As filed with the Securities and Exchange Commission on August 7,
1997
Registration No.333-21613
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 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) 1,458,247 $5.30(1) $7,728,709 $2,342.03
Redeemable Series 1
Common Stock Purchase
Warrants(3) 1,458,247 $0.10 $145,825 $44.19
Redeemable Series 2
Common Stock Purchase
Warrants(4) 1,458,247 $0.10 $145,825 $44.19
Series A Common Stock
issuable on exercise
of Redeemable Series
1 Common Stock
Purchase Warrants(5) 1,458,247 $6.36 $9,274,451 $2,810.44
Series A Common Stock
issuable on exercise
of Redeemable Series
2 Common Stock
Purchase Warrants(6) 1,458,247 $10.60 $15,457,418 $4,684.06
Representative's
Warrants(7) 110,000 $.0001 $11 $(8)
Series A Common Stock
issuable upon exercise
of Representative's
Warrant(9) 110,000 $6.36 $699,600 $212
Redeemable Series 1
Common Stock Purchase
Warrants issuable upon
exercise of
Representative's
Warrants(9) 110,000 $.12 $13,200 $4
Redeemable Series 2
Common Stock Purchase
Warrants issuable upon
exercise of
Representative's
Warrants(9) 110,000 $.12 $13,200 $4
Series A Common Stock
issuable upon exercise
of Series 1 Warrants
issuable upon exercise
of Representative's
Warrants(9) 110,000 $7.63 $839,300 $254.33
Series A Common Stock
issuable upon exercise
of Series 2 Warrants
issuable upon exercise
of Representative's
Warrants 110,000 $12.72 $1,399,200 $424
Total $35,716,739 $10,823.24(11)
</TABLE>
(1) Estimated sales for purposes of computing the registration fee
pursuant to Rule 457(a).
(2) Includes 165,000 shares of Series A Common Stock which the
Underwriters have the option to purchase to cover over-allotments,
if any. Also includes 193,047 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 $5.00
of principal and accrued interest for one share of Series A Common
Stock.
(3) Includes 193,047 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 $5.00 of principal and accrued interest for one Series 1
Warrant.
(4) Includes 193,047 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 $5.00 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)A registration fee of $10,735.52 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 AUGUST , 1997
----
THERMOENERGY CORPORATION
/ LOGO /
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
ThermoEnergy Corporation, an Arkansas corporation ("Company"),
hereby offers ("Offering") 1,100,000 shares of Series A Common
Stock, par value $.001 per share ("Common Stock" or "Series A
Common Stock"), 1,100,000 Redeemable Series 1 Common Stock Purchase
Warrants ("Series 1 Warrants") and 1,100,000 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 $6.36 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 Nasdaq
SmallCap Market ("Nasdaq") equals or exceeds $10.60 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 $10.60
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 Nasdaq
SmallCap Market ("Nasdaq") equals or exceeds $15.90 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 the Offering, the Company is registering
193,047 shares of Common Stock ("Concurrent Offering Shares"),
193,047 Series 1 Warrants and 193,047 Series 2 Warrants
(collectively, "Concurrent Offering Warrants"), and the shares
underlying such Warrants ("Concurrent Offering Warrant Shares"), at
its expense, to be sold to certain holders of bridge financing
notes ("Concurrent Offering"). The Concurrent Offering is not part
of this underwritten Offering and the Concurrent Offering Shares
are the subject of a "lock-up" agreement for a period of 180 days
following the date of this Prospectus. The Company shall not
receive any cash from the sale of Concurrent Offering Shares and
Concurrent Offering Warrants to such noteholders; instead the
noteholders will convert the principal and interest accrued under
the bridge financing notes into units ("Concurrent Offering Units")
at a conversion ratio of $5.00 of principal and interest for one
Concurrent Offering Unit, consisting of one share of Common Stock,
one Series 1 Warrant and one Series 2 Warrant. The Company will
receive proceeds from the exercise, if any, of the Concurrent
Offering Warrants. See "Concurrent Registration of Securities,"
"Use of Proceeds," "Description of Securities" 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 between
$5 and $6 per share, and the initial public offering price per
Warrant will be $0.10. 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". Application has been made for listing of the
Common Stock, the Series 1 Warrants and the Series 2 Warrants on
Nasdaq under the symbols "THMO", "THMO.W1" and "THMO.W2".
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 19."
--------------------
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 $5.30 $ $
Per Series 1 Warrant $.10 $ $
Per Series 2 Warrant $.10 $ $
Total(3) $6,059,000 $ $
</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 110,000 shares of Common Stock and/or 110,000 Series 1
Warrants and/or 110,000 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 165,000 additional shares of Common Stock and/or
165,000 Series 1 Warrants and/or 165,000 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 NASDAQ SMALLCAP MARKET 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 SHARES OF
COMMON STOCK 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
1,100,000 shares of Common Stock upon exercise of the Series 1
Warrants, (iii) the issuance of up to 1,100,000 shares of Common
Stock upon exercise of the Series 2 Warrants, (iv) the issuance of
up to 110,000 shares of Common Stock, 110,000 Series 1 Warrants
and 110,000 Series 2 Warrants upon exercise of the Representative's
Warrants, (v) the issuance of up to 220,000 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 September 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 1,100,000 shares of Common Stock,
1,100,000 Redeemable Series 1 Common
Stock Purchase Warrants and 1,100,000
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 $6.36 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 Nasdaq equals or
exceeds $10.60 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 $10.60 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 Nasdaq equals or
exceeds $15.90 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) 1,293,047 shares of Series A Common
Stock, 1,293,047 Series 1 Warrants,
1,293,047 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
proposed collaborative ventures; to
fund additional research and
development costs; to lease and equip
an additional facility; to repay
outstanding intercompany
indebtedness; to collateralize a bank
loan of the Company; and to fund
working capital and general corporate
purposes. See "Use of Proceeds".
Proposed Nasdaq 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 1000 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, subject to shareholder approval.
(4) Includes Concurrent Offering Shares.
<PAGE>
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, potential 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) $4,320,609
Total assets 173,333 422,878 4,848,348
Total liabilities 1,867,575 2,817,730 523,274
Stockholders'
equity (deficit) (1,694,242) (2,394,852) 4,325,074
</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. Such loans shall be repaid with
interest from the proceeds of this Offering. See "Use of
Proceeds".
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.
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".
Potential 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. 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 may
need a substantial influx of new capital 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.
In the event the Company is presented with one or more
significant projects, individually or in conjunction with
collaborative working partners, it may require additional capital
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 adequate 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. 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."
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 the 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 61% of the net proceeds of this Offering has
been allocated for working capital and general corporate purposes.
In addition, approximately 26% 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 27% 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, expenses associated with the December 1996 special
shareholders meeting and proxy statements, and travel expenses for
"road show" and other necessary and required expenditures of the
Company associated with the Offering; 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
2,201,200 shares of Series B Common Stock (including all Series B
Warrants) and 38,940 shares of Common Stock from the Concurrent
Offering. Concurrent Offering Shares 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 Concurrent Offering Shares 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 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.
Dilution
Purchasers of shares of Common Stock in this Offering will
experience an immediate and substantial dilution of $4.59 per
share, or approximately 86.6%, 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 $6.36 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 $10.60 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 Nasdaq equals or exceeds $10.60 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 Nasdaq equals or exceeds $15.90 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 $5.30 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
$5,263,500 (approximately $6,053,025 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 $3,204,500 61%
Strategic Alliances and Technology(1) 800,000 15
Research and Development(2) 550,000 11
Other Current Liabilities(3) 384,000 7
Fees and Expenses Associated
with Offering(4) 225,000 4
Repayment of Bridge Financing (5) 100,000 2
---------- -------
$5,263,500 100%
</TABLE>
(1) 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.
(2) 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.
(3) 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 and other general obligations of
the Company, including $100,000 to the officers for back pay
accumulated since 1994.
(4) Includes legal and audit expenses, expenses associated with
the December 1996 special shareholders meeting and proxy
statements, and travel expenses for "road show" and other necessary
and required expenses of the Company associated with the Offering.
(5) Represents repayment of $1,341,000 plus interest as of June 30,
1997 for bridge financing, 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 $965,234 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 $5.00 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. See "Concurrent
Registration of Securities". 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."
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 18 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 the
Offering will satisfy the Company's requirements for any particular
period of time. The Company anticipates that, after 18 months from
the receipt of the net proceeds of this Offering, additional
funding may be needed. No assurance can be given that such
additional financing will be available on terms acceptable to the
Company, if at all. See "Risk Factors - Potential 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 1,293
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 10,562,245
Accumulated deficit (6,242,011) (6,242,011)
Total stockholders' equity (deficit) (2,394,852) 4,325,074
Total capitalization $(2,394,852) $4,325,074
============ ===========
</TABLE>
(1) Includes 193,047 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 $5.30 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 $4,325,074, or $.91
per share. This represents an increase in net tangible book value
per share of $1.65 to the Company's existing stockholders and an
immediate dilution of $4.59 per share to new stockholders
purchasing shares of Common Stock in this Offering. The following
table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed public offering
price per share $5.30
Negative net tangible
book value per share
before the Offering(1) $(.76)
Increase per share
attributable to
payments by new
stockholders $1.65
Pro forma net tangible
book value per share
after the Offering $.91
-----
Dilution per share to
new stockholders $4.59
=====
</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 to the issuance of 60,600
shares of Series B Common Stock to noteholders of bridge loans made
during the period from December 1996 through the date of this
Prospectus, the number of shares of Series A Common Stock Warrants
to be purchased by investors in this Offering at an assumed initial
public offering price of $5.30 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 1,100,000 25% 6,000,000 72% $5.30
Existing stock-
holders(1) 3,217,972 75 2,373,129(2) 28 $.74
---------- ------- --------- --------- --------
Total 4,317,972 100% 8,373,129 100%
</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 $5.30 per share and the Concurrent
Offering, 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 1,293,047 27% 6,965,234 71% $ 5.39
Existing
stockholders(1) 3,463,568 73 2,864,321(2) 29 $ .83
---------- ------- --------- --------- --------
Total 4,756,615 100% 9,829,555 100%
</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) $4,320,609
Total assets 173,333 422,878 4,848,348
Total liabilities 1,867,575 2,817,730 523,274
Stockholders'
equity (deficit) (1,694,242) (2,394,852) 4,325,074
</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 $175,000 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 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. 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 September 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 See "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.
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 September 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)
Gerald J. Franz 54 Director
Louis J. Ortmann, DDS 60 Director
J. Donald Phillips 63 Director
</TABLE>
- ----------------
(1) As of June 30, 1997.
(2) Positions will be assumed upon completion of the 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.
Gerald J. Franz is the President of McKeown & Franz, Inc.
("MFI"), a New York City based environmental consulting firm which
he founded in 1977. Mr. Franz has been the President of MFI since
its inception. Mr. Franz holds a Masters Degree in Ecology from
the University of Connecticut and a Masters Degree in Environmental
Health from University of New York. He is currently a member of
the Board of Directors of Management Technologies, Inc., a banking
computer software company. Mr. Franz has served as a Director of
the Company since March 1994.
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.
Election of Board of Directors
The Board of Directors of the Company consists of five
Directors. Up to seven people may serve on the Board of Directors.
Directors are elected at the Company's Annual Meeting of
Shareholders. Five Directors serve staggered three year terms,
with two Directors elected each year, and one Director serves a
five year term. Gerald J. Franz was elected on March 2, 1994 and
will serve a three year term until March 1997 or until his
successor is duly elected. 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. 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. Prior
to December 28, 1996, the Company had seven directors. Rodman
Grimm, President of Centerpoint Power Corporation, resigned as a
director of the Company on December 28, 1996 for personal and
professional reasons. Thomas Randall Kemp was 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. The Company has
not filled these vacancies.
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 Gerald Franz 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 present in
person or by proxy and entitled to vote at the next Annual Meeting
of Shareholders . 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 approval by the holders of a majority
of the common shares present in person or by proxy and entitled to
vote at the Annual Meeting of Shareholders on May 7, 1997. In the
event that such approval is not obtained, the Plan and all options
granted under the Plan shall be null and void and of no force and
effect. 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)
Three Non-Employee
Directors 5,000 Non-Qualified 1% (1)
All Executive
Officers and
Directors as a
Group(which would
be 7 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 331,603(3) 9.39 6.90
Dennis Cossey
11706 Pleasant Ridge Drive
Little Rock, AR 72212 310,540(4) 8.82 6.46
J. Donald Phillips
218 Belmont
No. Little Rock, AR 72216 6,250 * *
Louis J. Ortmann
3832 Victoria Road
Festus, MO 63028 44,237(5) 1.27 2.09
Gerald J. Franz
60 Sutton Place South
New York, NY 10022 9,375(6) * *
Alexander Fassbender
Battelle Pacific
Northwest Laboratories
Battelle Blvd.
Richland, WA 99352 625 *
All Officers and Directors
as a Group(7 Persons) 702,630 19.52 14.46
Centerpoint Power
Corporation of VA
8228 Smithfield Road
Springfield, VA 22152 701,875(7) 16.85 12.86
Frank T. Rayner
P.O. Box 16532
Panama City, FL 32406 241,302(8) 6.95 5.07
Robert Trump
167 E. 61st Street
New York, NY 10021 644,595(9) 17.21 12.79
</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 14,470 shares of Common Stock to be received in the
Concurrent Offering upon conversion of $72,350 of principal and
interest owed by the Company for bridge loans from Mr. Montesi.
Does not include 14,470 Concurrent Offering Warrants to be received
by Mr. Montesi in the Concurrent Offering. Concurrent Offering
Shares 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 1,470 shares of Common Stock to be
received in the Concurrent Offering upon conversion of $7,350 of
principal and interest owed by the Company for bridge loans from
Mr. Cossey. Does not include 1,470 Concurrent Offering Warrants to
be received by Mr. Cossey in the Concurrent Offering. Concurrent
Offering Shares 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 15,200 shares of Common Stock
to be received in the Concurrent Offering upon conversion of
$76,000 of principal and interest owed by the Company for bridge
loans from Dr. Ortmann. Does not include 15,200 Concurring
Offering Warrants to be received by Dr. Ortmann in the Concurrent
Offering. Concurrent Offering Shares 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 26,563 shares of
Series B Common Stock owned by Dr. Ortmann's wife, or Series B
Warrants purchased September 17, 1996 for $339.40 exercisable at
$2.00 per share for 4,244 shares of Common Stock within forty-eight
months from date of purchase. 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 McKeown & Franz, Inc.
(7) Assumes the exercise of warrants by Centerpoint for 701,875
shares of
Series B Common Stock.
(8) Includes 5,000 shares of Series B Common Stock to be
received upon repayment of a December 1996 loan to the Company.
Also includes 8,000 shares of Common Stock to be received in the
Concurrent Offering upon conversion of $40,000 of principal and
interest owed by the Company for bridge loans from Mr. Rayner. Does
not include 8,000 Concurrent Offering Warrants to be received by
Mr. Rayner in the Concurrent Offering. Concurrent Offering Shares
are subject to a lock-up agreement for a period of 180 days. See
"Description of the Securities."
(9) 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 $70,000 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.
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 150,000 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, President of MFI, was elected to the Board of
Directors of the Company on March 2, 1994, to a three year term
until March 1997 or until his successor is duly elected.
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. 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 Concurrent
Offering, Messrs. Montesi, Ortmann and Rayner have agreed to
convert $72,350, $76,000 and $40,000, respectively, of principal
and interest owed by the Company to each of them for bridge loans
at a conversion rate of $5.00 of principal and accrued interest for
one Concurrent Offering Unit. In the Concurrent Offering, Messrs.
Montesi, Ortmann and Rayner shall receive 14,500 Concurrent
Offering Units, 15,200 Concurrent Offering Units and 8,000
Concurrent Offering Units, respectively. See "Concurrent
Registration of Securities".
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 this Offering
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 (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 Nasdaq equals or exceeds $10.60 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 $10.60 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 Nasdaq 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 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.
CONCURRENT REGISTRATION OF SECURITIES
Concurrently with this Offering, the Company is registering
193,047 shares of Common Stock ("Concurrent Offering Shares"),
193,047 Series 1 Warrants and 193,047 Series 2 Warrants
(collectively, "Concurrent Offering Warrants"), and the shares
underlying such Warrants ("Concurrent Offering Warrant Shares"), at
its expense, to be sold to certain holders of bridge financing
notes ("Concurrent Offering"). The Concurrent Offering Shares and
Concurrent Offering Warrants are not part of this underwritten
Offering. All Concurrent Offering Shares are the subject of a
"lock-up" agreement whereby holders of Concurrent Offering Shares
have agreed not to sell or otherwise dispose of the Concurrent
Offering 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 cash for the sale of Concurrent
Offering Shares and Concurrent Offering Warrants to such
noteholders; instead the noteholders will convert the principal and
interest accrued under the bridge financing notes into units
("Concurrent Offering Units") at a conversion ratio of $5.00 of
principal and interest for one Concurrent Offering Unit, consisting
of one share of Common Stock, one Series 1 Warrant and one Series
2 Warrant. The Company will receive proceeds from the exercise, if
any, of the Concurrent Offering 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 1,293,047
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. 193,047 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 3,463,568 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."
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 . . . . . . . . . . . . . . 1,100,000
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 $5.30 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 the
commencement of 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 165,000 shares of Series A Common Stock and/or
an additional 165,000 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 110,000 shares of Common Stock
and/or 110,000 Series 1 Warrants and/or 110,000 Series 2 Warrants
(the "Representative's Warrants"). The Representative's Warrants
are initially exercisable at a price of $6.36 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 that the Representative and any
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
62,500 shares of Series B Common Stock, representing less than 2%
of the Company's outstanding common stock. 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 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 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 licenses,
patents and related expenses. 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 $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
Deferred public offering expenses (Note 3) 126,432
-------- --------
Total Current Assets 176,549 62,333
Advances to officers 223,365 96,200
Accrued interest receivable - officers 18,499 9,138
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.
<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 ...................................... 5
RISK FACTORS ............................................11
USE OF PROCEEDS .........................................19
DIVIDEND POLICY..........................................20
CAPITALIZATION...........................................20
DILUTION.................................................21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .........24
BUSINESS ................................................27
MANAGEMENT...............................................37
PRINCIPAL STOCKHOLDERS...................................42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........44
DESCRIPTION OF SECURITIES................................47
SHARES ELIGIBLE FOR FUTURE SALE..........................50
UNDERWRITING.............................................50
LEGAL MATTERS............................................52
EXPERTS..................................................52
ADDITIONAL INFORMATION...................................52
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
1,100,000 Shares of
Series A Common Stock
and
1,100,000 Redeemable
Series 1 Common Stock
Purchase Warrants
and
1,100,000 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 Opinion of The Davidson Law Firm, to be filed by
Amendment.
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. 2 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 August 7, 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 August 7, 1997
- -------------------- Officer, Secretary and
Dennis C. Cossey Director (Principal Executive
Officer)
* President and Director August 7, 1997
- -------------------- (Principal Financial
Primo L. Montesi Officer)
* Director August 7, 1997
- ----------------------
J. Donald Phillips
* Director August 7, 1997
- ---------------------
Dr. Louis J. Ortmann
/s/Gerald J. Franz Director August 7, 1997
- ---------------------
Gerald J. Franz
</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 August 7, 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/Gerald J. Franz Director August 7, 1997
- ---------------------
Gerald J. Franz
</TABLE>
EXHIBIT 1.1
1,100,000 Shares of Common Stock
and 1,100,000 Series 1 Redeemable Warrants
and 1,100,00 Series 2 Redeemable Warrants
THERMOENERGY CORPORATION
UNDERWRITING AGREEMENT
Little Rock, Arkansas
August ___, 1997
National Securities Corporation
As Representative of the Several Underwriters
1001 Fourth Avenue, Suite 2200
Seattle, Washington 98154
Ladies and Gentlemen:
Thermoenergy Corporation, an Arkansas corporation (the
"Company"), hereby agrees with National Securities Corporation
("National") and each of the underwriters named in Schedule A
hereto (collectively, the "Underwriters," which term shall also
include any underwriter substituted as hereinafter provided in
Section 11), for whom National is acting as representative (in
such capacity, National shall hereinafter be referred to as "you"
or the "Representative") with respect to the sale by the Company
and the purchase by the Underwriters, acting severally and not
jointly, of the respective amount of shares (the "Shares") set
forth in said Schedule A of the Company's Series A common stock,
par value $.001 per share (the "Common Stock"), Series 1
redeemable common stock purchase warrants (the "Series 1
Warrants"), each to purchase one share of Common Stock and Series
2 Redeemable Common Stock Purchase Warrants (the "Series 2
Warrants"), each to purchase 1 share of common stock, set forth
in Schedule A hereto. The Series 1 Warrants and the Series 2
Warrants are sometimes referred to herein collectively as (the
"Warrants"). The aggregate 1,100,000 Shares and 2,200,000
Warrants shall be separately tradeable upon issuance and are
hereinafter referred to as the "Firm Securities." Each Warrant
is exercisable commencing on _________, 1998 until _________,
2002, unless previously redeemed by the Company, at an initial
exercise price of $_______ per share of Common Stock. The
Warrants may be redeemed by the Company at a redemption price of
$.05 per Warrant at any time after _________, 1998 on thirty (30)
days' prior written notice, provided that the closing sale price
of the Common Stock equals or exceeds $_________ per share
(subject to adjustment under certain circumstances), for any
twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to
the notice of redemption, all in accordance with the terms and
conditions of the Warrant Agreement (herein defined).
