.68) (0.18) (0.10) (0.05) (0.03)
</TABLE>
See notes top financial statements.
<PAGE> F-25
THERMOENERGY CORPORATION
(A Development State Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Periods Ended September 30, 1988 Through September 30, 1996 and
the Nine Months Ended June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-In Development
Stock Capital Stage Total
------- ------------ ------------ -----
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE> F-26
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Periods Ended September 30, 1988 Through September 30, 1996 and
the Nine Months Ended June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-In Development
Stock Capital Stage Total
------- ------------ ------------ -------
<S> <C> <C> <C> <C>
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
$16.00 per share) 3 3,997 4,000
</TABLE>
<PAGE> F-27
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through September 30, 1996 and
the Nine Months Ended June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid in Development
Stock Capital Stage Total
------ --------- ----------- ------
<S> <C> <C> <C> <C>
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
(3,667 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)
</TABLE>
<PAGE> F-28
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through September 30, 1996 and the
Nine Months Ended June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development
Stock Capital Stage Total
------- ---------- ----------- -----
<S> <C> <C> <C> <C>
Issuance of warrants
to stockholder $ $ 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)
Net loss (700,610) (700,610)
------- ----------- ----------- -----------
Balance (deficit),
June 30, 1997
(Unaudited) $3,241 $3,843,918 $(6,242,011) $(2,394,852)
======= ========== =========== ===========
</TABLE>
See notes to financial statements
<PAGE> F-29
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
During
Development Nine Months
Stage Through Ended June 30
June 30, 1997 1997 1996
-------------- ---- ----
(Unaudited)
<S> <C> <C> <C>
Operating Activities:
Net loss $(6,242,011) $(700,610) $(382,833)
Items not requiring
(providing) cash:
Depreciation 15,344 1,197 2,373
Expenses funded by Common
Stock issuance 543,187
Other 3,341
Changes in:
Advances to officers (422,348) (127,165) (28,000)
Other assets (144,931) (135,793) (4,961)
Accounts payable 454,792 94,504 58,214
Accrued expenses 792,908 236,081 151,195
Deferred compensation 428,012 13,570 12,261
------------ ---------- ----------
Net cash used in
operating activities (4,571,706) (618,216) (191,751)
------------ ---------- ----------
Investing activities:
Purchase of fixed assets (19,808)
Other (3,341)
------------ ---------- ----------
Net cash used in
investing activities (23,149)
------------ ---------- ----------
Financing activities:
Proceeds from issuance of
Common Stock and warrants 2,620,562 1,800
Proceeds from notes payable 1,595,609 606,000 88,200
Proceeds from convertible debentures 475,000
Payments on notes payable (154,609)
Other 108,410 65,000
------------ ---------- -----------
Net cash provided by
financing activities 4,644,972 606,000 155,000
------------ ---------- -----------
Increase (decrease) in cash 50,117 (12,216) (36,751)
Cash, beginning of period 0 62,333 52,524
------------ ---------- -----------
Cash, end of period $ 50,117 $ 50,117 $ 15,773
=========== ========== ==========
</TABLE>
See notes to financial statements.
<PAGE> F-30
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
UNAUDITED
NOTE 1: FINANCIAL STATEMENTS
The balance sheet as of June 30, 1997, the statements of
operations and cash flows cumulative during development stage
through June 30, 1997, the statements of operations for the nine
months and three months ended June 30, 1997 and 1996 and the
statements of changes in stockholders' equity (deficit) and cash
flows for the nine months ended June 30, 1997, have been prepared
by Thermoenergy Corporation (the "Company"), formerly Innotek
Corporation, without audit. In the opinion of management, all
adjustments (consisting only of normal recurring items) necessary
to present fairly the financial position, results of operations
and cash flows at June 30, 1997 and for all periods presented
have been made. Operating results for the nine months ended June
30, 1997 are not necessarily indicative of the results that may
be expected for the entire year ending September 30, 1997.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been omitted in accordance
wit Article 10 of Regulation S-X. These financial statements
should be read in conjunction with the financial statements and
notes thereto included in the Company's September 30, 1996 Form
10-K.