Upon your request, as provided in Section 2(b) of this
Agreement, the Company shall also issue and sell to the
Underwriters, acting severally and not jointly, up to an
additional 165,000 shares of Common Stock and/or 165,000 Series 1
Warrants and/or 165,000 Series 2 Warrants for the purpose of
covering overallotments, if any. Such 165,000 shares of Common
Stock and/or 165,000 Warrants are hereinafter collectively to as
the "Option Securities." The Company also proposes to issue and
sell to you warrants (the "Representative's Warrants") pursuant
to the Representative's Warrant Agreement (the "Representative's
Warrant Agreement") for the purchase of an additional 110,000
shares of Common Stock and/or 110,000 Warrants and/or 110,000
Series 2 Warrants. The shares of Common Stock and Warrants
issuable upon exercise of the Representative's Warrants are
hereinafter referred to as the "Representative's Securities."
The Firm Securities, the Option Securities, the Representative's
Warrants and the Representative's Securities (collectively,
hereinafter referred to as the "Securities") are more fully
described in the Registration Statement and the Prospectus
referred to below.
1. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to, and agrees with,
each of the Underwriters as of the date hereof, and as of the
Closing Date and the Option Closing Date, if any, as follows:
(a) The Company has prepared and filed with the
Securities and Exchange Commission (the "Commission") a
registration statement, and an amendment or amendments thereto,
on Form SB-2 (No.333-21613), including any related preliminary
prospectus (the "Preliminary Prospectus"), for the registration
of the Firm Securities, the Option Securities and the
Representative's Securities under the Securities Act of 1933, as
amended (the "Act"), which registration statement and amendment
or amendments have been prepared by the Company in conformity
with the requirements of the Act, and the Regulations (as defined
below) of the Commission under the Act. The Company will not
file any other amendment thereto to which the Underwriters shall
have objected in writing after having been furnished with a copy
thereof. Except as the context may otherwise require, such
registration statement, as amended, on file with the Commission
at the time the registration statement becomes effective
(including the prospectus, financial statements, schedules,
exhibits and all other documents filed as a part thereof or
incorporated therein and all information deemed to be a part
thereof as of such time pursuant to paragraph (b) of Rule 430(A)
of the Regulations), is hereinafter called the "Registration
Statement," and the form of prospectus in the form first filed
with the Commission pursuant to Rule 424(b) of the Regulations,
is hereinafter called the "Prospectus." For purposes hereof,
"Regulations" mean the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory
authority has issued any order preventing or suspending the use
of any Preliminary Prospectus, the Registration Statement or the
Prospectus and no proceedings for a stop order suspending the
effectiveness of the Registration Statement have been instituted,
or, to the Company's knowledge, are threatened. Each of the
Preliminary Prospectus, the Registration Statement and the
Prospectus at the time of filing thereof conformed in all
material respects with the requirements of the Act and
Regulations, and none of the Preliminary Prospectus, the
Registration Statement or the Prospectus at the time of filing
thereof contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein
and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to
statements made in reliance upon and in conformity with written
information furnished to the Company with respect to the
Underwriters by or on behalf of the Underwriters expressly for
use in such Preliminary Prospectus, Registration Statement or
Prospectus.
(c) When the Registration Statement becomes effective
and at all times subsequent thereto up to the Closing Date (as
defined in Section 2(c) hereof) and each Option Closing Date (as
defined in Section 2(b) hereof), if any, and during such longer
period as the Prospectus may be required to be delivered in
connection with sales by the Underwriters or a dealer, the
Registration Statement and the Prospectus, as amended or
supplemented as required, will contain all statements which are
required to be stated therein in accordance with the Act and the
Regulations, and will conform in all material respects to the
requirements of the Act and the Regulations; neither the
Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, will contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading, provided, however, that this representation and
warranty does not apply to statements made or statements omitted
in reliance upon and in conformity with information furnished to
the Company in writing by or on behalf of any Underwriter
expressly for use in the Registration Statement or the Prospectus
or any amendment thereof or supplement thereto.
(d) The Company and each of its subsidiaries have been
duly organized and are validly existing as corporations in good
standing under the laws of the respective states of their
incorporation. Except as set forth in the Prospectus, the
Company does not own or control, directly or indirectly, any
corporation, partnership, trust, joint venture or other business
entity other than the subsidiaries listed in Exhibit 21 of the
Registration Statement. Each of the Company and its subsidiaries
is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or
leasing of any properties or the character of its operations
require such qualification or licensing, except where the failure
to be so qualified or licensed would not have a material and
adverse effect on the condition, financial or otherwise, or the
business affairs, operations, properties, or results of
operations of the Company and its subsidiaries, taken as a whole
(the "Business"). Each of the Company and its subsidiaries has
all requisite power and authority (corporate and other), and has
obtained any and all necessary authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including,
without limitation, those having jurisdiction over environmental
or similar matters), to own or lease its properties and conduct
its business as described in the Prospectus; the Company and each
of its subsidiaries have been doing business in compliance in all
material respects with all such authorizations, approvals,
orders, licenses, certificates, franchises and permits and all
federal, state, local and foreign laws, rules and regulations
except where the failure to do so would not have a material
adverse effect on the business; and neither the Company nor any
of its subsidiaries have received any notice of proceedings
relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise,
or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially and
adversely affect the Business. The disclosures in the
Registration Statement concerning the effects of federal, state,
local, and foreign laws, rules and regulations on the Company's
business as currently conducted and as contemplated are correct
in all material respects and do not omit to state a material fact
necessary to make the statements contained therein not misleading
in light of the circumstances in which they were made.
(e) The Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus under
the headings "Capitalization" and "Description of Securities" and
will have the adjusted capitalization set forth therein on the
Closing Date and the Option Closing Date, if any, based upon the
assumptions set forth therein, and the Company is not a party to
or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement and as
described in the Prospectus. The Securities and all other
securities issued or issuable by the Company conform or, when
issued and paid for, will conform, in all material respects to
all statements with respect thereto contained in the Registration
Statement and the Prospectus. All issued and outstanding shares
of capital stock of each subsidiary of the Company have been duly
authorized and validly issued and are fully paid and
nonassessable. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company and the
related notes thereto included in the Prospectus, neither the
Company nor any subsidiary has outstanding any options to
purchase, or any preemptive rights or other rights to subscribe
for or to purchase, any securities or obligations convertible
into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible
securities or obligations. The description of the Company's
stock option, stock bonus and other stock plans or arrangements
and the options or other rights granted and exercised thereunder
as set forth in the Prospectus conforms in all material respects
with the requirements of the Act. All issued and outstanding
securities of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and the holders
thereof have no rights of rescission with respect thereto and are
not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation of
the preemptive rights of any holders of any security of the
Company or similar contractual rights granted by the Company.
(f) The Securities are not and will not be subject to
any preemptive or other similar rights of any stockholder, have
been duly authorized and, when issued, paid for and delivered in
accordance with the terms hereof, will be validly issued, fully
paid and nonassessable and will conform in all material respects
to the description thereof contained in the Prospectus; the
holders thereof will not be subject to any liability solely as
such holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities has been duly and
validly taken; and the certificates representing the Securities
will be in due and proper form. Upon the issuance and delivery
pursuant to the terms hereof of the Securities to be sold by the
Company hereunder, the Underwriters or the Representative, as the
case may be, will acquire good and marketable title to such
Securities free and clear of any lien, charge, claim,
encumbrance, pledge, security interest, defect, or other
restriction or equity of any kind whatsoever. No stockholder of
the Company has any right which has not been waived in writing to
require the Company to register the sale of any shares owned by
such stockholder under the Act in the public offering
contemplated by this Agreement. No further approval or authority
of the stockholders or the Board of Directors of the Company will
be required for the issuance and sale of the Shares, the Option
Shares and the Representative's Warrants to be sold by the
Company as contemplated herein.
(g) The financial statements of the Company, together
with the related notes and schedules thereto, included in the
Registration Statement, each Preliminary Prospectus and the
Prospectus fairly present the financial position, changes in
stockholders' equity and the results of operations of the Company
at the respective dates and for the respective periods to which
they apply and such financial statements have been prepared in
conformity with generally accepted accounting principles and the
Regulations, consistently applied throughout the periods
involved. There has been no material adverse change or material
adverse development involving a material adverse prospective
change in the Business, whether or not arising in the ordinary
course of business since the date of the financial statements
included in the Registration Statement and the Prospectus and the
outstanding debt, the property, both tangible and intangible, and
the description of the business of the Company thereof contained
in the Registration Statement and the Prospectus. Financial
information set forth in the Prospectus under the headings
"Prospectus Summary - Selected Financial Data," "Capitalization,"
and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," fairly present, on the basis stated
in the Prospectus, the information set forth therein and have
been derived from or compiled on a basis consistent with that of
the audited financial statements included in the Prospectus.
(h) The Company (i) has paid all federal, state,
local, franchise, and foreign taxes for which it is liable,
including, but not limited to, withholding taxes and amounts
payable under Chapters 21 through 24 of the Internal Revenue Code
of 1986, as amended (the "Code"), and has furnished all
information returns it is required to furnish pursuant to the
Code, (ii) has established adequate reserves for such taxes which
are not due and payable, and (iii) does not have any tax
deficiency or claims outstanding, proposed or assessed against
it.
(i) No transfer tax, stamp duty or other similar tax
is payable by or on behalf of the Underwriters in connection with
(i) the issuance by the Company of the Securities, (ii) the
purchase by the Underwriters of the Firm Securities and the
Option Securities from the Company and the purchase by the
Representative of the Representative's Warrants from the Company,
(iii) the consummation by the Company of any of its obligations
under this Agreement, or (iv) resales of the Firm Securities and
the Option Securities in connection with the distribution
contemplated hereby.
(j) There is no action, suit, proceeding, inquiry,
arbitration, mediation, investigation, litigation or governmental
proceeding (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or
foreign, pending or threatened against (or circumstances that may
give rise to the same), or involving the properties or businesses
of, the Company which (i) questions the validity of the capital
stock of the Company, this Agreement or the Representative's
Warrant Agreement, or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement or the
Representative's Warrant Agreement, (ii) is required to be
disclosed in the Registration Statement which is not so disclosed
(and such proceedings as are summarized in the Registration
Statement are accurately summarized in all material respects), or
(iii) might materially and adversely affect the condition,
financial or otherwise, or the business, affairs, position,
stockholders' equity, operation, properties, or results of
operations of the Company and its subsidiaries taken as a whole.
(k) The Company has the corporate power and authority
to authorize, issue, deliver, and sell the Securities and to
enter into this Agreement, the Warrant Agreement, and the
Representative's Warrant Agreement, and to consummate the
transactions provided for in such agreements; and this Agreement,
the Warrant Agreement and the Representative's Warrant Agreement
have each been duly and properly authorized, executed, and
delivered by the Company. Each of this Agreement, the Warrant
Agreement and the Representative's Warrant Agreement constitutes
a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its respective terms
(except as the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting
enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as
rights to indemnity or contribution may be limited by applicable
law), and none of the issue and sale of the Securities, execution
by the Company, delivery or performance of this Agreement, the
Warrant Agreement, and the Representative's Warrant Agreement,
the consummation by the Company of the transactions contemplated
herein and therein, or the conduct of the Company's businesses as
described in the Registration Statement, the Prospectus, and any
amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any breach or
violation of any of the terms or provisions of, or constitutes or
will constitute a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any
kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of (i) the
articles of incorporation or by-laws of the Company, as amended
and restated, (ii) any license, contract, indenture, mortgage,
deed of trust, voting trust agreement, stockholders agreement,
note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or by which it is or
may be bound or to which its properties or assets (tangible or
intangible) is or may be subject, or any indebtedness, or (iii)
any statute, judgment, decree, order, rule or regulation
applicable to the Company of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or
body (including, without limitation, those having jurisdiction
over environmental or similar matters), domestic or foreign,
having jurisdiction over the Company of any of their activities
or properties.
(l) No consent, approval, authorization or order of,
and no filing with, any court, regulatory body, government agency
or other body, domestic or foreign, is required for the issuance
of the Securities pursuant to the Prospectus and the Registration
Statement, the performance of this Agreement, the Warrant
Agreement, the Representative's Warrant Agreement, and the
transactions contemplated hereby and thereby, including without
limitation, any waiver of any preemptive, first refusal or other
rights that any entity or person may have for the issue and/or
sale of any of the Securities, except such as have been or may be
obtained under the Act or may be required under state securities
or Blue Sky laws in connection with the Underwriters' purchase
and distribution of the Firm Securities, the Option Securities,
and the Representative's Warrants to be sold by the Company
hereunder.
(m) All executed agreements, contracts or other
documents or copies of executed agreements, contracts or other
documents filed as exhibits to the Registration Statement to
which the Company is a party or by which it may be bound or to
which its assets, properties or businesses may be subject have
been duly and validly authorized, executed and delivered by the
Company and constitute the legal, valid and binding agreements of
the Company enforceable against the Company in accordance with
their respective terms (except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and
except as rights to indemnity or contribution may be limited by
applicable law). The descriptions in the Registration Statement
of such agreements, contracts and other documents are accurate in
all material respects and fairly present the information required
to be shown with respect thereto by Form SB-2, and there are no
contracts or other documents which are required by the Act to be
described in the Registration Statement or filed as exhibits to
the Registration Statement which are not described or filed as
required, and the exhibits which have been filed are complete and
correct copies of the documents of which they purport to be
copies.
(n) Since the respective dates as of which information
is given in the Registration Statement and Prospectus, and except
as described in or specifically contemplated by the Prospectus
(i) the Company has not incurred any material liabilities or
obligations, indirect, direct or contingent, or entered into any
material verbal or written agreement or other transaction which
is not in the ordinary course of business or which could result
in a material reduction in the future earnings of the Company;
(ii) the Company has not sustained any material loss or
interference with its business or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by
insurance; (iii) the Company has not paid or declared any
dividends or other distributions with respect to its capital
stock, and the Company is not in default in the payment of
principal or interest on any outstanding debt obligations; (iv)
there has not been any change in the capital stock (other than
upon the sale of the Firm Securities, the Option Securities and
the Representative's Warrants hereunder and upon the exercise of
options and warrants described in the Registration Statement) of,
or indebtedness material to, the Company (other than in the
ordinary course of business); (v) the Company has not issued any
securities or incurred any liability or obligation, primary or
contingent, for borrowed money; and (vi) there has not been any
material adverse change in the condition (financial or
otherwise), business, properties, results of operations, or
prospects of the Company and its subsidiaries.
(o) No default exists in the due performance and
observance of any term, covenant or condition of any material
license, contract, indenture, mortgage, installment sale
agreement, lease, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement, or any
other material agreement or instrument evidencing an obligation
for borrowed money, or any other material agreement or instrument
to which the Company is a party or by which the Company may be
bound or to which the property or assets (tangible or intangible)
of the Company is subject or affected, except for such defaults,
if any, which individually and in the aggregate would not have a
material adverse effect on the Business.
(p) To the Company's knowledge, there are no pending
investigations involving the Company by the U.S. Department of
Labor, or any other governmental agency responsible for the
enforcement of such federal, state, local, or foreign laws and
regulations. There is no unfair labor practice charge or
complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute,
slowdown or stoppage pending or to its knowledge threatened
against or involving the Company. No representation question
exists respecting the employees of the Company. No collective
bargaining agreement, or modification thereof is currently being
negotiated by the Company. No grievance or arbitration
proceeding is pending under any expired or existing collective
bargaining agreements of the Company. No labor dispute with the
employees of the Company exists or to its knowledge is imminent.
(q) Except as described in the Prospectus, the Company
does not maintain, sponsor or contribute to any program or
arrangement that is an "employee pension benefit plan," an
"employee welfare benefit plan," or a "multiemployer plan" as
such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") ("ERISA Plans"). The Company does not
maintain or contribute to a defined benefit plan, as defined in
Section 3(35) of ERISA. No ERISA Plan (or any trust created
thereunder) has engaged in a "prohibited transaction" within the
meaning of Section 406 of ERISA or Section 4975 of the Code,
which could subject the Company to any tax penalty on prohibited
transactions and which has not adequately been corrected. Each
ERISA Plan is in compliance with all material reporting,
disclosure and other requirements of the Code and ERISA as they
relate to any such ERISA Plan. Determination letters have been
received from the Internal Revenue Service with respect to each
ERISA Plan which is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are
qualified thereunder. The Company has never completely or
partially withdrawn from a "multiemployer plan."
(r) None of the Company, nor any of its employees,
directors, stockholders, or affiliates (within the meaning of the
Regulations) of any of the foregoing has taken or will take
directly or indirectly, any action designed to or which has
constituted or which might be expected to cause or result in
unlawful stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities.
(s) The Company has good and marketable title to, or
valid and enforceable leasehold estates in, all items of real and
personal property stated in the Prospectus to be owned or leased
by it, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, or other restrictions
or equities of any kind whatsoever, other than those referred to
in the Prospectus and liens for taxes not yet due and payable.
(t) Kemp & Company ("Kemp"), whose report is filed
with the Commission as a part of the Registration Statement, are
independent certified public accountants as required by the Act
and the Regulations.
(u) [The Company has caused to be duly executed
legally binding and enforceable agreements pursuant to which all
persons or entities that directly or beneficially own Common
Stock, as of the effective date of the Registration Statement,
have agreed not to, directly or indirectly, offer, offer to sell,
sell, grant any option for the sale of, transfer, assign, pledge,
hypothecate or otherwise encumber or dispose of any shares of
Common Stock or securities convertible into Common Stock,
exercisable or exchangeable for or evidencing any right to
purchase or subscribe for any shares of Common Stock (either
pursuant to Rule 144 of the Regulations or otherwise) or dispose
of any interest therein for a period from the date of the
Prospectus until twelve (12) months following the date that the
Registration Statement becomes effective, without the prior
written consent of National (the "Lock-up Agreements"). The
Company will cause the Transfer Agent (as defined herein) to
place "stop transfer" orders on the Company's stock ledgers in
order to effect the Lock-up Agreements.]
(v) There are no claims, payments, arrangements or
understandings, whether oral or written, for services in the
nature of a finder's or origination fee with respect to the sale
of the Securities hereunder or any other arrangements,
agreements, understandings, payments or issuance with respect to
the Company or any of its officers, directors, stockholders,
employees or affiliates that may affect the Underwriters'
compensation as determined by the Commission and the National
Association of Securities Dealers, Inc. (the "NASD").
(w) The Securities have been approved for listing on
the NASDAQ SmallCap Market.
(x) Neither the Company nor any of its officers,
employees, agents or any other person acting on behalf of the
Company has, directly or indirectly, given or agreed to give any
money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or
supplier, or official or employee of any governmental agency
(domestic or foreign) or instrumentality of any government
(domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may
be in a position to help or hinder the business of the Company
(or assist the Company in connection with any actual or proposed
transaction) which might subject the Company or any other such
person to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign). The
Company's internal accounting controls are sufficient to cause
the Company to comply with the Foreign Corrupt Practices Act of
1977, as amended.
(y) Except as set forth in the Prospectus, no officer,
director or stockholder of the Company, or any "affiliate" or
"associate" (as these terms are defined in Rule 405 promulgated
under the Regulations) of any of the foregoing persons or
entities has or has had, either directly or indirectly, (i) an
interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed
to be furnished or sold by the Company, or (B) purchases from or
sells or furnishes to the Company any goods or services, or (ii)
a beneficiary interest in any contract or agreement to which the
Company is a party or by which it may be bound or affected.
Except as set forth in the Prospectus there are no existing
agreements, arrangements, understandings or transactions, or
proposed agreements, arrangements, understandings or
transactions, between or among the Company, and any officer,
director, principal shareholder (as such term is used in the
Prospectus) of the Company, or any affiliate or associate of any
of the foregoing persons or entities which are required to be
disclosed in the Prospectus.
(z) The Company is not, and does not intend to conduct
its business in a manner in which it would become an "investment
company" within the meaning of the Investment Company Act of
1940, as amended.
(aa) Any certificate signed by any officer of the
Company and delivered to the Underwriters or to the Underwriters'
Counsel (as defined in Section 4(d) herein) shall be deemed a
representation and warranty by the Company to the Underwriters as
to the matters covered thereby.
(ab) The minute books of the Company have been made
available to the Underwriters and contain a complete summary of
all meetings and actions of the directors and stockholders of the
Company, since the time of its incorporation, and reflect all
transactions referred to in such minutes accurately in all
material respects.
(ac) The Company has not distributed and will not
distribute prior to the Closing Date any offering material in
connection with the offering and sale of the Shares in this
offering other than the Prospectus, the Registration Statement
and the other materials permitted by the Act. Except as
described in the Prospectus, no holders of any securities of the
Company or of any options, warrants or other convertible or
exchangeable securities of the Company have the right to include
any securities issued by the Company as part of the Registration
Statement or to require the Company to file a registration
statement under the Act and no person or entity holds any
antidilution rights with respect to any securities of the
Company.
(ad) Each of the Company and its subsidiaries
maintains insurance by insurers of recognized financial
responsibility of the types and in the amounts as the Company
believes are prudent and adequate for the business in which it is
engaged, including, but not limited to, insurance covering real
and personal property owned or leased by the Company and its
subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of
which insurance is in full force and effect. The Company has
delivered to the Underwriter's Counsel full summaries of these
insurance policies. The Company has no reason to believe that it
will not be able to renew existing insurance coverage with
respect to the Company as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary
to continue its business, in either case, at a cost that would
not have a material adverse effect on the financial condition,
operations, business, assets or properties of the Company. The
Company has not failed to file any material claims, has no
material disputes with its insurance company regarding any claims
submitted under its insurance policies, and has complied in
material respects with all material provisions contained in its
insurance policies.
2. Purchase, Sale and Delivery of the Securities.
----------------------------------------------
(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell
to each Underwriter, and each Underwriter, severally and not
jointly agrees to purchase from the Company, at a price equal to
$ per Share and $ per Warrant, that
number of Firm Securities set forth in Schedule A opposite the
name of such Underwriter, subject to such adjustment as the
Representative in its discretion shall make to eliminate any
sales or purchases of fractional shares, plus any additional
numbers of Shares which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 11 hereof.
(b) In addition, on the basis of the representations,
warranties, covenants and agreements, herein contained, but
subject to the terms and conditions herein set forth, the Company
hereby grants an option to the Underwriters, severally and not
jointly, to purchase all or any part of an additional 165,000
shares of Common Stock at a price of $ per share of
Common Stock and/or an additional 165,000 Series 1 Warrants
and/or 165,000 Series 2 Warrants at a price of $ per
Warrant. The option granted hereby will expire 45 days after (i)
the date the Registration Statement becomes effective, if the
Company has elected not to rely on Rule 430A under the
Regulations, or (ii) the date of this Agreement if the Company
has elected to rely upon Rule 430A under the Regulations, and may
be exercised in whole or in part from time to time (but not on
more than two (2) occasions) only for the purpose of covering
over-allotments which may be made in connection with the offering
and distribution of the Firm Securities upon notice by the
Representative to the Company setting forth the number of Option
Securities as to which the several Underwriters are then
exercising the option and the time and date of payment and
delivery for any such Option Securities. Any such time and date
of delivery (an "Option Closing Date") shall be determined by the
Representative, but shall not be later than three full business
days after the exercise of said option, nor in any event prior to
the Closing Date, as hereinafter defined, unless otherwise agreed
upon by the Representative and the Company. Nothing herein
contained shall obligate the Underwriters to exercise the
over-allotment option described above. No Option Securities
shall be delivered unless the Firm Securities shall be
simultaneously delivered or shall theretofore have been delivered
as herein provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Firm Securities shall be made at the
offices of National, at 1001 Fourth Avenue, Suite 2200, Seattle,
Washington, or at such other place as shall be agreed upon by the
Representative and the Company. Such delivery and payment shall
be made at 10:00 a.m. (New York time) on ______________, 1997, or
at such other time and date as shall be agreed upon by the
Representative and the Company, but no more than four (4)
business days after the date hereof (such time and date of
payment and delivery being herein called the "Closing Date"). In
addition, in the event that any or all of the Option Securities
are purchased by the Underwriters, payment of the purchase price
for, and delivery of certificates for, such Option Securities
shall be made at the above mentioned office of National or at
such other place as shall be agreed upon by the Representative
and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the
certificates for the Firm Securities and the Option Securities,
if any, shall be made to the Underwriters against payment by the
Underwriters, of the purchase price for the Firm Securities and
the Option Securities, if any, to the order of the Company. In
the event such option is exercised, each of the Underwriters,
acting severally and not jointly, shall purchase that proportion
of the total number of Option Securities then being purchased
which the number of Firm Securities set forth in Schedule A
hereto opposite the name of such Underwriter bears to the total
number of Firm Securities, subject in each case to such
adjustments as the Representative in their discretion shall make
to eliminate any sales or purchases of fractional shares.
Certificates for the Firm Securities and the Option Securities,
if any, shall be in definitive, fully registered form, shall bear
no restrictive legends and shall be in such denominations and
registered in such names as the Underwriters may request in
writing at least three (3) business days prior to Closing Date or
the relevant Option Closing Date, as the case may be. The
certificates for the Firm Securities and the Option Securities,
if any, shall be made available to the Representative at such
office or such other place as the Representative may designate
for inspection, checking and packaging no later than 9:30 a.m. on
the last business day prior to Closing Date or the relevant
Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and
sell to the Representative Representative's Warrants at a
purchase price of $0.0001 per warrant, which warrants shall
entitle the holders thereof to purchase an aggregate of 110,000
shares of Common Stock and/or 110,000 Series 1 Warrants and/or
110,000 Series 2 Warrants. The Representative's Warrants shall
expire five (5) years after the effective date of the
Registration Statement and shall be exercisable for a period of
four (4) years commencing one (1) year from the effective date
of the Registration Statement at a price equaling one hundred
twenty percent (120%) of the initial public offering price of the
Shares. The Representative's Warrant Agreement and form of
Warrant Certificate shall be substantially in the form filed as
Exhibit 4.2 to the Registration Statement. Payment for the
Representative's Warrants shall be made on the Closing Date.
3. Public Offering of the Shares and the Warrants.
-----------------------------------------------
As soon after the Registration Statement becomes effective
as the Representative deems advisable, the Underwriters shall
make a public offering of the Shares and the Warrants (other than
to residents of or in any jurisdiction in which qualification of
the Shares and the Warrants is required and has not become
effective) at the price and upon the other terms set forth in the
Prospectus. The Representative may from time to time increase or
decrease the public offering price after distribution of the
Shares and the Warrants has been completed to such extent as the
Representative, in its sole discretion, deems advisable. The
Underwriters may enter into one or more agreements as the
Underwriters, in each of their sole discretion, deem advisable
with one or more broker-dealers who shall act as dealers in
connection with such public offering.
4. Covenants of the Company.
-------------------------
The Company covenants and agrees with each of the
Underwriters as follows:
(a) The Company shall use its best efforts to cause
the Registration Statement and any amendments thereto to become
effective as promptly as practicable and will not at any time,
whether before or after the effective date of the Registration
Statement, file any amendment to the Registration Statement or
supplement to the Prospectus or file any document under the Act
or Exchange Act before termination of the offering of the Shares
by the Underwriters of which the Representative shall not
previously have been advised and furnished with a copy, or to
which the Representative shall have objected or which is not in
compliance with the Act, the Exchange Act or the Regulations.
(b) As soon as the Company is advised or obtains
knowledge thereof, the Company will advise the Representative and
confirm the notice in writing, (i) when the Registration
Statement, as amended, becomes effective, if the provisions of
Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and
when any post-effective amendment to the Registration Statement
becomes effective, (ii) of the issuance by the Commission of any
stop order or of the initiation, or the threatening, of any
proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the
Preliminary Prospectus or the Prospectus, or any amendment or
supplement thereto, or the institution of proceedings for that
purpose, (iii) of the issuance by the Commission or by any state
securities commission of any proceedings for the suspension of
the qualification of any of the Securities for offering or sale
in any jurisdiction or of the initiation, or the threatening, of
any proceeding for that purpose, (iv) of the receipt of any
comments from the Commission; and (v) of any request by the
Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional
information. If the Commission or any state securities
commission authority shall enter a stop order or suspend such
qualification at any time, the Company will use its best efforts
to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Representative) in accordance with
the requirements of the Act.
(d) The Company will give the Representative notice of
its intention to file or prepare any amendment to the
Registration Statement (including any post-effective amendment)
or any amendment or supplement to the Prospectus (including any
revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Securities
which differs from the corresponding prospectus on file at the
Commission at the time the Registration Statement becomes
effective, whether or not such revised prospectus is required to
be filed pursuant to Rule 424(b) of the Regulations), and will
furnish the Representative with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such
amendment or supplement to which the Representative or Camhy
Karlinsky & Stein LLP ("Underwriters' Counsel") shall reasonably
object.
(e) The Company shall endeavor in good faith, in
cooperation with the Representative, at or prior to the time the
Registration Statement becomes effective, to qualify the
Securities for offering and sale under the securities laws of
such jurisdictions as the Representative may reasonably designate
to permit the continuance of sales and dealings therein for as
long as may be necessary to complete the distribution, and shall
make such applications, file such documents and furnish such
information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a
foreign corporation or become subject to service of process in
any such jurisdiction. In each jurisdiction where such
qualification shall be effected, the Company will, unless the
Representative agree that such action is not at the time
necessary or advisable, use all reasonable efforts to file and
make such statements or reports at such times as are or may
reasonably be required by the laws of such jurisdiction to
continue such qualification.
(f) During the time when a prospectus is required to
be delivered under the Act, the Company shall use all reasonable
efforts to comply with all requirements imposed upon it by the
Act, as now and hereafter amended, and by the Regulations, as
from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Securities in
accordance with the provisions hereof and the Prospectus, or any
amendments or supplements thereto. If at any time when a
prospectus relating to the Securities is required to be delivered
under the Act, any event shall have occurred as a result of
which, in the opinion of counsel for the Company or Underwriters'
Counsel, the Prospectus, as then amended or supplemented,
includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary
at any time to amend or supplement the Prospectus to comply with
the Act, the Company will notify the Representative promptly and
prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act, each such
amendment or supplement to be satisfactory to Underwriters'
Counsel, and the Company will furnish to the Underwriters copies
of such amendment or supplement as soon as available and in such
quantities as the Underwriters may request.
(g) As soon as practicable, but in any event not later
than 45 days after the end of the 12-month period beginning on
the day after the end of the fiscal quarter of the Company during
which the effective date of the Registration Statement occurs (90
days in the event that the end of such fiscal quarter is the end
of the Company's fiscal year), the Company shall make generally
available to its security holders, in the manner specified in
Rule 158(b) of the Regulations, and to the Representative, an
earnings statement which will be in the detail required by, and
will otherwise comply with, the provisions of Section 11(a) of
the Act and Rule 158(a) of the Regulations, which statement need
not be audited unless required by the Act, covering a period of
at least 12 consecutive months after the effective date of the
Registration Statement.
(h) During a period of five (5) years after the date
hereof, the Company will furnish to its stockholders, as soon as
practicable, annual reports (including financial statements
audited by independent public accountants) and will make
available to its stockholders unaudited quarterly reports of
earnings, and will deliver to the Representative:
(i) concurrently with furnishing such quarterly
reports to its stockholders, statements of income of the Company
for each quarter in the form furnished to the Company's
stockholders;
(ii) concurrently with furnishing such annual
reports to its stockholders, a balance sheet of the Company as at
the end of the preceding fiscal year, together with statements of
operations, stockholders' equity, and cash flows of the Company
for such fiscal year, accompanied by a copy of the report thereon
of independent certified public accountants;
(iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the
Commission, the Nasdaq SmallCap Market or any securities
exchange;
(v) every press release and every material news
item or article of interest to the financial community in respect
of the Company or its affairs which was released or prepared by
or on behalf of the Company; and
(vi) any additional information of a public nature
concerning the Company (and any future subsidiaries) or its
businesses which the Representative may reasonably request.
During such five-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a
consolidated basis to the extent that the accounts of the Company
and its subsidiaries are consolidated, and will be accompanied by
similar financial statements for any significant subsidiary which
is not so consolidated.
(i) The Company will maintain a transfer agent (the
"Transfer Agent") and, if necessary under the jurisdiction of
incorporation of the Company, a registrar (which may be the same
entity as the transfer agent) for the Common Stock and the
Representative's Warrants.
(j) The Company will furnish to the Representative or
on the Representative's order, without charge, at such place as
the Representative may designate, copies of each Preliminary
Prospectus, the Registration Statement and any pre-effective or
post-effective amendments thereto (two of which copies will be
signed and will include all financial statements and exhibits),
each Preliminary Prospectus, the Prospectus, and all amendments
and supplements thereto, including any prospectus prepared after
the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative
may reasonably request.
(k) [On or before the effective date of the
Registration Statement, the Company shall provide the
Representative with true copies of duly executed Lock-up
Agreements. On or before the Closing Date, the Company shall
deliver instructions to the Transfer Agent authorizing it to
place appropriate stop transfer orders on the Company's ledgers.]
(l) The Company shall use its best efforts to cause
its officers, directors, stockholders or affiliates (within the
meaning of the Regulations) not to take, directly or indirectly,
any action designed to, or which might in the future reasonably
be expected to cause or result in, unlawful stabilization or
manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the
sale of the Securities substantially in the manner, and subject
to the conditions, set forth under "Use of Proceeds" in the
Prospectus.
(n) The Company shall timely file all such reports,
forms or other documents as may be required (including, but not
limited to, a Form SR as may be required pursuant to Rule 463
under the Act) from time to time, under the Act, the Exchange
Act, and the Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the
applicable requirements under the Act, the Exchange Act, and the
Regulations.
(o) The Company shall cause the Securities to be
listed on the NASDAQ SmallCap Market, and for a period of two (2)
years from the date hereof shall use its best efforts to maintain
the listing of the Securities to the extent outstanding.
(p) For a period of two (2) years from the Closing
Date, the Company shall furnish to the Representative, at the
Company's sole expense, monthly consolidated transfer sheets
relating to the, Common Stock and Warrants.
(q) For a period of five (5) years after the effective
date of the Registration Statement the Company shall, at the
Company's sole expense, take all necessary and appropriate
actions to further qualify the Company's securities in all
jurisdictions of the United States in order to permit secondary
sales of such securities pursuant to the Blue Sky laws of those
jurisdictions which do not require the Company to qualify as a
foreign corporation or to file a general consent to service of
process.
(r) The Company (i) prior to the effective date of the
Registration Statement, has filed a Form 8-A with the Commission
providing for the registration of the Common Stock and Warrants
under the Exchange Act and (ii) as soon as practicable, will use
its best efforts to take all necessary and appropriate actions to
be included in Standard and Poor's Corporation Descriptions and
Moody's OTC Manual and to continue such inclusion for a period of
not less than five (5) years.
(s) [The Company agrees that for a period of nine (9)
months following the effective date of the Registration Statement
it will not, without the prior written consent of National,
offer, issue, sell, contract to sell, grant any option for the
sale of or otherwise dispose of any Common Stock, or securities
convertible into Common Stock, except for the issuance of the
Option Securities, the Representative's Warrants, and shares of
Common Stock issued upon the exercise of currently outstanding
warrants or options, or options and warrants granted in the
ordinary course of business consistent with prior practice.]
(t) Until the completion of the distribution of the
Securities, the Company shall not without the prior written
consent of National or Underwriters' Counsel, issue, directly or
indirectly any press release or other communication or hold any
press conference with respect to the Company or its activities or
the offering contemplated hereby, other than trade releases
issued in the ordinary course of the Company's business
consistent with past practices with respect to the Company's
operations.
(u) For a period equal to the lesser of (i) five (5)
years from the date hereof, and (ii) the sale to the public of
the Representative's Securities, the Company will not
take any action or actions which may prevent or disqualify the
Company's use of an appropriate form for the registration under
the Act of the Representative's Securities.
(v) The Company agrees that it shall use its best
efforts, which shall include, but shall not be limited to, the
solicitation of proxies, to elect one (1) designee of National to
the Company's Board of Directors for a period of five (5) years
following the Closing, provided that such designee is reasonably
acceptable to the Company and that such director may be excluded
from consideration of certain confidential matters which, in the
good faith judgment of a majority of the other directors, such
director's presence would not be appropriate.
(w) The Company agrees that within forty-five (45)
days after the Closing it shall retain a public relations firm
which is reasonably acceptable to National. The Company shall
keep such public relations firm, or any replacement, for a period
of two (2) years from the Closing. Any replacement public
relations firm shall be retained only with the consent of
National, which shall not be unreasonably withheld.
(x) The Company agrees that any and all future
transactions between the Company and its officers, directors,
principal stockholders and the affiliates of the foregoing
persons 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 that any such transactions also be
approved by a majority of the Company's outside independent
directors disinterested in the transaction.
(y) The Company shall prepare and deliver, at the
Company's sole expense, to National within the one hundred and
twenty (120) day period after the later of the effective date of
the Registration Statement or the latest Option Closing Date, as
the case may be, one bound volume containing all correspondence
with regulatory officials, agreements, documents and all other
materials in connection with the offering as requested by the
Underwriters' Counsel.
5. Payment of Expenses.
--------------------
(a) The Company hereby agrees to pay on each of the
Closing Date and each Option Closing Date (to the extent not
previously paid) all expenses and fees (other than fees of
Underwriters' Counsel, except as provided in (iv) below) incident
to the performance of the obligations of the Company under this
Agreement, the Warrant Agreement, and the Representative's
Warrant Agreement, including, without limitation, (i) the fees
and expenses of accountants and counsel for the Company, (ii) all
costs and expenses incurred in connection with the preparation,
duplication, printing, filing, delivery and mailing (including
the payment of postage with respect thereto) of the Registration
Statement and the Prospectus and any amendments and supplements
thereto and the duplication, mailing (including the payment of
postage with respect thereto) and delivery of this Agreement, the
Warrant Agreement, the Agreement Among Underwriters, the Selected
Dealers Agreements, the Powers of Attorney, and related
documents, including the cost of all copies thereof and of the
Preliminary Prospectuses and of the Prospectus and any amendments
thereof or supplements thereto supplied to the Underwriters and
such dealers as the Underwriters may request, in quantities as
hereinabove stated, (iii) the printing, engraving, issuance and
delivery of the certificates representing the Securities, (iv)
the qualification of the Securities under state or foreign
securities or "Blue Sky" laws and determination of the status of
such securities under legal investment laws, including the costs
of word processing and mailing the "Preliminary Blue Sky
Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal
Investments Survey," if any, and reasonable disbursements and
fees of counsel in connection therewith, (v) advertising costs
and expenses, including but not limited to the costs and expenses
incurred by the Company and the Representative in connection with
the "road show," information meetings and presentations, bound
volumes and prospectus memorabilia and "tombstone" advertisement
expenses, (vi) experts, (vii) fees and expenses of the transfer
agent and registrar, (viii) the fees payable to the Commission
and the NASD, (ix) issue and transfer taxes, if any and (x) the
fees and expenses incurred in connection with the listing of the
Common Stock on the Nasdaq National Market and any other market
or exchange.