NOTE 2: NOTES PAYABLE TO STOCKHOLDERS
As of September 30, 1996 notes payable to stockholders
aggregating $735,000 were outstanding. The unsecured notes
mature four years from the date of issuance with interest at a
rate of 6.63%. 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 date. 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 such m
ore favorable terms. The notes payable have been classified as
current liabilities since management anticipates that they will
be paid off within one year.
In December 1996, the Board of Directors authorized the Company
to borrow from stockholders up to $500,000 to fund operations
through the completion of a proposed public offering (see Note
3). The terms of the unsecured notes provided for maturities six
months from the date of execution or the closing of the proposed
public offering, whichever was sooner, with interest at a rate of
10%. The maturity dates of the $500,000 of outstanding notes
payable were extended to December 1997 and the Board of Directors
authorized an additional $200,000 of such notes during the
quarter ended June 30, 1997. A total of $106,000 of such notes
were issued during the quarter ended June 30, 1997. The notes
also provide for the issuance of shares of Series B Common Stock
(see Note 3), to the holders of the notes, in the ratio of one
share for each $10
<PAGE> F-31
loan to the Company, within six months from the date of execution
of the notes or extensions thereof or the closing of the proposed
public offering, whichever is sooner.
As of June 30, 1997, the Company had executed notes payable to
stockholders under this arrangement in the aggregate amount of
$606,000. The Company is committed to issue 60,600 shares of
Series B Common Stock to the holders of the notes.
NOTE 3: COMMON STOCK
On October 23, 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. The letter of intent
provided for the underwriting on a firm commitment basis of
approximately 1,600,000 shares of Series A Common Stock (as
described more fully below) and 1,600,000 warrants redeemable for
Series A Common Stock, based upon no more than 3,500,000 shares
of Common Stock and 1,600,000 warrants convertible to Common
Stock outstanding immediately prior to closing.
In order to comply with the pre-conditions set forth in the
letter of intent, the Board of Directors approved a resolution
for a four-to-one reverse stock split of the Company's Common
Stock in addition to the four-to-one reverse stock split approved
by stockholders in 1994. The Board of Directors also approved
amendments to the Company's Articles of Incorporation as follows:
(1) To authorize the designation of 10,000,000 shares as Series A
Common Stock and 65,000,000 shares as Series B Common Stock,
which are convertible to Series A Common Stock commencing 12
months after the effective date of a registration statement for
the proposed offering subject to certain conditions, from the
75,000,000 shares of $0.001 par value Common Stock authorized
originally under the Company's Articles of Incorporation; (2) To
authorize the designation of and reclassification of all shares
of Common Stock issued prior to the adoption of the proposed
amendments to the Articles of Incorporation to Series B Common
Stock; and (3) To change the name of the Company from Innotek
Corporation to Thermoenergy Corporation. Stockholders' approval
of these matters was obtained on December 12, 1996 during a
special stockholders' meeting.
During May 1997, the Company and the managing underwriter
terminated the nonbinding letter of intent regarding the
Company's proposed public offering. Negotiations with the
underwriter resulted in the structure for the proposed public
offering described more fully in Note 7. As of June 30, 1997,
public offering expenses aggregating $126,432 have been deferred
and will be charged against the gross proceeds of the public
offering.
<PAGE> F-32
The two reverse stock splits described above were implemented
during the quarter ended March 31, 1997. All numbers of common
stock shares and per share data have been restated to reflect the
reverse stock splits.
During 1997, the Board of Directors approved a Stock Option Plan
which 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.
Implementation of the Plan is subject to approval by
stockholders.
NOTE 4: LOSS PER COMMON SHARE
Loss per common share is computed by dividing the net loss for
the period by weighted average number of shares outstanding
during the period, after giving effect to the reverse stock
splits described in Note 3. 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.
The weighted average number of common shares used in the loss per
share computations were 3,706,693 shares for the period
cumulative since inception through June 30, 1997, and 3,799,555
shares for the nine month and three month periods ended June 30,
1997 and 1996.
NOTE 5: MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS
The Company has incurred net losses since inception.
Additionally, substantial capital will likely be required to
commercialize the Company's 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, including the sale
of stock pursuant to a public offering (see Notes 3 and 7) and
fees from projects involving the Company's technologies.
The Company plans to use the net proceeds from the public
offering to satisfy the cash requirements for its operations for
the next eighteen months. 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. During the next
twelve months,
<PAGE> F-33
the Company expects to add two executives to senior management,
seven engineering, technical and sales positions and three
clerical positions.