(b) If this Agreement is terminated by the
Underwriters in accordance with the provisions of Section 6,
Section 10(a) or Section 11, the Company shall reimburse and
indemnify the Representative for all of its actual out-of-pocket
expenses on an accountable basis, including the fees and
disbursements of Underwriters' Counsel, less any amounts already
paid pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to
the expenses payable pursuant to subsection (a) of this Section
5, it will pay to the Representative on the Closing Date by
certified or bank cashier's check or, at the election of the
Representative, by deduction from the proceeds of the offering
contemplated herein a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds received by the Company
from the sale of the Firm Securities, $50,000,000 of which has
been paid to date. In the event the Representative elects to
exercise the over-allotment option described in Section 2(b)
hereof, the Company further agrees to pay to the Representative
on the Option Closing Date (by certified or bank cashier's check
or, at the Representative's election, by deduction from the
proceeds of the offering) a non-accountable expense allowance
equal to three percent (3%) of the gross proceeds received by the
Company from the sale of the Option Securities.
6. Conditions of the Underwriters' Obligations.
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The obligations of the Underwriters hereunder shall be
subject to the continuing accuracy of the representations and
warranties of the Company herein as of the date hereof and as of
the Closing Date and each Option Closing Date, if any, as if they
had been made on and as of the Closing Date or each Option
Closing Date, as the case may be; the accuracy on and as of the
Closing Date or Option Closing Date, if any, of the statements of
officers of the Company made pursuant to the provisions hereof;
and the performance by the Company on and as of the Closing Date
and each Option Closing Date, if any, of its covenants and
obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become
effective not later than 5:00 p.m., New York City time, on the
date prior to the date of this Agreement or such later date and
time as shall be consented to in writing by the Representative,
and, at Closing Date and each Option Closing Date, if any, no
stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the
Commission for additional information shall have been complied
with to the reasonable satisfaction of Underwriters' Counsel. If
the Company has elected to rely upon Rule 430A of the
Regulations, the price of the Shares and any price-related
information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted
to the Commission for filing pursuant to Rule 424(b) of the
Regulations within the prescribed time period, and prior to
Closing Date the Company shall have provided evidence
satisfactory to the Representative of such timely filing, or a
post-effective amendment providing such information shall have
been promptly filed and declared effective in accordance with the
requirements of Rule 430A of the Regulations.
(b) The Representative shall not have advised the
Company that the Registration Statement, or any amendment
thereto, contains an untrue statement of fact which, in the
Representative's opinion, is material, or omits to state a fact
which, in the Representative's opinion, is material and is
required to be stated therein or is necessary to make the
statements therein not misleading, or that the Prospectus, or any
supplement thereto, contains an untrue statement of fact which,
in the Representative's reasonable opinion, is material, or omits
to state a fact which, in the Representative's reasonable
opinion, is material and is required to be stated therein or is
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Underwriters
shall have received from Underwriters' Counsel such opinion or
opinions with respect to the organization of the Company, the
validity of the Securities, the Registration Statement, the
Prospectus and other related matters as the Representative may
request and Underwriters' Counsel shall have received from the
Company such papers and information as they request to enable
them to pass upon such matters.
(d) At Closing Date, the Underwriters shall have
received the favorable opinion of Waring Cox, PLC ("Waring Cox"),
counsel to the Company, dated the Closing Date, addressed to the
Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) the Company (A) has been duly organized and is
validly existing as a corporation in good standing under the laws
of its jurisdiction of incorporation, (B) is duly qualified and
licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties
or the character of its operations requires such qualification or
licensing, and (C) to the best of such counsel's knowledge, has
all requisite corporate power and authority and has obtained any
and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental
or regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or
similar matters), to own or lease its properties and conduct its
business as described in the Prospectus.
(ii) except as described in the Prospectus, and to
the best of such counsel's knowledge after reasonable
investigation, the Company does not own an interest in any
corporation, limited liability company, partnership, joint
venture, trust or other business entity;
(iii) the Company has a duly authorized, issued
and outstanding capitalization as set forth in the Prospectus,
and any amendment or supplement thereto, under "Capitalization"
and "Description of Securities," and to the knowledge of such
counsel, the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to
issue any capital stock, rights, warrants, options or other
securities, except for this Agreement, the Warrant Agreement, the
Representative's Warrant Agreement, and as described in the
Prospectus. The Securities and all other securities issued or
issuable by the Company conform in all material respects to the
statements with respect thereto contained in the Registration
Statement and the Prospectus. All issued and outstanding
securities of the Company have been duly authorized and validly
issued and are fully paid and nonassessable; the holders thereof
are not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation of
the preemptive rights of any holders of any security of the
Company. The Securities to be sold by the Company hereunder,
under the Warrant Agreement, and under the Representative's
Warrant Agreement are not and will not be subject to any
preemptive or other similar rights of any stockholder, have been
duly authorized and, when issued, paid for and delivered in
accordance with their terms, will be validly issued, fully paid
and nonassessable and will conform in all material respects to
the description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such
holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities has been duly and
validly taken; and the certificates representing the Securities
are in due and proper form. The Representative's Warrants and
the Warrants constitute valid and binding obligations of the
Company to issue and sell, upon exercise thereof and payment
therefor, the number and type of securities of the Company called
for thereby (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting
enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as
rights to indemnity or contribution may be limited by applicable
law). Upon the issuance and delivery pursuant to this Agreement
of the Securities to be sold by the Company, the Company will
convey, against payment therefor as provided herein, to the
Underwriters and the Representative, respectively, good and
marketable title to the Securities free and clear of all liens
and other encumbrances;
(iv) the Registration Statement is effective under
the Act, and, if applicable, filing of all pricing information
has been timely made in the appropriate form under Rule 430A, and
no stop order suspending the use of the Preliminary Prospectus,
the Registration Statement or Prospectus or any part of any
thereof or suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been instituted or are pending or, to the best of such
counsel's knowledge, threatened or contemplated under the Act;
(v) each of the Preliminary Prospectus, the
Registration Statement, and the Prospectus and any amendments or
supplements thereto (other than the financial statements and
other financial and statistical data included therein as to which
no opinion need be rendered) comply as to form in all material
respects with the requirements of the Act and the Regulations.
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the
Company and the Representative and representatives of the
independent public accountants for the Company, at which
conferences the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus, and any amendments or
supplements thereto were discussed, and, although such counsel is
not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in
the Preliminary Prospectus, the Registration Statement and
Prospectus, and any amendments or supplements thereto, on the
basis of the foregoing, no facts have come to the attention of
such counsel which lead them to believe that either the
Registration Statement or any amendment thereto, at the time such
Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or supplement
thereto as of the date of such opinion contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading (it being understood that such counsel
need express no opinion with respect to the financial statements
and schedules and other financial and statistical data included
in the Preliminary Prospectus, the Registration Statement or
Prospectus, and any amendments or supplements thereto);
(vi) to the best of such counsel's knowledge
after reasonable investigation, (A) there are no agreements,
contracts or other documents required by the Act to be described
in the Registration Statement and the Prospectus and filed as
exhibits to the Registration Statement other than those described
in the Registration Statement and the Prospectus and filed as
exhibits thereto; (B) the descriptions in the Registration
Statement and the Prospectus and any supplement or amendment
thereto of contracts and other documents to which the Company is
a party or by which it is bound are accurate in all material
respects and fairly represent the information required to be
shown by Form SB-2; (C) there is not pending or threatened
against the Company any action, arbitration, suit, proceeding,
litigation, governmental or other proceeding (including, without
limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, pending or threatened
against the Company which (x) is required to be disclosed in the
Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are
accurately summarized in all material respects), (y) questions
the validity of the capital stock of the Company or this
Agreement, the Warrant Agreement, or the Representative's Warrant
Agreement, or of any action taken or to be taken by the Company
pursuant to or in connection with any of the foregoing; and (D)
there is no action, suit or proceeding pending or threatened
against the Company before any court or arbitrator or
governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which may result in
a material adverse change in the financial condition, business,
affairs, stockholders' equity, operations, properties, business
or results of operations of the Company, which could adversely
affect the present or prospective ability of the Company to
perform its obligations under this Agreement, the Warrant
Agreement, or the Representative's Warrant Agreement, or which in
any manner draws into question the validity or enforceability of
this Agreement, the Warrant Agreement or the Representative's
Warrant Agreement;
(vii) the Company has the corporate power and
authority to enter into each of this Agreement, the Warrant
Agreement, and the Representative's Warrant Agreement and to
consummate the transactions provided for therein; and each of
this Agreement, the Warrant Agreement, and the Representative's
Warrant Agreement has been duly authorized, executed and
delivered by the Company. Each of this Agreement, the Warrant
Agreement, and the Representative's Warrant Agreement, assuming
due authorization, execution and delivery by each other party
thereto, constitutes a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its
terms (except as the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting
enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as
rights to indemnity or contribution may be limited by applicable
law), and none of the Company's execution, delivery or
performance of this Agreement, the Warrant Agreement, and the
Representative's Warrant Agreement, the consummation by the
Company of the transactions contemplated herein or therein, or
the conduct of the Company's business as described in the
Registration Statement, the Prospectus, and any amendments or
supplements thereto conflicts with or results in any breach or
violation of any of the terms or provisions of, or constitutes a
default under, or result in the creation or imposition of any
lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever
upon, any property or assets (tangible or intangible) of the
Company pursuant to the terms of (A) the articles of
incorporation or by-laws of the Company, as amended, (B) any
license, contract, indenture, mortgage, deed of trust, voting
trust agreement, stockholders' agreement, note, loan or credit
agreement or any other agreement or instrument known to such
counsel to which the Company is a party or by which it is bound,
or (C) any federal, state or local statute, rule or regulation
applicable to the Company or any judgment, decree or order known
to such counsel of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or
properties;
(viii) no consent, approval, authorization or
order, and no filing with, any court, regulatory body, government
agency or other body (other than such as may be required under
Blue Sky laws, as to which no opinion need be rendered or under
federal securities laws, as to which no opinion need be rendered
pursuant to this subsection (viii), the Rules of the NASD and the
NASDAQ SmallCap Market) is required in connection with the
issuance of the Securities pursuant to the Prospectus, and the
Registration Statement, the performance of this Agreement, the
Warrant Agreement, and the Representative's Warrant Agreement,
and the transactions contemplated hereby and thereby;
(ix) to the best of such counsel's knowledge
after reasonable investigation, the properties and business of
the Company conform in all material respects to the description
thereof contained in the Registration Statement and the
Prospectus;
(x) to the best knowledge of such counsel, and
except as disclosed in Registration Statement and the Prospectus,
the Company is not in breach of, or in default under, any term or
provision of any license, contract, indenture, mortgage,
installment sale agreement, deed of trust, lease, voting trust
agreement, stockholders' agreement, note, loan or credit
agreement or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the
Company is bound or to which the property or assets (tangible or
intangible) of the Company is subject; and the Company is not in
violation of any term or provision of its articles of
incorporation or by-laws, as amended, and to the best of such
counsel's knowledge after reasonable investigation, not in
violation of any franchise, license, permit, judgment, decree,
order, statute, rule or regulation;
(xi) the statements in the Prospectus under
"Dividend Policy," "Description of Securities," and "Shares
Eligible for Future Sale" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of
statutes, licenses, rules or regulations or legal conclusions,
are correct in all material respects;
(xii) the Common Stock has been accepted for
listing on the NASDAQ SmallCap Market;
(xiii) to the best of such counsel's knowledge and
based upon a review of the outstanding securities and the
contracts furnished to such counsel by the Company, no person,
corporation, trust, partnership, association or other entity has
the right to include and/or register any securities of the
Company in the Registration Statement, require the Company to
file any registration statement or, if filed, to include any
security in such registration statement;
(xiv) assuming due execution by the parties
thereto other than the Company, each Lock-up Agreement is a
legal, valid and binding obligation of the party thereto,
enforceable against the party and any subsequent holder of the
securities subject thereto in accordance with its terms (except
as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law);
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws,
rules and regulations of the United States and the laws, rules
and regulations of the State of Arkansas, to the extent such
counsel deems proper and to the extent specified in such opinion,
if at all, upon an opinion or opinions (in form and substance
satisfactory to Underwriters' Counsel) of other counsel
acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper,
on certificates and written statements of responsible officers of
the Company and certificates or other written statements of
officers of departments of various jurisdictions having custody
of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel if
requested. The opinion of such counsel shall state that
knowledge shall not include the knowledge of a director or
officer of the Company who is affiliated with such firm in his or
her capacity as an officer or director of the Company. The
opinion of such counsel for the Company shall state that the
opinion of any such other counsel is in form satisfactory to such
counsel.
At each Option Closing Date, if any, the Underwriters
shall have received the favorable opinion of Waring Cox, counsel
to the Company, dated the Option Closing Date, addressed to the
Underwriters and in form and substance satisfactory to
Underwriters' Counsel confirming as of such Option Closing Date
the statements made by Waring Cox in its opinion delivered on the
Closing Date.
(e) On or prior to each of the Closing Date and the
Option Closing Date, if any, Underwriters' Counsel shall have
been furnished such documents, certificates and opinions as they
may reasonably require for the purpose of enabling them to review
or pass upon the matters referred to in subsection (c) of this
Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or
conditions of the Company or herein contained.
(f) Prior to each of the Closing Date and each Option
Closing Date, if any, (i) there shall have been no material
adverse change nor development involving a prospective change in
the condition, financial or otherwise, prospects, stockholders'
equity or the business activities of the Company, whether or not
in the ordinary course of business, from the latest dates as of
which such condition is set forth in the Registration Statement
and Prospectus; (ii) there shall have been no transaction, not in
the ordinary course of business, entered into by the Company,
from the latest date as of which the financial condition of the
Company is set forth in the Registration Statement and Prospectus
which is adverse to the Company; (iii) the Company shall not be
in default under any provision of any instrument relating to any
outstanding indebtedness which default has not been waived; (iv)
the Company shall not have issued any securities (other than the
Securities) or declared or paid any dividend or made any
distribution in respect of its capital stock of any class and
there has not been any change in the capital stock, or any
material increase in the debt (long or short term) or liabilities
or obligations of the Company (contingent or otherwise); (v) no
material amount of the assets of the Company shall have been
pledged or mortgaged, except as set forth in the Registration
Statement and Prospectus; (vi) no action, suit or proceeding, at
law or in equity, shall have been pending or threatened (or
circumstances giving rise to same) against the Company, or
affecting any of its respective properties or businesses before
or by any court or federal, state or foreign commission, board or
other administrative agency wherein an unfavorable decision,
ruling or finding may materially adversely affect the business,
operations, prospects or financial condition or income of the
Company, except as set forth in the Registration Statement and
Prospectus; and (vii) no stop order shall have been issued under
the Act and no proceedings therefor shall have been initiated,
threatened or contemplated by the Commission.
(g) At each of the Closing Date and each Option
Closing Date, if any, the Underwriters shall have received a
certificate of the Company signed on behalf of the Company by the
principal executive officer of the Company, dated the Closing
Date or Option Closing Date, as the case may be, to the effect
that such executive has carefully examined the Registration
Statement, the Prospectus and this Agreement, and that:
(i) The representations and warranties of the
Company in this Agreement are true and correct, as if made on and
as of the Closing Date or the Option Closing Date, as the case
may be, and the Company has complied with all agreements and
covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to
such Closing Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of
the Registration Statement or any part thereof has been issued,
and no proceedings for that purpose have been instituted or are
pending or, to the best of each of such person's knowledge after
due inquiry, are contemplated or threatened under the Act;
(iii) The Registration Statement and the
Prospectus and, if any, each amendment and each supplement
thereto, contain all statements and information required by the
Act to be included therein, and none of the Registration
Statement, the Prospectus nor any amendment or supplement thereto
includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading and
neither the Preliminary Prospectus or any supplement, as of their
respective dates, thereto included any untrue statement of a
material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading; and
(iv) Subsequent to the respective dates as of
which information is given in the Registration Statement and the
Prospectus, (a) the Company has not incurred up to and including
the Closing Date or the Option Closing Date, as the case may be,
other than in the ordinary course of its business, any material
liabilities or obligations, direct or contingent; (b) the Company
has not paid or declared any dividends or other distributions on
its capital stock; (c) the Company has not entered into any
transactions not in the ordinary course of business; (d) there
has not been any change in the capital stock or material increase
in long-term debt or any increase in the short-term borrowings
(other than any increase in the short-term borrowings in the
ordinary course of business) of the Company, (e) the Company has
not sustained any loss or damage to its property or assets,
whether or not insured, (f) there is no litigation which is
pending or threatened (or circumstances giving rise to same)
against the Company or any affiliated party of any of the
foregoing which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth, and (g)
there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in
this subsection (g) are to such documents as amended and
supplemented at the date of such certificate.
(h) By the Closing Date, the Underwriters will have
received clearance from the NASD as to the amount of compensation
allowable or payable to the Underwriters.
(i) At the time this Agreement is executed, the
Underwriters shall have received a letter, dated such date,
addressed to the Underwriters in form and substance satisfactory
in all respects (including the non-material nature of the changes
or decreases, if any, referred to in clause (iii) below) to the
Underwriters and Underwriters' Counsel, from Kemp:
(i) confirming that they are independent certified
public accountants with respect to the Company within the meaning
of the Act and the applicable Rules and Regulations;
(ii) stating that it is their opinion that the
financial statements and supporting schedules of the Company
included in the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of
the Act and the Regulations thereunder and that the
Representative may rely upon the opinion of Arthur Andersen with
respect to the financial statements and supporting schedules
included in the Registration Statement;
(iii) stating that, on the basis of a limited
review which included a reading of the latest available unaudited
interim financial statements of the Company (with an indication
of the date of the latest available unaudited interim financial
statements), a reading of the latest available minutes of the
stockholders and board of directors and the various committees of
the board of directors of the Company, consultations with
officers and other employees of the Company responsible for
financial and accounting matters and other specified procedures
and inquiries, nothing has come to their attention which would
lead them to believe that (A) the unaudited financial statements
and supporting schedules of the Company included in the
Registration Statement, if any, do not comply as to form in all
material respects with the applicable accounting requirements of
the Act and the Regulations or are not fairly presented in
conformity with generally accepted accounting principles applied
on a basis substantially consistent with that of the audited
financial statements of the Company included in the Registration
Statement, or (B) at a specified date not more than five (5) days
prior to the effective date of the Registration Statement, there
has been any change in the capital stock or material increase in
long-term debt of the Company, or any material decrease in the
stockholders' equity or net current assets or net assets of the
Company as compared with amounts shown in the _____________, 1997
balance sheet included in the Registration Statement, other than
as set forth in or contemplated by the Registration Statement,
or, if there was any change or decrease, setting forth the amount
of such change or decrease.
(iv) stating that they have compared specific
dollar amounts, numbers of shares, percentages of revenues and
earnings, statements and other financial information pertaining
to the Company set forth in the Prospectus in each case to the
extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records,
including work sheets, of the Company and excluding any questions
requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted
auditing standards) set forth in the letter and found them to be
in agreement; and
(v) statements as to such other material matters
incident to the transaction contemplated hereby as the
Representative may reasonably request.
(j) At the Closing Date and each Option Closing Date,
if any, the Underwriters shall have received from Kemp a letter,
dated as of the Closing Date or the Option Closing Date, as the
case may be, to the effect that they reaffirm that statements
made in the letter furnished pursuant to Subsection (i) of this
Section 6, except that the specified date referred to shall be a
date not more than five (5) days prior to Closing Date or the
Option Closing Date, as the case may be, and, if the Company has
elected to rely on Rule 430A of the Rules and Regulations, to the
further effect that they have carried out procedures as specified
in clause (iv) of Subsection (i) of this Section 6 with respect
to certain amounts, percentages and financial information as
specified by the Representative and deemed to be a part of the
Registration Statement pursuant to Rule 430A(b) and have found
such amounts, percentages and financial information to be in
agreement with the records specified in such clause (iv).
(k) On each of Closing Date and Option Closing Date,
if any, there shall have been duly tendered to the Representative
for the several Underwriters' accounts the appropriate number of
Securities.
(l) No order suspending the sale of the Securities in
any jurisdiction designated by the Representative pursuant to
subsection (e) of Section 4 hereof shall have been issued on
either the Closing Date or the Option Closing Date, if any, and
no proceedings for that purpose shall have been instituted or
shall be contemplated.