In the event that the public offering is not completed,
management would continue to raise capital through private
placement financings, sales of warrants and common stock. 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 and/or NitRem. 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. The
Company has entered into marketing agreements with third parties
in order to pursue this business strategy.
NOTE 6: EXECUTIVE BONUS PLAN
In January 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 but
less than 15% of net sales. The Board of Directors approved
bonus payment percentages for certain individuals for fiscal
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.
<PAGE> F-34
NOTE 7: SUBSEQUENT EVENT
During July 1997, the Company and the managing underwriter
discussed in Note 3, executed a nonbinding letter of intent
revising the proposed public offering. The letter of intent
provides for the underwriting on a firm commitment basis of
1,100,000 units consisting of one share of Series A Common Stock,
one Series 1 Common Stock Warrant exercisable within 48 months at
120% of the offering price and callable at 200% of the offering
price, and one Series 2 Common Stock Warrant exercisable within
48 months at 200% of the offering price and callable at 300% of
the offering price.
On September 30, 1997, the number of units for the proposed
public offering was reduced to 635,000 units.
<PAGE>
===========================================================================
No dealer, salesperson or any other person that has been
authorized to give any information or to make any representation
other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon
as having been authorized by the Company or any Underwriter.
Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since
the date hereof or that the information contained herein is
correct as of any date subsequent to the date hereof. This
Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any
jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom
it is unlawful to make such offer or solicitation.
-----------------
TABLE OF CONTENTS
PROSPECTUS SUMMARY ...................................... 3
RISK FACTORS ............................................ 9
USE OF PROCEEDS .........................................18
DIVIDEND POLICY..........................................19
CAPITALIZATION...........................................19
DILUTION.................................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .........23
BUSINESS ................................................26
MANAGEMENT...............................................37
PRINCIPAL STOCKHOLDERS...................................43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........46
DESCRIPTION OF SECURITIES................................50
PRIVATE PLACEMENT .......................................53
CONCURRENT REGISTRATION OF SECURITIES....................54
SHARES ELIGIBLE FOR FUTURE SALE..........................50
SELLING SECURITYHOLDERS..................................54
UNDERWRITING.............................................57
LEGAL MATTERS............................................59
EXPERTS..................................................59
ADDITIONAL INFORMATION...................................59
INDEX TO FINANCIAL STATEMENTS...........................F-1
Until , 1997 all dealers effecting transactions in
the registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus. This
delivery requirement is in addition to the obligations of dealers
to deliver a Prospectus when acting as Underwriters and with
respect to their unsold allotments or subscriptions.
=================================================================
THERMOENERGY CORPORATION
1,200,000 Shares of
Series A Common Stock
and
1,200,000 Redeemable
Series 1 Common Stock
Purchase Warrants
and
1,200,000 Redeemable
Series 2 Common Stock Purchase Warrants
(Purchased as Units, each consisting of one share of Series A
Common Stock, one Redeemable Series 1 Common Stock Purchase
Warrant and one Redeemable Series 2 Common Stock Purchase
Warrant, each of which will trade separately immediately
following the Offering)
-----------------------------------
PROSPECTUS
-----------------------------------
NATIONAL SECURITIES
CORPORATION
, 1997
------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 4-27-850(A) of the Business Corporation Act of 1987
of the State of Arkansas provides that an Arkansas corporation
may indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or
was a director, officer, employee or agent of the corporation or
is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or
enterprise, against expense, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no cause to believe his
conduct was unlawful.
Section 4-27-850(B) provides that a Arkansas corporation may
indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that such person acted in any
of the capacities set forth above, against expenses actually and
reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar
standards, except that no indemnification may be made in respect
of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to
the extent that the court in which such action or suit was
brought shall determine that despite the adjudication of
liability, such person is fairly and reasonably entitled to be
indemnified for such expenses which the court shall deem proper.
Section 4-27-850(C) further provides that to the extent a
director or officer of a corporation has been successful in the
defense of any action, suit or proceeding referred to in
subsections (A) and (B) or in the defense of any claim, issue or
matter therein, he shall be indemnified against expenses actually
and reasonably incurred by him in connection therewith; that
indemnification provided for by Section 4-27-850(A) shall not be
deemed exclusive of any other rights to which the indemnified
party may be entitled; and that the corporation may purchase and
maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him or
incurred by him in any such capacity or arising out of his status
as such whether or not the corporation would have the power to
indemnify him against such liabilities under such Section 4-27-850(B).