(m) On or before the Closing Date, the Company shall
have executed and delivered to the Representative, (i) the
Representative's Warrant Agreement, substantially in the form
filed as Exhibit 4(b), to the Registration Statement, in final
form and substance satisfactory to the Representative, and (ii)
the Representative's Warrants in such denominations and to such
designees as shall have been provided to the Company.
(n) On or before Closing Date, the Common Stock shall
have been duly approved for listing on the NASDAQ SmallCap
Market.
(o) [On or before Closing Date, there shall have been
delivered to the Representative all of the Lock-up Agreements in
final form and substance satisfactory to Underwriters' Counsel.]
If any condition to the Underwriters' obligations
hereunder to be fulfilled prior to or at the Closing Date or the
relevant Option Closing Date, as the case may be, is not so
fulfilled, the Representative may terminate this Agreement or, if
the Representative so elect, they may waive any such conditions
which have not been fulfilled or extend the time for their
fulfillment.
7. Indemnification.
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(a) The Company agrees to indemnify and hold harmless
each of the Underwriters (for purposes of this Section 7
"Underwriters" shall include the officers, directors, partners,
employees, agents and counsel of the Underwriters, including
specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof), and each person,
if any, who controls the Underwriter ("controlling person")
within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act, from and against any and all loss, liability,
claim, damage, and expense whatsoever (including, but not limited
to, reasonable attorneys' fees and any and all reasonable expense
whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim
whatsoever and any and all amounts paid in settlement of any
claim or litigation provided that the indemnified persons may not
agree to any such settlement without the prior written consent of
the Company), as and when incurred, arising out of, based upon or
in connection with (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any Preliminary
Prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented); or (B) in any application
or other document or communication (in this Section 7
collectively called "application") executed by or on behalf of
the Company or based upon written information furnished by or on
behalf of the Company in any jurisdiction in order to qualify the
Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, the NASDAQ
SmallCap Market; or any omission or alleged omission to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading (in the case of the
Prospectus, in the light of the circumstances under which they
were made), unless such statement or omission was made in
reliance upon and in conformity with written information
furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary
Prospectus, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, or in any application,
as the case may be; or (ii) any breach of any representation,
warranty, covenant or agreement of the Company contained in this
Agreement. The indemnity agreement in this subsection (a) shall
be in addition to any liability which the Company may have at
common law or otherwise.
(b) Each of the Underwriters agrees severally, but not
jointly, to indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the Registration
Statement, and each other person, if any, who controls the
Company, within the meaning of the Act, to the same extent as the
foregoing indemnity from the Company to the Underwriters but only
with respect to statements or omissions, if any, made in any
Preliminary Prospectus, the Registration Statement or Prospectus
or any amendment thereof or supplement thereto or in any
application made in reliance upon, and in strict conformity with,
written information furnished to the Company with respect to any
Underwriter by such Underwriter or the Representative expressly
for use in such Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment thereof or supplement
thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or Prospectus
directly relating to the transactions effected by the
Underwriters in connection with this Offering. The Company
acknowledges that the statements with respect to the public
offering of the Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus
have been furnished by the Underwriters expressly for use therein
and constitute the only information furnished in writing by or on
behalf of the Underwriters or the Representative for inclusion in
the Prospectus.
(c) Promptly after receipt by an indemnified party
under this Section 7 of notice of the commencement of any action,
suit or proceeding, such indemnified party shall, if a claim in
respect thereof is to be made against one or more indemnifying
parties under this Section 7, notify each party against whom
indemnification is to be sought in writing of the commencement
thereof (but the failure to so notify an indemnifying party shall
not relieve it from any liability which it may have otherwise or
which it may have under this Section 7, except to the extent that
it has been prejudiced in any material respect by such failure).
In case any such action is brought against any indemnified party,
and it notifies an indemnifying party or parties of the
commencement thereof, the indemnifying party or parties will be
entitled to participate therein, and to the extent it may elect
by written notice delivered to the indemnified party promptly
after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right
to employ its or their own counsel in any such case, but the fees
and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such
counsel shall have been authorized in writing by the indemnifying
parties in connection with the defense of such action at the
expense of the indemnifying party, (ii) the indemnifying parties
shall not have employed counsel reasonably satisfactory to such
indemnified party to have charge of the defense of such action
within a reasonable time after notice of commencement of the
action, or (iii) such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it
or them which are different from or additional to those available
to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or
parties), in any of which events the reasonable fees and expenses
of one additional counsel shall be borne by the indemnifying
parties. In no event shall the indemnifying parties be liable
for fees and expenses of more than one counsel (in addition to
any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate
but similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances. Anything
in this Section 7 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any
claim or action effected without its written consent; provided,
however, that such consent was not unreasonably withheld.
(d) In order to provide for just and equitable
contribution in any case in which (i) an indemnified party makes
claim for indemnification pursuant to this Section 7, but it is
judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time
to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding
the fact that the express provisions of this Section 7 provide
for indemnification in such case, or (ii) contribution under the
Act may be required on the part of any indemnified party, then
each indemnifying party shall contribute to the amount paid as a
result of such losses, claims, damages, expenses or liabilities
(or actions in respect thereof) (A) in such proportion as is
appropriate to reflect the relative benefits received by each of
the contributing parties, on the one hand, and the party to be
indemnified on the other hand, from the offering of the
Securities or (B) if the allocation provided by clause (A) above
is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to
in clause (i) above but also the relative fault of each of the
contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable
considerations. In any case where the Company is a contributing
party and the Underwriters are the indemnified party, the
relative benefits received by the Company on the one hand, and
the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the
Securities (before deducting expenses other than underwriting
discounts and commissions) bear to the total underwriting
discounts received by the Underwriters hereunder, in each case as
set forth in the table on the Cover Page of the Prospectus.
Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or
by the Underwriters, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages,
expenses or liabilities (or actions in respect thereof) referred
to above in this subdivision (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this
subdivision (d) the Underwriters shall not be required to
contribute any amount in excess of the underwriting discount
applicable to the Securities purchased by the Underwriters
hereunder. No person guilty of fraudulent misrepresentation
(within the meaning of Section 12(f) of the Act) shall be
entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section
7, each person, if any, who controls the Company within the
meaning of the Act, each officer of the Company who has signed
the Registration Statement, and each director of the Company
shall have the same rights to contribution as the Company,
subject in each case to this subparagraph (d). Any party
entitled to contribution will, promptly after receipt of notice
of commencement of any action, suit or proceeding against such
party in respect to which a claim for contribution may be made
against another party or parties under this subparagraph (d),
notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall
not relieve the party or parties from whom contribution may be
sought from any obligation it or they may have hereunder or
otherwise than under this subparagraph (d), or to the extent that
such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in
addition to any liabilities which any indemnifying party may have
at common law or otherwise.
8. Representations and Agreements to Survive Delivery.
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All representations, warranties and agreements
contained in this Agreement or contained in certificates of
officers of the Company submitted pursuant hereto, shall be
deemed to be representations, warranties and agreements of the
Company at the Closing Date and the Option Closing Date, as the
case may be, and such representations, warranties and agreements
of the Company and the respective indemnity and contribution
agreements contained in Section 7 hereof shall remain operative
and in full force and effect regardless of any investigation made
by or on behalf of any Underwriter, the Company, any controlling
person of either the Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and
delivery of the Securities to the Underwriters and the
Representative, as the case may be.
9. Effective Date.
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(a) This Agreement shall become effective at 5:00
p.m., New York City time, on the date hereof. For purposes of
this Section 9, the Securities to be purchased hereunder shall be
deemed to have been so released upon the earlier of dispatch by
the Representative of telegrams to securities dealers releasing
such shares for offering or the release by the Representative for
publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. Termination.
------------
(a) Subject to subsection (b) of this Section 10, the
Representative shall have the right to terminate this Agreement,
if between the date of this Agreement and the Closing Date or the
Option Closing Date, as the case may be, (i) if any domestic or
international event or act or occurrence has materially
disrupted, or in the Representative's reasonable opinion will in
the immediate future materially disrupt the financial markets; or
(ii) any material adverse change in the financial markets shall
have occurred; or (iii) if trading on the New York Stock
Exchange, the NASDAQ SmallCap Market, or in the over-the-counter
market shall have been suspended, or minimum or maximum prices
for trading shall have been fixed, or maximum ranges for prices
for securities shall have been required on the over-the-counter
market by the NASD or by order of the Commission or any other
government authority having jurisdiction; or (iv) if the United
States shall have become involved in a war or major hostilities,
or if there shall have been an escalation in an existing war or
major hostilities or a national emergency shall have been
declared in the United States; or (v) if a banking moratorium has
been declared by a state or federal authority; or (vi) if the
Company shall have sustained a loss material or substantial to
the Company by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act which, whether
or not such loss shall have been insured, will, in the
Representative's opinion, make it inadvisable to proceed with the
delivery of the Securities; or (viii) if there shall have been
such a material adverse change in the prospects or conditions of
the Company, or such material adverse change in the general
market, political or economic conditions, in the United States or
elsewhere as in the Representative's judgment would make it
inadvisable to proceed with the offering, sale and/or delivery of
the Securities.
(b) If this Agreement is terminated by the
Representative in accordance with any of the provisions of
Section 6, Section 10(a) or Section 11, the Company shall
promptly reimburse and indemnify the Underwriters pursuant to
Section 5(b) hereof. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any
termination of this Agreement (including, without limitation,
pursuant to Sections 6, 10, 11 and 12 hereof), and whether or not
this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such
election or termination or failure to carry out the terms of this
Agreement or any part hereof.
11. Substitution of the Underwriters.
---------------------------------
If one or more of the Underwriters shall fail
(otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 6,
Section 10 or Section 12 hereof) to purchase the Securities which
it or they are obligated to purchase on such date under this
Agreement (the "Defaulted Securities"), the Representative shall
have the right, within 24 hours thereafter, to make arrangement
for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the
Defaulted Securities in such amounts as may be agreed upon and
upon the terms herein set forth. If, however, the Representative
shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not
exceed 10% of the total number of Firm Securities to be purchased
on such date, the non-defaulting Underwriters shall be obligated
to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10%
of the total number of Firm Securities to be purchased on such
date, this Agreement shall terminate without liability on the
part of any nondefaulting Underwriters.
No action taken pursuant to this Section shall relieve
any defaulting Underwriter from liability in respect of any
default by such Underwriter under this Agreement.
In the event of any such default which does not result
in a termination of this Agreement, the Representative shall have
the right to postpone the Closing Date for a period not exceeding
seven days in order to effect any required changes in the
Registration Statement or Prospectus or in any other documents or
arrangements.
12. Default by the Company.
-----------------------
If the Company shall fail at the Closing Date or any
Option Closing Date, as applicable, to sell and deliver the
number of Securities which it is obligated to sell hereunder on
such date, then this Agreement shall terminate (or, if such
default shall occur with respect to any Option Securities to be
purchased on an Option Closing Date, the Underwriters may at the
Representative's option, by notice from the Representative to the
Company, terminate the Underwriters' obligation to purchase
Option Securities from the Company on such date) without any
liability on the part of any non-defaulting party other than
pursuant to Section 5, Section 7 and Section 10 hereof. No
action taken pursuant to this Section shall relieve the Company
from liability, if any, in respect of such default.
13. Notices.
--------
All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and
shall be deemed to have been duly given if mailed or transmitted
by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representative, c/o
National Securities Corporation, 1001 Fourth Avenue, Suite 2200,
Seattle, Washington 98154, Attention: Steven A. Rothstein, with a
copy, which shall not constitute notice, to Camhy Karlinsky &
Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019,
Attention: Alan I. Annex, Esq. Notices to the Company shall be
directed to the Company at Thermoenergy Corporation, 323 Center
Street, Suite 1300, Little Rock, Arkansas 72201, with a copy,
which shall not constitute notice, to Waring Cox, PLC, 50 North
Front Street, Suite 1300, Memphis, Tennessee 38103, Attention:
Jay Lindy.
14. Parties.
--------
This Agreement shall inure solely to the benefit of and
shall be binding upon the Underwriters, the Company and the
controlling persons, directors and officers referred to in
Section 7 hereof and their respective successors, legal
representatives and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any
provisions herein contained. No purchaser of Securities from any
Underwriter shall be deemed to be a successor by reason merely of
such purchase.
15. Construction.
-------------
This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York
without giving effect to the choice of law or conflict of laws
principles.
16. Counterparts.
-------------
This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original,
and all of which taken together shall be deemed to be one and the
same instrument.
17. Entire Agreement; Amendments.
-----------------------------
This Agreement, the Warrant Agreement, and the
Representative's Warrant Agreement constitute the entire
agreement of the parties hereto and supersede all prior written
or oral agreements, understandings and negotiations with respect
to the subject matter hereof. This Agreement may not be amended
except in a writing, signed by the Representative and the
Company.
If the foregoing correctly sets forth the understanding
between the Underwriters and the Company, please so indicate in
the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among us.
Very truly yours,
THERMOENERGY CORPORATION
By:
-------------------------
Name:
Title:
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
NATIONAL SECURITIES CORPORATION
By:
-----------------------------
Name: Steven A. Rothstein
Title: Chairman
For itself and as Representative of the Underwriters named in
Schedule A hereto.
SCHEDULE A
<TABLE>
<CAPTION>
Number of Shares of Number of Series 1 Number of Series 2
Common Stock to be Warrants to be Warrants to be
Name of Underwriter Purchased Purchased Purchased
- ------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
National Securities
Corporation
TOTAL ..... 1,100,000 1,100,000 1,100,000
</TABLE>
EXHIBIT 4.1
(FORM OF STOCK CERTIFICATE-FRONT SIDE)
Incorporated Under the Laws Series A Common Stock
of the State of Arkansas
NUMBER SHARES
TEB [LOGO] CUSIP
THERMOENERGY CORPORATION
THIS CERTIFICATE IS TRANSFERABLE
IN NEW YORK, NY AND RIDGEFIELD
PARK, NJ SEE REVERSE FOR CERTAIN
DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE SERIES A COMMON
STOCK, PAR VALUE $.001 PER SHARE, OF ThermoEnergy Corporation
(the "Corporation") transferable on the books of the Corporation
by the holder hereof, in person or by duly authorized attorney,
upon surrender of this certificate properly endorsed. This
certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the
facsimile signatures of its duly authorized officers.
Dated:
P. L. Montesi
President Countersigned and Registered:
ChaseMellon Shareholder
Services, L.L.C.
Transfer Agent
and Registrar
By
Authorized
Signature
{SEAL}
Dennis Cossey
Secretary
<PAGE>
[FORM OF STOCK CERTIFICATE-REVERSE SIDE]
ThermoEnergy Corporation
The Corporation will furnish the shareholders with
designations, relative rights, preferences and limitations
applicable to each class and the variation in rights,
preferences, and limitations determined for each series (and the
authority of the Board of Directors to determine variations for
future series) on request in writing and without charge.
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or
regulations:
TEN COM-as tenants in common UNIF TRANSF TO MIN ACT
TEN ENT-as tenants by the entirety
JT TEN-as joint tenants with right ______Custodian____ Minor
survivorship and not as under Uniform Transfers
tenants in common to Minors Act
______________
State
Additional abbreviations may also be used though not in the
above list.
For value received, _________ hereby sell, assign and transfer
unto
Please insert social security or other
identifying number of assignee
[ ]
_________________________________________________________________
_________________________________________________________________
Please print or typewrite name and address including postal zip
code of assignee.
_________________________________________________________________
_________________________________________________________________
Shares of the capital stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint
_______________ Attorney to transfer the said stock on the books
of the within-named Corporation with full power of substitution
in the premises.
Dated, ______________
NOTICE: X____________________________
THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN X____________________________
UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
SIGNATURE(S) GUARANTEED BY:
EXHIBIT 4.2
(FORM OF STOCK CERTIFICATE-FRONT SIDE)
Incorporated Under the Laws Series B Common Stock
of the State of Arkansas
NUMBER SHARES
TEB [LOGO]
THERMOENERGY CORPORATION
THIS CERTIFICATE IS TRANSFERABLE CUSIP
IN DALLAS, TEXAS AND NEW YORK,
NEW YORK SEE REVERSE FOR CERTAIN
DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE SERIES B COMMON
STOCK, PAR VALUE $.001 PER SHARE, OF ThermoEnergy Corporation
(the "Corporation") transferable on the books of the Corporation
by the holder hereof, in person or by duly authorized attorney,
upon surrender of this certificate properly endorsed. This
certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the
facsimile signatures of its duly authorized officers.
Dated:
P. L. MONTESI
President Countersigned and Registered:
ChaseMellon Shareholder
Services, L.L.C.
Transfer Agent
and Registrar
By
Authorized
Signature
THERMOENERGY CORPORATION
CORPORATE SEAL
1-19-88
DENNIS COSSEY
Secretary
<PAGE>
[FORM OF STOCK CERTIFICATE-REVERSE SIDE]
RESTRICTIVE LEGEND
Series B Shares are convertible to Series A Shares commencing
twelve (12) months after the effective date of a registration
statement filed with the United States Securities and Exchange
Commission resulting in gross proceeds to the Corporation of
$5,000,000 or more and the average closing bid price of the
Series A Shares 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 Corporation's Series A Shares twelve (12) months
from the effective date does not meet the "trading test", then no
more than 20% of the Series B Shares may be converted to Series A
Shares, on a pro rata basis, in any one quarterly calendar
period, or 100% of the Series B Shares shall be converted to
Series A Shares when the "trading test" is met, whichever first
occurs and all shares will be transferable. At such time as all
Series B Shares have been converted to Series A Shares, the
separate class designations shall be removed as a matter of law.
ThermoEnergy Corporation
The Corporation will furnish the shareholders with
designations, relative rights, preferences and limitations
applicable to each class and the variation in rights,
preferences, and limitations determined for each series (and the
authority of the Board of Directors to determine variations for
future series) on request in writing and without charge.
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or
regulations:
TEN COM-as tenants in common UNIF TRANSF TO MIN ACT
TEN ENT-as tenants by the entirety
JT TEN-as joint tenants with right _____Custodian_____ Minor
survivorship and not as under Uniform Transfers
tenants in common to Minors Act
__________
State
Additional abbreviations may also be used though not in the
above list.
For value received, _________ hereby sell, assign and transfer
unto
Please insert social security or other
identifying number of assignee
[ ]
_________________________________________________________________
_________________________________________________________________
Please print or typewrite name and address including postal zip
code of assignee.
_________________________________________________________________
_________________________________________________________________
Shares of the capital stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint
_______________ Attorney to transfer the said stock on the books
of the within-named Corporation with full power of substitution
in the premises.
Dated, ______________
NOTICE: X____________________________
THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN X____________________________
UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
SIGNATURE(S) GUARANTEED BY:
EXHIBIT 4.3
No. W VOID AFTER August 2002
------- ---,
WARRANTS
-------
REDEEMABLE [Series 1] [Series 2] WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
THERMOENERGY CORPORATION
CUSIP #
---------
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or its registered assigns (the "Registered Holder") is the owner
of the number of Redeemable Warrants (the "Warrants") specified
above. Each Warrant initially entitles the Registered Holder to
purchase, subject to the terms and conditions set forth in this
Certificate and the Warrant Agreement (as hereinafter defined),
one fully paid and nonassessable share of Common Stock, no par
value, of ThermoEnergy Corporation, an Arkansas corporation (the
"Company"), at any time between August , 1997 (the "Initial
Warrant Exercise Date"), and the Expiration Date (as hereinafter
defined) upon the presentation and surrender of this Warrant
Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of [ChaseMellon Shareholder
Services,] as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $ per share, subject to
adjustment (the "Exercise Price'), in lawful money of the United
States of America in cash or by check made payable to the Warrant
Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby
are issued pursuant to and are subject in all respects to the
terms and conditions set forth in the Warrant Agreement (the
"Warrant Agreement"), dated August , 1997, by and between the
Company, National Securities Corporation ("National") and the
Warrant Agent.
In the event of certain contingencies provided for in the
Warrant Agreement, the Exercise Price and the number of shares of
Common Stock subject to purchase upon the exercise of each
Warrant represented hereby are subject to modification or
adjustment.
Each Warrant represented hereby is exercisable at the option
of the Registered Holder, but no fractional interests will be
issued. In the case of the exercise of less than all the
Warrants represented hereby, the Company shall cancel this
Warrant Certificate upon the surrender hereof and shall execute
and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the
balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York
time) on the date which is five (5) years after the Initial
Warrant Exercise Date. If each such date shall in the State of
New York be a holiday or a day on which the banks are authorized
to close, then the Expiration Date shall mean 5:00 p.m. (New York
time) the next following day which in the State of New York is
not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities
pursuant to the exercise of this Warrant unless a registration
statement under the Securities Act of 1933, as amended (the
"Act'), with respect to such securities is effective or an
exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the
Federal securities laws, use its best efforts to cause the same
to become effective, use its best efforts to keep such
registration statement current, if required under the Act, while
any of the Warrants are outstanding, and deliver a prospectus
which complies with Section 10(a)(3) of the Act to the Registered
Holder exercising this Warrant. This Warrant shall not be
exercisable by a Registered Holder in any state where such
exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the
Warrant Agent, for a new Warrant Certificate or Warrant
Certificates of like tenor representing an equal aggregate number
of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment and
payment of any tax or other charge imposed in connection
therewith or incident thereto, for registration of transfer of
this Warrant Certificate at such office, a new Warrant
Certificate or Warrant Certificates representing an equal
aggregate number of Warrants will be issued to the transferee in
exchange therefor, subject to the limitations provided in the
Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a
stockholder of the Company, including, without limitation, the
right to vote or to receive dividends or other distributions, and
shall not be entitled to receive any notice of any proceedings of
the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this
Warrant may be redeemed at the option of the Company, at a
redemption price of $.05 per Warrant, at any time commencing
after August , 1998, provided that the average closing bid
price for the Common Stock as reported by the Nasdaq SmallCap
Market, if the Common Stock is then traded on the Nasdaq SmallCap
Market (or the average closing sale price, if the Common Stock is
then traded on the Nasdaq National Market or a national
securities exchange), shall have equalled or exceeded $ per
share for any twenty (20) trading days within a period of thirty
(30) consecutive trading days ending on the fifth trading day
prior to the Notice of Redemption, as defined below (subject to
adjustment in the event of any stock splits or other similar
events) and National has given its prior written consent to such
redemption. Notice of redemption (the "Notice of Redemption")
shall be given not later than the thirtieth day before the date
fixed for redemption, or as provided in the Warrant Agreement.
On and after the date fixed for redemption, the Registered Holder
shall have no rights with respect to the Warrants except to
receive the $.05 per Warrant upon surrender of this Warrant
Certificate.
Upon certain circumstances, National may be entitled to
receive an aggregate of five percent (5%) of the Exercise Price
of the Warrants represented hereby, if it is engaged as a Warrant
solicitation agent by the Company.
Prior to due presentment for registration of transfer
hereof, the Company and the Warrant Agent may deem and treat the
Registered Holder as the absolute owner hereof and of each
Warrant represented hereby (notwithstanding any notations of
ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all
purposes and shall not be affected by any notice to the contrary,
except as provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed
in accordance with the laws of the State of California without
giving effect to conflicts of laws.
This Warrant Certificate is not valid unless countersigned
by the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile by two
of its officers thereunto duly authorized and a facsimile of its
corporate seal to be imprinted hereon.
Dated: August , 1997
[SEAL] THERMOENERGY CORPORATION
By:
--------------------------
Name: P.L. Montesi
Title: President
By:
---------------------------
Dennis Cossey
COUNTERSIGNED:
CHASEMELLON SHAREHOLDER SERVICES
as Warrant Agent
By:
-----------------------------
Authorized Officer
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects
to exercise Warrants represented by this Warrant
Certificate, and to purchase the securities issuable upon the
exercise of such Warrants, and requests that certificates for
such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
-------------------------------------
-------------------------------------
-------------------------------------
(please print or type name and address)
and be delivered to
-------------------------------------
-------------------------------------
-------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants
evidenced by this Warrant Certificate, that a new Warrant
Certificate for the balance of such Warrants be registered in the
name of, and delivered to, the Registered Holder at the address
stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING
1. The exercise of this Warrant was solicited by:
-------------------------------------. [ ]
2. The exercise of this Warrant was not solicited. [ ]
Dated:
----------------------------
------------------------------
------------------------------
Address
------------------------------
Social Security or Taxpayer
Identification Number
------------------------------
Signature Guaranteed
------------------------------
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, , hereby sells,
assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
--------------------------------
--------------------------------
--------------------------------
--------------------------------
(please print or type name and address)
of the Warrants represented by this
Warrant Certificate, and hereby irrevocably constitutes and
appoints Attorney to transfer this Warrant
Certificate on the books of the Company, with full power of
substitution in the premises.
Dated:
---------------------
----------------------------
Signatured Guaranteed
----------------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST
CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
EXHIBIT 4.4
[FORM OF REPRESENTATIVE'S WARRANT CERTIFICATE]
THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS CERTIFICATE AND
THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT
APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER
SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY
SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S WARRANT
REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH
THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, August , 2002
Representative's Warrant No.
____ Shares of Common Stock and/or ____ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that , or
registered assigns, is the registered holder of Warrants to
purchase initially, at any time from August ___, 1998 until 5:30
p.m., New York time on August ___, 2002 ("Expiration Date"), up
to ____ shares of Common Stock and/or ____ Series 1 Warrants
and/or ____ Series 2 Warrants at the initial exercise price,
subject to adjustment in certain events, of $____ [120% of
initial offering price per share] per share of Common Stock and
$___ per Warrant (the "Exercise Price") upon surrender of this
Representative's Warrant Certificate and payment of the Exercise
Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Representative's Warrant
Agreement dated as of August___, 1997 between the Company and
National Securities Corporation (the "Warrant Agreement").
Payment of the Exercise Price shall be made by certified or
official bank check in New York Clearing House funds payable to
the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time,
on the Expiration Date, at which time all Representative's
Warrant evidenced hereby, unless exercised prior thereto, shall
thereafter be void.
The Representative's Warrant evidenced by this Warrant
Certificate are part of a duly authorized issue of
Representative's Warrants issued pursuant to the Warrant
Agreement, which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of
rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning
the registered holders or registered holder) of the
Representative's Warrant.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of
the Company's securities issuable thereupon may, subject to
certain conditions, be adjusted. In such event, the Company
will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and
the number and/or type of securities issuable upon the exercise
of the Representative's Warrant; provided, however, that the
failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the
rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new
Warrant Certificate or Warrant Certificates of like tenor and
evidencing in the aggregate a like number of Representative's
Warrant shall be issued to the transferee(s) in exchange for this
Warrant Certificate, subject to the limitations provided herein
and in the Warrant Agreement, without any charge except for any
tax or other governmental charge imposed in connection with such
transfer.
Upon the exercise of less than all of the Representative's
Warrant evidenced by this Certificate, the Company shall
forthwith issue to the holder hereof a new Warrant Certificate
representing such numbered unexercised Representative's Warrant.
The Company may deem and treat the registered holder(s)
hereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing
hereon made by anyone), for the purpose of any exercise hereof,
and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any
notice to the contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them
in the Warrant Agreement.
This Warrant Certificate does not entitle any holder thereof
to any of the rights of a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of August ____, 1997
ATTEST: THERMOENERGY CORPORATION
- -------------------- By:
Secretary ------------------------
Name:
Title:
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase
____ shares of Common Stock and/or ____ Series 1 Warrants and/or
____ Series 2 Warrants and herewith tenders in payment for such
securities a certified or official bank check payable in New York
Clearing House Funds to the order of ThermoEnergy Corporation
(the "Company") in the amount of $_____, all in accordance with
the terms of Section 4 of the Representative's Warrant Agreement
dated as of August ___, 1997 between the Company and National
Securities Corporation. [Add cashless exercise provision.] The
undersigned requests that a certificate for such securities be
registered in the name of ______________________________, whose
address is
______________________________________________________________________________
and that such certificate be delivered to ,
whose address is
, and if said number of shares shall not be
all the shares purchasable hereunder, that a new Warrant
Certificate for the balance of the shares purchasable under the
within Warrant Certificate be registered in the name of the
undesigned warrantholder or his assignee as below indicated and
delivered to the address stated below.
Dated:
Signature:
----------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
Address:
------------------------
------------------------
(Insert Social Security or Other
Identifying Number of Holder)
Signature Guaranteed:
-----------------------------------------
(Signature must be guaranteed by a bank savings and loan
association, stockbroker, or credit union with membership in an
approved signature guaranty Medallion Program pursuant to
Securities Exchange Act Rule 17Ad-15.) <PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED, hereby sells, assigns and
transfers unto [NAME OF TRANSFEREE] this Warrant Certificate,
together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint
Attorney, to transfer the within Warrant Certificate on the books
of the within-named Company, with full power of substitution.
Dated:
--------------
Signature:
---------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
Address:
-----------------------
-----------------------
-------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
Signature Guaranteed:
-----------------------------------------
(Signature must be guaranteed by a bank savings and loan
association, stockbroker, or credit union with membership in an
approved signature guaranty Medallion Program pursuant to
Securities Exchange Act Rule 17Ad-15.)
EXHIBIT 10.23
THERMOENERGY CORPORATION
AND
CHASEMELLON SHAREHOLDER SERVICES
AND
NATIONAL SECURITIES CORPORATION
---------------------
WARRANT AGREEMENT
Dated as of August , 1996<PAGE>
AGREEMENT, dated this
day of August, 1997, among
THERMOENERGY CORPORATION, an Arkansas corporation (the
"Company"), CHASEMELLON SHAREHOLDER SERVICES, a New York banking
corporation, as Warrant Agent (the "Warrant Agent"), and NATIONAL
SECURITIES CORPORATION, its successors and assigns ("National" or
the "Representative").
W I T N E S S E T H:
WHEREAS, in connection with (i) the Company's offering to
the public of 1,100,000 shares of Common Stock (as defined in
Section 1), Series 1 redeemable common stock purchase warrants
(the "Series 1 Warrants"), each to purchase one share of Common
Stock and 1,100,000 Series 2 Redeemable Common Stock Purchase
Warrants (the "Series 2 Warrants"), each to purchase 1 share of
Common Stock. The Series 1 Warrants and the Series 2 Warrants
are sometimes referred to herein collectively as (the "Warrants")
and; (ii) the over-allotment option to purchase up to an
additional 165,000 shares of Common Stock, and/or 165,000 Series
1 Warrants, and/or 165,000 Series 2 Warrants, (the "Over-allotment Option");
and (iii) the sale to National of warrants
(the "Representative's Warrants") to purchase up to 1,465,000
shares of Common Stock and/or 160,000 Warrants, the Company will
issue up to 1,465,000 Series 1 Warrants and 1,465,000 Series 2
Warrants (subject to increase as provided in the Representative's
Warrant Agreement); and
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so
act, in connection with the issuance, registration, transfer,
exchange and redemption of the Warrants, the issuance of
certificates representing the Warrants, the exercise of the
Warrants and the rights of the holders thereof.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth and for the purpose of
defining the terms and provisions of the Warrants and the
certificates representing the Warrants and the respective rights
and obligations thereunder of the Company, National, the holders
of certificates representing the Warrants and the Warrant Agent,
the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following
terms shall have the following meanings, unless the context shall
otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as
amended.
(b) "Common Stock" shall mean the authorized stock of
the Company of any class, whether now or hereafter authorized,
which has the right to participate in the voting and in the
distribution of earnings and assets of the Company without limit
as to amount or percentage which at the date hereof consists of
10,000,000 shares of Common Stock, no par value per share.
(c) "Commission" shall mean the Securities and
Exchange Commission.
(d) "Corporate Office" shall mean the office of the
Warrant Agent (or its successor) at which at any particular time
its business in New York, New York, shall be administered, which
office is located on the date hereof c/o American Stock Transfer
& Trust Company, 40 Wall Street, New York, New York 10005.
(e) "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
(f) "Exercise Date" shall mean, subject to the
provisions of Section 5(b) hereof, as to any Warrant, the date on
which the Warrant Agent shall have received both (i) the Warrant
Certificate representing such Warrant, with the exercise form
thereon duly executed by the Registered Holder hereof or his
attorney duly authorized in writing, and (ii) payment in cash or
by official bank or certified check made payable to the Warrant
Agent for the account of the Company, of the amount in lawful
money of the United States of America equal to the applicable
Exercise Price (as hereinafter defined) in good funds.
(g) "Exercise Price" shall mean, subject to
modification and adjustment as provided in Section 8, $ per
share and further subject to the Company's right, in its sole
discretion, to decrease the Exercise Price for a period of not
less than 30 days on not less than 30 days' prior written notice
to the Registered Holders and National.
(h) "Initial Warrant Exercise Date" shall mean August
, 1997.
(i) "Initial Warrant Redemption Date" shall mean
August , 1998.
(j) "Market Price" shall mean the last reported sale
price, or, in case no such reported sale takes place on such day,
the average of the last reported sales prices for the last three
(3) trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed
or admitted to trading or by the Nasdaq Stock Market, or, if the
Common Stock is not listed or admitted to trading on any national
securities exchange or quoted by the Nasdaq, the average closing
bid price as furnished by the Nasdaq through Nasdaq or similar
organization if Nasdaq is no longer reporting such information,
or if the Common Stock is not quoted on Nasdaq, as determined in
good faith (using customary valuation methods) by resolution of
the members of the Board of Directors of the Company, based on
the best information available to it.
(k) "Nasdaq" shall mean the National Association of
Securities Dealers, Inc.
(l) "Nasdaq" shall mean the Nasdaq Stock Market.
(m) "Redemption Date" shall mean the date (which may
not occur before the Initial Warrant Redemption Date) fixed for
the redemption of the Warrants in accordance with the terms
hereof.
(n) "Redemption Price" shall mean the price at which
the Company may, at its option, redeem the Warrants, in
accordance with the terms hereof, which price shall be $0.05 per
Warrant, subject to adjustment from time to time pursuant to the
provisions of Section 9 hereof.
(o) "Registered Holder" shall mean the person in whose
name any certificate representing the Warrants shall be
registered on the books maintained by the Warrant Agent pursuant
to Section 6.
(p) "Transfer Agent" shall mean ChaseMellon
Shareholder Services, or its authorized successor.
(q) "Underwriting Agreement" shall mean the
underwriting agreement dated August , 1997 between the Company
and the several underwriters listed therein relating to the
purchase for resale to the public of the 1,600,000 shares of
Common Stock and 1,600,000 Warrants.
(r) "Representative's Warrant Agreement" shall mean
the agreement dated as of August , 1997 between the Company
and National relating to and governing the terms and provisions
of the Representative's Warrants.
(s) "Warrant Certificate" shall mean a certificate
representing each of the Warrants substantially in the form
annexed hereto as Exhibit A.
(t) "Warrant Expiration Date" shall mean, unless the
Warrants are redeemed as provided in Section 9 hereof prior to
such date, 5:00 p.m. (New York time), on August , 2002, or the
Redemption Date as defined herein, whichever date is earlier;
provided that if such date shall in the State of New York be a
holiday or a day on which banks are authorized to close, then
5:00 p.m. (New York time) on the next following day which, in the
State of New York, is not a holiday or a day on which banks are
authorized to close. Upon five business days' prior written
notice to the Registered Holders, the Company shall have the
right to extend the Warrant Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) Each Warrant shall initially entitle the
Registered Holder of the Warrant Certificate representing such
Warrant to purchase at the Exercise Price therefor from the
Initial Warrant Exercise Date until the Warrant Expiration Date
one share of Common Stock upon the exercise thereof in accordance
with the terms hereof, subject to modification and adjustment as
provided in Section 8.
(b) Upon execution of this Agreement, Warrant
Certificates representing the number of Warrants sold pursuant to
the Underwriting Agreement (subject to modification and
adjustment as provided in Section 8) shall be executed by the
Company and delivered to the Warrant Agent.
(c) Upon exercise of the Representative's Warrants as
provided therein, Warrant Certificates representing all or a
portion of 110,000 Warrants to purchase up to an aggregate of
330,000 shares of Common Stock, Warrants or any combination
thereof (subject to modification and adjustment as provided in
Section 8 hereof and in the Representative's Warrant Agreement),
shall be countersigned, issued and delivered by the Warrant Agent
upon written order of the Company signed by its Chairman of the
Board, Chief Executive Officer, President or a Vice President and
by its Treasurer or an Assistant Treasurer or its Secretary or an
Assistant Secretary.
(d) From time to time, up to the Warrant Expiration
Date or the Redemption Date, whichever date is earlier, the
Warrant Agent shall countersign and deliver Warrant Certificates
in required denominations of one or whole number multiples
thereof to the person entitled thereto in connection with any
transfer or exchange permitted under this Agreement. Except as
provided herein, no Warrant Certificates shall be issued except
(i) Warrant Certificates initially issued hereunder and those
issued on or after the Initial Warrant Exercise Date, upon the
exercise of fewer than all Warrants held by the exercising
Registered Holder, (ii) Warrant Certificates issued upon any
transfer or exchange of Warrants, (iii) Warrant Certificates
issued in replacement of lost, stolen, destroyed or mutilated
Warrant Certificates pursuant to Section 7, (iv) Warrant
Certificates issued pursuant to the Representative's Warrant
Agreement, and (v) at the option of the Company, Warrant
Certificates in such form as may be approved by its Board of
Directors, to reflect any adjustment or change in the Exercise
Price, the number of shares of Common Stock purchasable upon
exercise of the Warrants or the Redemption Price therefor made
pursuant to Section 8 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in
the form annexed hereto as Exhibit A (the provisions of which are
hereby incorporated herein) and may have such letters, numbers or
other marks of identification or designation and such legends,
summaries or endorsements printed, lithographed or engraved
thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation
made pursuant thereto or with any rule or regulation of any stock
exchange on which the Warrants may be listed, or to conform to
usage. The Warrant Certificates shall be dated the date of
issuance thereof (whether upon initial issuance, transfer,
exchange or in lieu of mutilated, lost, stolen or destroyed
Warrant Certificates) and issued in registered form. Warrants
shall be numbered serially with the letter "W" on the Warrants.
(b) Warrant Certificates shall be executed on behalf
of the Company by its Chairman of the Board, Chief Executive
Officer, President or any Vice President and by its Treasurer or
an Assistant Treasurer or its Secretary or an Assistant
Secretary, by manual signatures or by facsimile signatures
printed thereon, and shall have imprinted thereon a facsimile of
the Company's seal. Warrant Certificates shall be manually
countersigned by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In any case any officer of the
Company who shall have signed any of the Warrant Certificates
shall cease to be such officer of the Company before the date of
issuance of the Warrant Certificates or before countersignature
by the Warrant Agent and issue and delivery thereof, such Warrant
Certificates, nevertheless, may be countersigned by the Warrant
Agent, issued and delivered with the same force and effect as
though the person who signed such Warrant Certificates had not
ceased to be such officer of the Company. After countersignature
by the Warrant Agent, Warrant Certificates shall be delivered by
the Warrant Agent to the Registered Holder promptly and without
further action by the Company, except as otherwise provided by
Section 4(a) hereof.
SECTION 4. Exercise.
(a) Warrants in denominations of one or whole number
multiples thereof may be exercised by the Registered Holder
thereof commencing at any time on or after the Initial Warrant
Exercise Date, but not after the Warrant Expiration Date, upon
the terms and subject to the conditions set forth herein and in
the applicable Warrant Certificate. A Warrant shall be deemed to
have been exercised immediately prior to the close of business on
the Exercise Date and the person entitled to receive the
securities deliverable upon such exercise shall be treated for
all purposes as the holder, upon exercise thereof, as of the
close of business on the Exercise Date. If Warrants in
denominations other than whole number multiples thereof shall be
exercised at one time by the same Registered Holder, the number
of full shares of Common Stock which shall be issuable upon
exercise thereof shall be computed on the basis of the aggregate
number of full shares of Common Stock issuable upon such
exercise. As soon as practicable on or after the Exercise Date
and in any event within five business days after such date, if
one or more Warrants have been exercised, the Warrant Agent on
behalf of the Company shall cause to be issued to the person or
persons entitled to receive the same a Common Stock certificate
or certificates for the shares of Common Stock deliverable upon
such exercise, and the Warrant Agent shall deliver the same to
the person or persons entitled thereto. Upon the exercise of any
one or more Warrants, the Warrant Agent shall promptly notify the
Company in writing of such fact and of the number of securities
delivered upon such exercise and, subject to subsection (b)
below, shall cause all payments of an amount in cash or by check
made payable to the order of the Company, equal to the Exercise
Price, to be deposited promptly in the Company's bank account.