Section 4-27-202(B)(3) of the Business Corporation Act of
1987 provides that a corporation in its original certificate of
incorporation or an amendment thereto validly approved by
stockholders may eliminate or limit personal liability of members
of its board of directors or governing body for breach of a
director's fiduciary duty. However, no such provision may
eliminate or limit the liability of a director for breaching his
duty of loyalty, failing to act in good faith, engaging in
intentional misconduct or knowingly violating a law, paying a
dividend or approving a stock repurchase which was illegal, or
obtaining an improper personal benefit. A provision of this type
has no effect on the availability of equitable remedies, such as
injunction or rescission, for breach of fiduciary duty. The
Company's Amended Certificate of Incorporation contains such a
provision.
The Company's Bylaws provide that the Company shall
indemnify officers and directors, and to the extent authorized by
the Board of Directors, employees and agents of the Company, to
the full extent permitted by and in the manner permissible under
the laws of the State of Arkansas. The Amended Certificate of
Incorporation and Bylaws also permit the Board of Directors to
authorize the Company to purchase and maintain insurance against
any liability asserted against any director, officer, employee or
agent of the Company arising out of his capacity as such.
The Company has entered into and intends to execute
indemnity agreements with present and future directors for
indemnification of and advance of expenses to such persons to the
full extent permitted by law.
Item 25. Other Expenses of Issuance and Distribution.*
a. SEC filing fee $ 10,823.24
b. NASD filing fee 4,042.72
c. Blue Sky fees and expenses, including
legal fees 40,000.00
d. Printing and engraving 25,000.00
e. Legal fees and expenses 90,000.00
f. Accounting fees and expenses 30,000.00
g. Transfer agent and registrar fees and
expenses 7,000.00
h. Miscellaneous 19,000.00
-----------
$225,865.96
===========
* All fees and expenses other than the SEC and NASD Filing
Fees are estimated. All of such fees and expenses shall be borne
by the Company.
Item 26. Recent Sales of Unregistered Securities.
All shares of common stock described below are shares of
Series B Common Stock and all warrants described below are for
Series B Common Stock if exercised by the respective holders
before the lock up period expires as discussed in the Prospectus.
See "Certain Relationships and Related Transactions" and
"Underwriting".
On January 20, 1994, the Company sold to two shareholders
warrants to purchase 31,250 and 8,125 shares of the Company's
common stock, respectively. The warrants were sold for $100,000
and $26,000 respectively. The holders of the warrants
represented to the Company that the warrants were acquired for
investment and not with a view to the distribution thereof. The
warrants contain restrictive legends providing that such
securities may not be sold, except in compliance with the
Securities Act of 1933, as amended (the "Securities Act"). This
issuance was made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
On May 25, 1994, the Company sold to one shareholder
warrants to purchase 250,000 shares of the Company's common
stock. The warrants were sold for $100,000. The holder of the
warrants represented to the Company that the warrants were
acquired for investment and not with a view to the distribution
thereof. The warrants contain restrictive legends providing that
such securities may not be sold, except in compliance with the
Securities Act of 1933, as amended (the "Securities Act"). This
issuance was made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
From October 1994 to September 1996, the Company sold to 23
shareholders warrants to purchase 178,126 shares of the Company's
common stock. The warrants were sold for a total of $13,800.
The holder of the warrants represented to the Company that the
warrants were acquired for investment and not with a view to the
distribution thereof. The warrants contain restrictive legends
providing that such securities may not be sold, except in
compliance with the Securities Act of 1933, as amended (the
"Securities Act"). This issuance was made in reliance upon the
exemption from registration provided by Section 4(2) of the
Securities Act.
On May 10, 1995, the Company sold to one shareholder 6,250
shares of common stock and warrants to purchase 6,250 shares of
the Company's common stock. The shares were sold for $100,000
and the warrants were sold for par value. The holder of the
shares and warrants represented to the Company that the shares
and warrants were acquired for investment and not with a view to
the distribution thereof. The shares and warrants contain
restrictive legends providing that such securities may not be
sold, except in compliance with the Securities Act of 1933, as
amended (the "Securities Act"). This issuance was made in
reliance upon the exemption from registration provided by Section
4(2) of the Securities Act.