(b) The Company shall engage National as a Warrant
solicitation agent, and, at any time upon the exercise of any
Warrants after one year from the date hereof, the Company shall
instruct the Warrant Agent to, and the Warrant Agent shall, on a
daily basis, within two business days after such exercise, notify
National of the exercise of any such Warrants and shall, on a
weekly basis (subject to collection of funds constituting the
tendered Exercise Price, but in no event later than five business
days after the last day of the calendar week in which such funds
were tendered), remit to National an amount equal to five percent
(5%) of the Exercise Price of such Warrants then being exercised
unless National shall have notified the Warrant Agent that the
payment of such amount with respect to such Warrant is violative
of the General Rules and Regulations promulgated under the
Exchange Act, or the rules and regulations of the Nasdaq or
applicable state securities or "blue sky" laws, or the Warrants
are those underlying the Representative's Warrants in which
event, the Warrant Agent shall have to pay such amount to the
Company; provided, that, the Warrant Agent shall not be obligated
to pay any amounts pursuant to this Section 4(b) during any week
that such amounts payable are less than $1,000 and the Warrant
Agent's obligation to make such payments shall be suspended until
the amount payable aggregates $1,000, and provided further, that,
in any event, any such payment (regardless of amount) shall be
made not less frequently than monthly. Notwithstanding the
foregoing, National shall be entitled to receive the commission
contemplated by this Section 4(b) as Warrant solicitation agent
only if: (i) National has provided actual services in connection
with the solicitation of the exercise of a Warrant by a
Registered Holder and (ii) the Registered Holder exercising a
Warrant affirmatively designates in writing on the exercise form
on the reverse side of the Warrant Certificate that the exercise
of such Registered Holder's Warrant was solicited by National.
(c) The Company shall not be required to issue
fractional shares on the exercise of Warrants. Warrants may only
be exercised in such multiples as are required to permit the
issuance by the Company of one or more whole shares. If one or
more Warrants shall be presented for exercise in full at the same
time by the same Registered Holder, the number of whole shares
which shall be issuable upon such exercise thereof shall be
computed on the basis of the aggregate number of shares
purchasable on exercise of the Warrants presented. If any
fraction of a share would, except for the provisions provided
herein, be issuable on the exercise of any Warrant (or specified
portion thereof), the Company shall pay an amount in cash equal
to such fraction multiplied by the then current market value of a
share of Common Stock, determined as follows:
(1) If the Common Stock is listed, or admitted to
unlisted trading privileges on a national securities exchange, or
is traded on Nasdaq, the current market value of a share of
Common Stock shall be the closing sale price of the Common Stock
at the end of the regular trading session on the last business
day prior to the date of exercise of the Warrants on whichever of
such exchanges or Nasdaq had the highest average daily trading
volume for the Common Stock on such day; or
(2) If the Common Stock is not listed or admitted to
unlisted trading privileges on any national securities exchange,
or listed, quoted or reported for trading on Nasdaq, but is
traded in the over-the-counter market, the current market value
of a share of Common Stock shall be the average of the last
reported bid and asked prices of the Common Stock reported by the
National Quotation Bureau, Inc. on the last business day prior to
the date of exercise of the Warrants; or
(3) If the Common Stock is not listed, admitted to
unlisted trading privileges on any national securities exchange,
or listed, quoted or reported for trading on Nasdaq, and bid and
asked prices of the Common Stock are not reported by the National
Quotation Bureau, Inc., the current market value of a share of
Common Stock shall be an amount, not less than the book value
thereof as of the end of the most recently completed fiscal
quarter of the Company ending prior to the date of exercise,
determined by the members of the Board of Directors of the
Company exercising good faith and using customary valuation
methods.
SECTION 5. Reservation of Shares; Listing; Payment of
Taxes; etc.
(a) The Company covenants that it will at all times
reserve and keep available out of its authorized Common Stock,
solely for the purpose of issue upon exercise of Warrants, such
number of shares of Common Stock as shall then be issuable upon
the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be issuable upon
exercise of the Warrants shall, at the time of delivery thereof,
be duly and validly issued and fully paid and nonassessable and
free from all preemptive or similar rights, taxes, liens and
charges with respect to the issue thereof, and that upon issuance
such shares shall be listed on each securities exchange, if any,
on which the other shares of outstanding Common Stock of the
Company are then listed.
(b) The Company covenants that if any securities to be
reserved for the purpose of exercise of Warrants hereunder
require registration with, or approval of, any governmental
authority under any federal securities law before such securities
may be validly issued or delivered upon such exercise, then the
Company will file a registration statement under the federal
securities laws or a post-effective amendment, use its best
efforts to cause the same to become effective and to keep such
registration statement current while any of the Warrants are
outstanding and deliver a prospectus which complies with Section
10(a)(3) of the Act, to the Registered Holder exercising the
Warrant (except, if in the opinion of counsel to the Company,
such registration is not required under the federal securities
law or if the Company receives a letter from the staff of the
Commission stating that it would not take any enforcement action
if such registration is not effected). The Company will use its
best efforts to obtain appropriate approvals or registrations
under state "blue sky" securities laws with respect to any such
securities. However, Warrants may not be exercised by, or shares
of Common Stock issued to, any Registered Holder in any state in
which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or
similar taxes and other governmental charges that may be imposed
with respect to the issuance of Warrants, or the issuance or
delivery of any shares of Common Stock upon exercise of the
Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered
Holder of the Warrant Certificate representing any Warrant being
exercised, then no such delivery shall be made unless the person
requesting the same has paid to the Warrant Agent the amount of
transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized
as the Transfer Agent to requisition from time to time
certificates representing shares of Common Stock or other
securities required upon exercise of the Warrants, and the
Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other
Warrant Certificates representing an equal aggregate number of
Warrants of the same class or may be transferred in whole or in
part. Warrant Certificates to be exchanged shall be surrendered
to the Warrant Agent at its Corporate Office, and, upon
satisfaction of the terms and provisions hereof, the Company
shall execute and the Warrant Agent shall countersign, issue and
deliver in exchange therefor the Warrant Certificate or
Certificates which the Registered Holder making the exchange
shall be entitled to receive.
(b) The Warrant Agent shall keep, at its office, books
in which, subject to such reasonable regulations as it may
prescribe, it shall register Warrant Certificates and the
transfer thereof in accordance with customary practice. Upon due
presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the
Warrant Agent shall issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates
representing an equal aggregate number of Warrants of the same
class.
(c) With respect to all Warrant Certificates presented
for registration of transfer, or for exchange or exercise, the
subscription or exercise form, as the case may be, on the reverse
thereof shall be duly endorsed or be accompanied by a written
instrument or instruments of transfer and subscription, in form
satisfactory to the Company and the Warrant Agent, duly executed
by the Registered Holder thereof or his attorney-in-fact duly
authorized in writing.
(d) A service charge may be imposed by the Warrant
Agent for any exchange or registration of transfer of Warrant
Certificates. In addition, the Company may require payment by
such holder of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise
or for exchange in case of mutilated Warrant Certificates shall
be promptly canceled by the Warrant Agent and thereafter retained
by the Warrant Agent until termination of this Agreement.
(f) Prior to due presentment for registration of
transfer thereof, the Company and the Warrant Agent may deem and
treat the Registered Holder of any Warrant Certificate as the
absolute owner thereof and of each Warrant represented thereby
(notwithstanding any notations of ownership or writing thereon
made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be
affected by any notice to the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company
and the Warrant Agent of evidence satisfactory to them of the
ownership of and the loss, theft, destruction or mutilation of
any Warrant Certificate and (in the case of loss, theft or
destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company
shall execute and the Warrant Agent shall (in the absence of
notice to the Company and/or the Warrant Agent that a new Warrant
Certificate has been acquired by a bona fide purchaser)
countersign and deliver to the Registered Holder in lieu thereof
a new Warrant Certificate of like tenor representing an equal
aggregate number of Warrants. Applicants for a substitute
Warrant Certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Warrant
Agent may prescribe.
SECTION 8. Adjustment of Exercise Price and Number of
Shares of Common Stock Deliverable.
(a) Except as hereinafter provided, in the event the
Company shall, at any time or from time to time after the date
hereof and during the term of the Warrants, issue or sell any
shares of Common Stock for a consideration per share less than
the Exercise Price or issue any shares of Common Stock as a stock
dividend to the holders of Common Stock, or subdivide or combine
the outstanding shares of Common Stock into a greater or lesser
number of shares (any such issuance, subdivision or combination
being herein called a "Change of Shares"), then, and thereafter
upon each further Change of Shares, the Exercise Price for the
Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to such Change of Shares
shall be changed to a price (including any applicable fraction of
a cent to the nearest cent) determined by dividing (i) the sum of
(a) the total number of shares of Common Stock outstanding
immediately prior to such Change of Shares, multiplied by the
Exercise Price in effect immediately prior to such Change of
Shares and (b) the consideration, if any, received by the Company
upon such sale, issuance, subdivision or combination, by (ii) the
total number of shares of Common Stock outstanding immediately
after such Change of Shares; provided, however, that in no event
shall the Exercise Price be adjusted pursuant to this computation
to an amount in excess of the Exercise Price in effect
immediately prior to such computation, except in the case of a
combination of outstanding shares of Common Stock.
For the purposes of any adjustment to be made in
accordance with this Section 8(a), the following provisions shall
be applicable:
(A) In case of the issuance or sale of shares of
Common Stock (or of other securities deemed hereunder to involve
the issuance or sale of shares of Common Stock) for a
consideration part or all of which shall be cash, the amount of
the cash portion of the consideration therefor deemed to have
been received by the Company shall be (i) the subscription price,
if shares of Common Stock are offered by the Company for
subscription, or (ii) the public offering price (before deducting
therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or
others performing similar services, or any expenses incurred in
connection therewith), if such securities are sold to
underwriters or dealers for public offering without a
subscription offering, or (iii) the gross amount of cash actually
received by the Company for such securities, in any other case.
(B) In case of the issuance or sale (otherwise
than as a dividend or other distribution on any stock of the
Company, and otherwise than on the exercise of options, rights or
warrants or the conversion or exchange of convertible or
exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of
shares of Common Stock) for a consideration part or all of which
shall be other than cash, the amount of the consideration
therefor other than cash deemed to have been received by the
Company shall be the value of such consideration as determined in
good faith by the Board of Directors of the Company, using
customary valuation methods and on the basis of prevailing market
values for similar property or services.
(C) Shares of Common Stock issuable by way of
dividend or other distribution on any stock of the Company shall
be deemed to have been issued immediately after the opening of
business on the day following the record date for the
determination of shareholders entitled to receive such dividend
or other distribution and shall be deemed to have been issued
without consideration.
(D) The reclassification of securities of the
Company other than shares of Common Stock into securities
including shares of Common Stock shall be deemed to involve the
issuance of such shares of Common Stock for a consideration other
than cash immediately prior to the close of business on the date
fixed for the determination of security holders entitled to
receive such shares, and the value of the consideration allocable
to such shares of Common Stock shall be determined as provided in
subsection (B) of this Section 8(a).
(E) The number of shares of Common Stock at any
one time outstanding shall be deemed to include the aggregate
maximum number of shares issuable (subject to readjustment upon
the actual issuance thereof) upon the exercise of options, rights
or warrants and upon the conversion or exchange of convertible or
exchangeable securities.
(b) Upon each adjustment of the Exercise Price
pursuant to this Section 8, the number of shares of Common Stock
purchasable upon the exercise of each Warrant shall be the number
derived by multiplying the number of shares of Common Stock
purchasable immediately prior to such adjustment by the Exercise
Price in effect prior to such adjustment and dividing the product
so obtained by the applicable adjusted Exercise Price.
(c) In case the Company shall at any time after the
date hereof issue options, rights or warrants to subscribe for
shares of Common Stock, or issue any securities convertible into
or exchangeable for shares of Common Stock, for a consideration
per share (determined as provided in Sections 8(a) and 8(b) and
as provided below) less than the Exercise Price in effect
immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, or
without consideration (including the issuance of any such
securities by way or dividend or other distribution), the
Exercise Price for the Warrants (whether or not the same shall be
issued and outstanding) in effect immediately prior to the
issuance of such options, rights or warrants, or such convertible
or exchangeable securities, as the case may be, shall be reduced
to a price determined by making the computation in accordance
with the provisions of Sections 8(a) and 8(b) hereof, provided
that:
(A) The aggregate maximum number of shares of
Common Stock, as the case may be, issuable or that may become
issuable under such options, rights or warrants (assuming
exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and
outstanding at the time such options, rights or warrants were
issued, for a consideration equal to the minimum purchase price
per share provided for in such options, rights or warrants at the
time of issuance, plus the consideration, if any, received by the
Company for such options, rights or warrants; provided, however,
that upon the expiration or other termination of such options,
rights or warrants, if any thereof shall not have been exercised,
the number of shares of Common Stock deemed to be issued and
outstanding pursuant to this subsection (A) (and for the purposes
of subsection (E) of Section 8(a) hereof) shall be reduced by the
number of shares as to which options, warrants and/or rights
shall have expired, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Exercise Price then
in effect shall forthwith be readjusted and thereafter be the
price that it would have been had adjustment been made on the
basis of the issuance only of the shares actually issued plus the
shares remaining issuable upon the exercise of those options,
rights or warrants as to which the exercise rights shall not have
expired or terminated unexercised.
(B) The aggregate maximum number of shares of
Common Stock issuable or that may become issuable upon conversion
or exchange of any convertible or exchangeable securities
(assuming conversion or exchange in full even if not then
currently convertible or exchangeable in full) shall be deemed to
be issued and outstanding at the time of issuance of such
securities, for a consideration equal to the consideration
received by the Company for such securities, plus the minimum
consideration, if any, receivable by the Company upon the
conversion or exchange thereof; provided, however, that upon the
termination of the right to convert or exchange such convertible
or exchangeable securities (whether by reason of redemption or
otherwise), the number of shares of Common Stock deemed to be
issued and outstanding pursuant to this subsection (B) (and for
the purposes of subsection (E) of Section 8(a) hereof) shall be
reduced by the number of shares as to which the conversion or
exchange rights shall have expired or terminated unexercised, and
such number of shares shall no longer be deemed to be issued and
outstanding, and the Exercise Price then in effect shall
forthwith be readjusted and thereafter be the price that it would
have been had adjustment been made on the basis of the issuance
only of the shares actually issued plus the shares remaining
issuable upon conversion or exchange of those convertible or
exchangeable securities as to which the conversion or exchange
rights shall not have expired or terminated unexercised.
(C) If any change shall occur in the price per
share provided for in any of the options, rights or warrants
referred to in subsection (A) of this Section 8(c), or in the
price per share or ratio at which the securities referred to in
subsection (B) of this Section 8(c) are convertible or
exchangeable, such options, rights or warrants or conversion or
exchange rights, as the case may be, to the extent not
theretofore exercised, shall be deemed to have expired or
terminated on the date when such price change became effective in
respect of shares not theretofore issued pursuant to the exercise
or conversion or exchange thereof, and the Company shall be
deemed to have issued upon such date new options, rights or
warrants or convertible or exchangeable securities.
(d) In case of any reclassification or change of
outstanding shares of Common Stock issuable upon exercise of the
Warrants (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of
a subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other
than a merger with a Subsidiary in which merger the Company is
the continuing corporation) and which does not result in any
reclassification or change of the then outstanding shares of
Common Stock or other capital stock issuable upon exercise of the
Warrants (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of
subdivision or combination) or in case of any sale or conveyance
to another corporation of the property of the Company as an
entirety or substantially as an entirety, then, as a condition of
such reclassification, change, consolidation, merger, sale or
conveyance, the Company, or such successor or purchasing
corporation, as the case may be, shall make lawful and adequate
provision whereby the Registered Holder of each Warrant then
outstanding shall have the right thereafter to receive on
exercise of such Warrant the kind and amount of securities and
property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the
number of securities issuable upon exercise of such Warrant
immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance and shall forthwith
file at the Corporate Office of the Warrant Agent a statement
signed by its Chief Executive Officer, President or a Vice
President and by its Treasurer or an Assistant Treasurer or its
Secretary or an Assistant Secretary evidencing such provision.
Such provisions shall include provision for adjustments which
shall be as nearly equivalent as may be practicable to the
adjustments provided for in Sections 8(a), (b) and (c). The
above provisions of this Section 8(d) shall similarly apply to
successive reclassifications and changes of shares of Common
Stock and to successive consolidations, mergers, sales or
conveyances.
(e) Irrespective of any adjustments or changes in the
Exercise Price or the number of shares of Common Stock
purchasable upon exercise of the Warrants, the Warrant
Certificates theretofore and thereafter issued shall, unless the
Company shall exercise its option to issue new Warrant
Certificates pursuant to Section 2(e) hereof, continue to express
the Exercise Price per share and the number of shares purchasable
thereunder as the Exercise Price per share and the number of
shares purchasable thereunder were expressed in the Warrant
Certificates when the same were originally issued.
(f) After each adjustment of the Exercise Price
pursuant to this Section 8, the Company will promptly prepare a
certificate signed by the Chairman, Chief Executive Officer or
President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting
forth: (i) the Exercise Price as so adjusted, (ii) the number of
shares of Common Stock purchasable upon exercise of each Warrant,
after such adjustment, and (iii) a brief statement of the facts
accounting for such adjustment. The Company will promptly file
such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each
Registered Holder at his last address as it shall appear on the
registry books of the Warrant Agent. No failure to mail such
notice nor any defect therein or in the mailing thereof shall
affect the validity thereof except as to the holder to whom the
Company failed to mail such notice, or except as to the holder
whose notice was defective. The affidavit of an officer of the
Warrant Agent or the Secretary or an Assistant Secretary of the
Company that such notice has been mailed shall, in the absence of
fraud, be prima facie evidence of the facts stated herein.
(g) No adjustment of the Exercise Price shall be made
as a result of or in connection with (A) the issuance or sale of
shares of Common Stock pursuant to options, warrants, stock
purchase agreements and convertible or exchangeable securities
outstanding or in effect on the date hereof and on the terms
described in the final prospectus relating to the public offering
contemplated by the Underwriting Agreement; (B) the issuance or
sale of shares of Common Stock if the amount of said adjustment
shall be less than $.10, provided, however, that in such case,
any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and
together with the next subsequent adjustment that shall amount,
together with any adjustment so carried forward, to at least
$.10; (C) the issuance or sale of shares of Common Stock upon the
exercise of any "incentive stock options" (as such term is
defined in the Internal Revenue Code of 1986, as amended) or non-qualified
stock options under the Company's existing stock option
plans described in the final prospectus relating to the public
offering contemplated by the Underwriting Agreement provided the
exercise price of such options was not less than ten percent
(10%) of the Market Price on the date of grant; (D) the issuance
or sale of shares of Common Stock in an underwritten public
offering on behalf of the Company at a discount to the Market
Price of not more than seven percent (7%) per share; or (E) the
issuance or sale of shares of Common Stock for a bona fide
business purpose of the Company in an arm's length transaction
with an unaffiliated party involving a strategic alliance, joint
venture or licensing arrangement provided (i) the number of
shares so issued or sold do not exceed, individually or in the
aggregate at any time during the term of Warrants, more than
twenty percent (20%) of the then outstanding shares of Common
Stock; and (ii) such shares are issued or sold in exchange for
consideration valued by the Company's Board of Directors at not
less than ten percent (10%) of the Market Price on the date of
issuance and/or sale. In addition, Registered Holders shall not
be entitled to cash dividends paid by the Company prior to the
exercise of any Warrant or Warrants held by them.
SECTION 9. Redemption.
(a) Commencing on the Initial Warrant Redemption Date,
the Company may, on 30 days' prior written notice, redeem all the
Warrants at ten cents ($.10) per Warrant, provided, however, that
before any such call for redemption of Warrants can take place,
the average closing bid price for the Common Stock as reported by
Nasdaq, if the Common Stock is then traded on the Small Cap
Market (or the average closing sale price, if the Common Stock is
then traded on the Nasdaq National Market or on a national
securities exchange) shall have equaled or exceeded $ per
share for any twenty (20) trading days within a period of thirty
(30) consecutive trading days ending on the fifth trading day
prior to the date on which the notice contemplated by (b) and (c)
below is given (subject to adjustment in the event of any stock
splits or other similar events as provided in Section 8 hereof)
and if National gives its prior written consent to the giving of
the notice of redemption and the proposed redemption.