On July 25, 1997, the Company issued 245,596 shares of
common stock to one shareholder 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 such
shareholder. The holder of the shares represented to the
Company that the shares were acquired for investment and not with
a view to the distribution thereof. The shares contain
restrictive legends providing that such securities may not be
sold, except in compliance with the Securities Act of 1933, as
amended (the "Securities Act"). This issuance was made in
reliance upon the exemption from registration provided by Section
4(2) of the Securities Act.
Item 27. Exhibits.
(a) Exhibits.
Number assigned
in regulation
S-B, Item 601 Description of Exhibit
1.1** Underwriting Agreement.
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.
4.3** Form of Redeemable Series 1 and Series 2 Common Stock
Purchase Warrants.
4.4** Form of Representative Warrant.
5.1 Form of Opinion of The Davidson Law Firm.
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 (U.S.A.)
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** Form of Redeemable Series 1 and Series 2 Common Stock
Purchase Warrant Agreements.
10.24** Form of Representative Warrant Agreement.
23.1 Consent of Kemp & Company
23.2 Consent of Baird, Kurtz & Dobson
23.3 Consent of The Davidson Law Firm, see Exhibit 5.1
23.4** Consent of Waring Cox, PLC.
25.1 Powers of Attorney (included on signature page of
Registration Statement)
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.
** Previously filed.
(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.
Item 28. Undertakings.
(a) The undersigned registrant hereby undertakes to:
(1) file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) include any prospectus required by Section
10(a)(3) of the Securities Act of 1933 (the "Act");
(ii) reflect in the prospectus any facts or events
which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) include any additional or changed material
information with respect to the plan of distribution.
(2) for determining any liability under the Act, treat each
such post-effective amendment shall be deemed to be a new
registration relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) file a post-effective amendment to remove from
registration any of the securities being registered which remain
unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, as amended, the registrant has duly caused this Amendment
No. 3 to its Registration Statement on Form SB-2 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the
City of Little Rock, State of Arkansas, on October 10, 1997.
THERMOENERGY CORPORATION
By:/s/ Dennis C. Cossey
---------------------
Dennis C. Cossey
In accordance with the requirements of the Securities Act of
1933, as amended, this registration statement was signed by the
following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Dennis C. Cossey Chairman, Chief Executive October 10, 1997
- -------------------- Officer, Secretary and
Dennis C. Cossey Director (Principal Executive
Officer)
* President and Director October 10, 1997
- -------------------- (Principal Financial
Primo L. Montesi Officer)
* Director October 10, 1997
- ----------------------
J. Donald Phillips
* Director October 10, 1997
- ---------------------
Dr. Louis J. Ortmann
/s/ Andrew T. Melton
- ---------------------- Director October 10, 1997
Andrew T. Melton
/s/ Paul A. Loeffler
- ------------------- Director October 10, 1997
Dr. Paul A. Loeffler
/s/ Jerald H. Sklar
- ------------------- Director October 10, 1997
Jerald H. Sklar
</TABLE>
*By: /s/ Dennis C. Cossey
--------------------
Dennis C. Cossey,
Attorney-in-Fact
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
directors and officers of ThermoEnergy Corporation, an Arkansas
corporation, hereby constitutes and appoints Dennis Cossey, his
true and said attorney-in-fact, for him and in his name, place
and stead in any and all capacities to sign each Amendment to
this Registration Statement, and to file this Registration
Statement and each Amendment so signed with all exhibits thereto
and any and all documents in connection therewith with the
Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact full power and authority to do and perform any
and all acts and things requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might do in person, hereby ratifying and confirming all that said
attorneys-in-fact may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following
persons on October 10, 1997.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman, Chief Executive __________, 1997
- -------------------- Officer, Secretary and
Dennis C. Cossey Director (Principal Executive
Officer)
President and Director ___________, 1997
- -------------------- (Principal Financial
Primo L. Montesi Officer)
Director ___________, 1997
- ----------------------
J. Donald Phillips
Director ___________, 1997
- ---------------------
Dr. Louis J. Ortmann
/s/ Andrew T. Melton Director October 10, 1997
- ---------------------
Andrew T. Melton
/s/ Paul A. Loeffler
- -------------------- Director October 10, 1997
Dr. Paul A. Loeffler
/s/ Jerald H. Sklar
- -------------------- Director October 10, 1997
Jerald H. Sklar
</TABLE>
EXHIBIT 5.1
[FORM OF OPINION]
DAVIDSON LAW FIRM, LTD.
724 Garland Street
Little Rock, Arkansas 72201
________________, 1997
ThermoEnergy Corporation
1300 Tower Building
323 Center Street
Little Rock, AR 72201
Gentlemen:
We have acted as counsel to ThermoEnergy Corporation,
an Arkansas
corporation (the "Company"), in connection with its Registration
Statement on
Form SB-2 (File No. 333-21613) (the "Registration Statement"),
pursuant to the
Securities Act of 1933, as amended, relating to the registration
of 1,200,000
shares of its Series A Common Stock, $0.001 par value per share,
180,000 shares
of Series A Common Stock to cover the Underwriter's
Over-Allotment Option and
314,999 shares of Series A Common Stock to be sold on behalf of
certain selling
securityholders ("Selling Securityholders") (the "Shares");
1,200,000 Redeemable
Series 1 Common Stock Purchase Warrants and 314,999 Redeemable
Series 1 Common
Stock Purchase Warrants to be sold on behalf of the Selling
Securityholders (the
"Series 1 Warrants"); and 1,200,000 Redeemable Series 2 Common
Stock Purchase
Warrants and 314,999 Redeemable Series 2 Common Stock Purchase
Warrants to be
sold on behalf of the Selling Securityholders (the "Series 2
Warrants"); and the
Shares underlying the Series 1 Warrants and the Series 2
Warrants ("Warrant
Shares"). In addition, the Registration Statement relates to the
registration of
120,000 warrants to be sold to the Representatives
("Representative's Warrants")
and the Shares, Series 1 Warrants and Series 2 Warrants
underlying the
Representative's Warrants. The Shares, Series 1 Warrants and
Series 2 Warrants
underlying the Representative's Warrants are referred to
collectively as
"Representative Warrant Securities". This opinion is being
furnished in response
to Item 601 of Regulation S-B and the instructions to Form SB-2.
We are familiar with the proceedings to date with
respect to the
proposed offering and have examined such records, documents and
matters of law
and satisfied ourselves as to such matters of fact as we
have considered
relevant for purposes of this opinion.
We express no opinion as to the laws of any
jurisdiction other than
those of the State of Arkansas.
<PAGE>
Based on the foregoing, it is our opinion that:
1. The Company is a corporation validly existing under
the laws of the
state of Arkansas and is duly authorized to carry on its business
as described
in the Prospectus included as part of the Registration Statement.
2. When the Shares, the Series 1 Warrants, the Series
2 Warrants,
Warrant Shares, Representative's Warrants and Representative
Warrant Securities
are issued and delivered in accordance with the terms of the
agreements related
thereto, all filed as exhibits to the Registration Statement,
such securities
will be duly and validly issued, and the Shares, Warrant
Shares and Shares
underlying the Representative's Warrants will be fully paid and
nonassessable.
We do not purport to cover herein the application of
the securities
laws of various states to sales of the Shares.
We hereby consent to the use of this opinion as an
exhibit to the
Registration Statement and the reference to us under "Legal
Matters" in the
Registration Statement.
Very truly yours,
Davidson Law Firm, Ltd.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 4, 1996, in Amendment No. 3 to the
Registration Statement on Form SB-2 (Registration No. 333-21613) and related
Prospectus of ThermoEnergy Corporation for the registration of 1,100,000 shares
of Series A Common Stock, 1,100,000 Redeemable Series 1 Common Stock Purchase
Warrants and 1,100,000 Redeemable Series 2 Common Stock Purchase Warrants.
/s/ Kemp & Company
Little Rock, Arkansas
October 9, 1997
<PAGE>
EXHIBIT 23.2
Consent of Independent Accountants
To the Board of Directors
Thermo Energy Corporation
(Formerly Innotek Corporation)
Little Rock, Arkansas
We consent to the inclusion in this amendment number 3 to the registration
statement on Form SB-2 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
registration statement.
/s/ Baird, Kurtz & Dobson
Little Rock, Arkansas
October 9, 1997
<PAGE>