(b) In case the Company shall exercise its right to
redeem all of the Warrants, it shall give or cause to be given
notice to the Registered Holders of the Warrants, by mailing to
such Registered Holders a notice of redemption, first class,
postage prepaid, at their last address as shall appear on the
records of the Warrant Agent. Any notice mailed in the manner
provide herein shall be conclusively presumed to have been duly
given whether or not the Registered Holder receives such notice.
Not less than five (5) business days prior to the mailing to the
Registered Holders of the Warrants of the notice of redemption,
the Company shall deliver or cause to be delivered to National a
similar notice telephonically and confirmed in writing, and if
National is engaged as a Warrant solicitation agent, the Company
shall also deliver to cause to be delivered to National a list of
the Registered Holders (including their respective addresses and
number of Warrants beneficially owned) to whom such notice of
redemption has been or will be given.
(c) The notice of redemption shall specify (i) the
redemption price, (ii) the Redemption Date, which shall in no
event be less than thirty (30) days after the date of mailing of
such notice, (iii) the place where the Warrant Certificate shall
be delivered and the redemption price shall be paid, (iv) that
National shall receive the commission contemplated by Section
4(b) hereof, and (v) that the right to exercise the Warrant shall
terminate at 5:00 p.m. (New York time) on the business day
immediately preceding the date fixed for redemption. No failure
to mail such notice nor any defect therein or in the mailing
thereof shall affect the validity of the proceedings for such
redemption except as to a holder (a) to whom notice was not
mailed or (b) whose notice was defective. An affidavit of the
Warrant Agent or the Secretary or Assistant Secretary of the
Company that notice of redemption has been mailed shall, in the
absence of fraud, be prima facie evidence of the facts stated
therein.
(d) Any right to exercise a Warrant shall terminate at
5:00 p.m. (New York time) on the business day immediately
preceding the Redemption Date. The redemption price payable to
the Registered Holders shall be mailed to such persons at their
addresses of record.
(e) If National acts as the Warrant solicitation agent
for the Company, the Company shall indemnify National and each
person, if any, who controls National within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act
against all loss, claim, damage, expense or liability (including
all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act or otherwise,
arising from the registration statement or prospectus referred to
in Section 5(b) hereof to the same extent and with the same
effect (including the provisions regarding contribution) as the
provisions pursuant to which the Company has agreed to indemnify
National contained in Section 7 of the Underwriting Agreement.
(f) Five business days prior to the Redemption Date,
the Company shall furnish to National, as Warrant solicitation
agent, (i) an opinion of counsel to the Company, dated such date
and addressed to National, and (ii) a "cold comfort" letter dated
such date addressed to National, signed by the independent public
accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case
covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and,
in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are
customarily covered in opinions of issuer's counsel and in
accountants' letters delivered to underwriters in underwritten
public offerings of securities.
SECTION 10. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a
ministerial capacity for the Company and National, and its duties
shall be determined solely by the provisions hereof. The Warrant
Agent shall not, by issuing and delivering Warrant Certificates
or by any other act hereunder, be deemed to make any
representations as to the validity or value or authorization of
the Warrant Certificates or the Warrants represented thereby or
of any securities or other property delivered upon exercise of
any Warrant or whether any stock issued upon exercise of any
Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under
any duty or responsibility to any holder of Warrant Certificates
to make or cause to be made any adjustment of the Exercise Price
or the Redemption Price provided in this Agreement, or to
determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such
adjustments, when made, or with respect to the method employed in
making the same. It shall not (i) be liable for any recital or
statement of fact contained herein or for any action taken,
suffered or omitted by it in reliance on any Warrant Certificate
or other document or instrument believed by it in good faith to
be genuine and to have been signed or presented by the proper
party or parties, (ii) be responsible for any failure on the part
of the Company to comply with any of its covenants and
obligations contained in this Agreement or in any Warrant
Certificate, or (iii) be liable for any act or omission in
connection with this Agreement except for its own negligence, bad
faith or willful misconduct.
(c) The Warrant Agent may at any time consult with
counsel satisfactory to it (who may be counsel for the Company or
for National) and shall incur no liability or responsibility for
any action taken, suffered or omitted by it in good faith in
accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request,
direction, order or demand of the Company shall be sufficiently
evidenced by an instrument signed by the Chairman of the Board of
Directors, Chief Executive Officer, Chief Financial Officer,
President or any Vice President (unless other evidence in respect
thereof is herein specifically prescribed). The Warrant Agent
shall not be liable for any action taken, suffered or omitted by
it in accordance with such notice, statement, instruction,
request, direction, order or demand reasonably believed by it to
be genuine.
(e) The Company agrees to pay the Warrant Agent
reasonable compensation for its services hereunder and to
reimburse it for its reasonable expenses hereunder; the Company
further agrees to indemnify the Warrant Agent and save it
harmless from and against any and all losses, expenses and
liabilities, including judgments, costs and counsel fees, for
anything done or omitted by the Warrant Agent in the execution of
its duties and powers hereunder except losses, expenses and
liabilities arising as a result of the Warrant Agent's
negligence, bad faith or willful conduct.
(f) The Warrant Agent may resign its duties and be
discharged from all further duties and liabilities hereunder
(except liabilities resulting as a result of the Warrant Agent's
own gross negligence or willful misconduct), after giving 30
days' prior written notice to the Company. At least 15 days
prior to the date such resignation is to become effective, the
Warrant Agent shall cause a copy of such notice of resignation to
be mailed to the Registered Holder of each Warrant Certificate at
the Company's expense. Upon such resignation, or any inability
of the Warrant Agent to act as such hereunder, the Company shall
appoint in writing a new warrant agent. If the Company shall
fail to make such appointment within a period of 15 days after it
has been notified in writing of such resignation by the resigning
Warrant Agent, then the Registered Holder of any Warrant
Certificate may apply to any court of competent jurisdiction for
the appointment of a new warrant agent. Any new warrant agent,
whether appointed by the Company or by such a court, shall be a
bank or trust company having a capital and surplus, as shown by
its last published report to its stockholders, of not less than
$10,000,000 or a stock transfer company. After acceptance in
writing of such appointment by the new warrant agent is received
by the Company, such new warrant agent shall be vested with the
same powers, rights, duties and responsibilities as if it had
been originally named herein as the Warrant Agent, without any
further assurance, conveyance, act or deed; but if for any reason
it shall be necessary or expedient to execute and deliver any
further assurance, conveyance, act or deed, the same shall be
done at the expense of the Company and shall be legally and
validly executed and delivered by the resigning Warrant Agent.
Not later than the effective date of any such appointment the
Company shall file notice thereof with the resigning Warrant
Agent and shall forthwith cause a copy of such notice to be
mailed to the Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or
any new warrant agent may be converted or merged, any corporation
resulting from any consolidation to which the Warrant Agent or
any new warrant agent shall be a party, or any corporation
succeeding to the corporate trust business of the Warrant Agent
or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such
corporation is eligible for appointment as successor to the
Warrant Agent under the provisions of the preceding paragraph.
Any such successor warrant agent shall promptly cause notice of
its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and
affiliates, and any of its or their officers or directors, may
buy and hold or sell Warrants or other securities of the Company
and otherwise deal with the Company in the same manner and to the
same extent and with like effect as though it were not Warrant
Agent. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other
legal entity.
(i) The Warrant Agent shall retain for a period of two
years from the date of exercise any Warrant Certificate received
by it upon such exercise.
SECTION 11. Modification of Agreement.
The Warrant Agent and the Company may by supplemental
agreement make any changes or corrections in this Agreement (i)
that they shall deem appropriate to cure any ambiguity or to
correct any defective or inconsistent provision or manifest
mistake or error herein contained; or (ii) that they may deem
necessary or desirable and which shall not adversely affect the
interests of the holders of Warrant Certificates; provided,
however, that this Agreement shall not otherwise be modified,
supplemented or altered in any respect except with the consent in
writing of the Registered Holders representing not less than 66-2/3% of the
Warrants then outstanding; provided, further, that
no change in the number or nature of the securities purchasable
upon the exercise of any Warrant, or to increase the Exercise
Price therefor or to accelerate of the Warrant Expiration Date,
shall be made without the consent in writing of the Registered
Holder of the Warrant Certificate representing such Warrant,
other than such changes as are presenting specifically prescribed
by this Agreement as originally executed. In addition, this
Agreement may not be modified, amended or supplemented without
the prior written consent of National, other than to cure any
ambiguity or to correct any provision which is inconsistent with
any other provision of this Agreement or to make any such change
that is necessary or desirable and which shall not adversely
affect the interests of National and except as may be required by
law.
SECTION 12. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first-class registered or certified
mail, postage prepaid, as follows: if to the Registered Holder
of a Warrant Certificate, at the address of such holder as shown
on the registry books maintained by the Warrant Agent; if to the
Company at 323 Center Street, Suite 1300, Little Rock, Arkansas
72201, Attention: P.L. Montesi, or at such other address as may
have been furnished to the Warrant Agent in writing by the
Company; and if to the Warrant Agent, at [Address]. Copies of
any notice delivered pursuant to this Agreement shall also be
delivered to National Securities Corporation, 1001 Fourth Avenue,
Suite 2200, Seattle, Washington 98154-1100, Attention: General
Counsel, or at such other address as may have been furnished to
the Company and the Warrant Agent in writing.
SECTION 13. Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving
effect to conflicts of laws.
SECTION 14. Binding Effect.
This Agreement shall be binding upon and inure to the
benefit of the Company, National, the Warrant Agent and their
respective successors and assigns and the holders from time to
time of Warrant Certificates or any of them. Nothing in this
Agreement is intended or shall be construed to confer upon any
other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or
obligation.
SECTION 15. Termination.
This Agreement shall terminate at the close of business on
the Expiration Date of all of the Warrants or such earlier date
upon which all Warrants have been exercised or redeemed, except
that the Warrant Agent shall account to the Company for cash held
by it and the provisions of Section 10 hereof shall survive such
termination.
SECTION 16. Counterparts.
This Agreement may be executed in several counterparts,
which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the first date first above
written.
ATTEST: THERMOENERGY CORPORATION
By: By:
------------------- ----------------------
Name: Dennis E. Cossey Name: P. L. Montesi
Title: CEO/Secretary Title: President
NATIONAL SECURITIES
CORPORATION, INC.
By:
--------------------------
Name: Steven A. Rothstein
Title: Chairman
CHASEMELLON SHAREHOLDER
SERVICES
By:
--------------------------
Name:
Title:
<PAGE>
EXHIBIT A
No. W VOID AFTER August 2002
------- ---,
WARRANTS
-------
REDEEMABLE [Series 1] [Series 2] WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
THERMOENERGY CORPORATION
CUSIP #
---------
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or its registered assigns (the "Registered Holder") is the owner
of the number of Redeemable Warrants (the "Warrants") specified
above. Each Warrant initially entitles the Registered Holder to
purchase, subject to the terms and conditions set forth in this
Certificate and the Warrant Agreement (as hereinafter defined),
one fully paid and nonassessable share of Common Stock, no par
value, of ThermoEnergy Corporation, an Arkansas corporation (the
"Company"), at any time between August ____, 1997 (the "Initial
Warrant Exercise Date"), and the Expiration Date (as hereinafter
defined) upon the presentation and surrender of this Warrant
Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of [ChaseMellon Shareholder
Services,] as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $_____ per share, subject to
adjustment (the "Exercise Price'), in lawful money of the United
States of America in cash or by check made payable to the Warrant
Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby
are issued pursuant to and are subject in all respects to the
terms and conditions set forth in the Warrant Agreement (the
"Warrant Agreement"), dated August ____, 1997, by and between the
Company, National Securities Corporation ("National") and the
Warrant Agent.
In the event of certain contingencies provided for in the
Warrant Agreement, the Exercise Price and the number of shares of
Common Stock subject to purchase upon the exercise of each
Warrant represented hereby are subject to modification or
adjustment.
Each Warrant represented hereby is exercisable at the option
of the Registered Holder, but no fractional interests will be
issued. In the case of the exercise of less than all the
Warrants represented hereby, the Company shall cancel this
Warrant Certificate upon the surrender hereof and shall execute
and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the
balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York
time) on the date which is five (5) years after the Initial
Warrant Exercise Date. If each such date shall in the State of
New York be a holiday or a day on which the banks are authorized
to close, then the Expiration Date shall mean 5:00 p.m. (New York
time) the next following day which in the State of New York is
not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities
pursuant to the exercise of this Warrant unless a registration
statement under the Securities Act of 1933, as amended (the
"Act'), with respect to such securities is effective or an
exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the
Federal securities laws, use its best efforts to cause the same
to become effective, use its best efforts to keep such
registration statement current, if required under the Act, while
any of the Warrants are outstanding, and deliver a prospectus
which complies with Section 10(a)(3) of the Act to the Registered
Holder exercising this Warrant. This Warrant shall not be
exercisable by a Registered Holder in any state where such
exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the
Warrant Agent, for a new Warrant Certificate or Warrant
Certificates of like tenor representing an equal aggregate number
of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment and
payment of any tax or other charge imposed in connection
therewith or incident thereto, for registration of transfer of
this Warrant Certificate at such office, a new Warrant
Certificate or Warrant Certificates representing an equal
aggregate number of Warrants will be issued to the transferee in
exchange therefor, subject to the limitations provided in the
Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a
stockholder of the Company, including, without limitation, the
right to vote or to receive dividends or other distributions, and
shall not be entitled to receive any notice of any proceedings of
the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this
Warrant may be redeemed at the option of the Company, at a
redemption price of $.05 per Warrant, at any time commencing
after August , 1998, provided that the average closing bid
price for the Common Stock as reported by the Nasdaq SmallCap
Market, if the Common Stock is then traded on the Nasdaq SmallCap
Market (or the average closing sale price, if the Common Stock is
then traded on the Nasdaq National Market or a national
securities exchange), shall have equalled or exceeded $_____
per share for any twenty (20) trading days within a period of
thirty (30) consecutive trading days ending on the fifth trading
day prior to the Notice of Redemption, as defined below (subject
to adjustment in the event of any stock splits or other similar
events) and National has given its prior written consent to such
redemption. Notice of redemption (the "Notice of Redemption")
shall be given not later than the thirtieth day before the date
fixed for redemption, or as provided in the Warrant Agreement.
On and after the date fixed for redemption, the Registered Holder
shall have no rights with respect to the Warrants except to
receive the $.05 per Warrant upon surrender of this Warrant
Certificate.
Upon certain circumstances, National may be entitled to
receive an aggregate of five percent (5%) of the Exercise Price
of the Warrants represented hereby, if it is engaged as a Warrant
solicitation agent by the Company.
Prior to due presentment for registration of transfer
hereof, the Company and the Warrant Agent may deem and treat the
Registered Holder as the absolute owner hereof and of each
Warrant represented hereby (notwithstanding any notations of
ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all
purposes and shall not be affected by any notice to the contrary,
except as provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed
in accordance with the laws of the State of California without
giving effect to conflicts of laws.
This Warrant Certificate is not valid unless countersigned
by the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile by two
of its officers thereunto duly authorized and a facsimile of its
corporate seal to be imprinted hereon.
Dated: August , 1997
[SEAL] THERMOENERGY CORPORATION
By:
--------------------------
Name: P.L. Montesi
Title: President
By:
---------------------------
Dennis Cossey
COUNTERSIGNED:
CHASEMELLON SHAREHOLDER SERVICES
as Warrant Agent
By:
-----------------------------
Authorized Officer
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects
to exercise _____ Warrants represented by this Warrant
Certificate, and to purchase the securities issuable upon the
exercise of such Warrants, and requests that certificates for
such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
-------------------------------------
-------------------------------------
-------------------------------------
(please print or type name and address)
and be delivered to
-------------------------------------
-------------------------------------
-------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants
evidenced by this Warrant Certificate, that a new Warrant
Certificate for the balance of such Warrants be registered in the
name of, and delivered to, the Registered Holder at the address
stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING
1. The exercise of this Warrant was solicited by:
-------------------------------------. [ ]
2. The exercise of this Warrant was not solicited. [ ]
Dated:
----------------------------
------------------------------
------------------------------
Address
------------------------------
Social Security or Taxpayer
Identification Number
------------------------------
Signature Guaranteed
------------------------------
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ___________________, hereby sells,
assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
--------------------------------
--------------------------------
--------------------------------
--------------------------------
(please print or type name and address)
______________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
_____________ Attorney to transfer this Warrant Certificate on
the books of the Company, with full power of substitution in the
premises.
Dated:
---------------------
----------------------------
Signatured Guaranteed
----------------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST
CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
EXHIBIT 10.24
------------------------
THERMOENERGY CORPORATION
AND
NATIONAL SECURITIES CORPORATION
REPRESENTATIVE'S
WARRANT AGREEMENT
Dated as of August , 1997
-----------------------
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of August ___,
1997, between THERMOENERGY CORPORATION, an Arkansas corporation
(the "Company"), and NATIONAL SECURITIES CORPORATION and its
assignees or designees (each hereinafter referred to variously as
a "Holder" or "Representative").
W I T N E S S E T H :
WHEREAS, the Representative has agreed pursuant to the
underwriting agreement (the "Underwriting Agreement") dated as of
the date hereof and entered into between the Company and the
Representative, to act as the representative of the several
underwriters listed therein (the "Underwriters") in connection
with the Company's proposed public offering (the "Public
Offering") of 1,100,000 shares of Common Stock (as hereinafter
defined) at a public offering price of $________ per share,
1,100,000 Series 1 redeemable warrant (the "Series 1 Warrants)
and 1,100,000 Series 2 redeemable warrant (the "Series 2
Warrants") (the Series 1 Warrants and the Series 2 Warrants being
sometimes referred to herein as the "Warrants").
WHEREAS, pursuant to the Underwriting Agreement, the Company
proposes to issue warrants (the "Representative's Warrants") to
the Representative to purchase up to an aggregate of 110,000
shares of Common Stock of the Company and/or 220,000 Warrants.
WHEREAS, the Representative's Warrants to be issued pursuant
to this Agreement will be issued on the Closing Date (as such
term is defined in the Underwriting Agreement) by the Company to
the Representative in consideration for, and as part of the
Underwriters' compensation in connection with, the Representative
acting as the representative pursuant to the Underwriting
Agreement.
NOW, THEREFORE, in consideration of the premises, the
payment by the Representative to the Company of an aggregate of
eleven dollars ($11.00), the agreements herein set forth and
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant.
------
The Representative is hereby collectively granted the right
to purchase, at any time from August , 1998 (one year from the
Closing Date until 5:30 p.m., New York time, on August , 2002
(5 years from the Closing Date), at which time the
Representative's Warrants expire, up to an aggregate of 160,000
shares of Common Stock, $0.01 par value per share (the "Common
Stock"), and/or 160,000 Warrants at the Exercise Price (as
defined in Section 8 hereof). One Warrant is exercisable to
purchase one additional share of Common Stock at an initial
exercise of $____ [150% of the initial public offering price per
share] from August , 1998 [one year from the Effective Date of
the Registration Statement] until 5:30 p.m. New York time on
August , 2002 [5 years from the Closing Date of the
Registration Statement], at which time the Warrants shall expire.
Except as set forth herein, the shares of Common Stock and the
Warrants issuable upon exercise of the Representative's Warrants
are in all respects identical to the shares of Common Stock and
the Warrants being purchased by the Underwriters for resale to
the public pursuant to the terms and provisions of the
Underwriting Agreement. The shares of Common Stock and the
Warrants issuable upon exercise of the Representative's Warrants
are sometimes hereinafter referred to collectively as the
"Securities."
2. Representative's Warrant Certificates.
--------------------------------------
The Representative's warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this
Agreement shall be in the form set forth in Exhibit A, attached
hereto and made a part hereof, with such appropriate insertions,
omissions, substitutions, and other variations as required or
permitted by this Agreement.
3. Registration of Warrant.
------------------------
The Representative's Warrants shall be numbered and shall be
registered on the books of the Company when issued.
4. Exercise of Representative's Warrant.
-------------------------------------
4.1 The Representative's Warrants initially are
exercisable at an aggregate Exercise Price (subject to adjustment
as provided in Section 11 hereof) per share of Common Stock and
Warrant as set forth in Section 8 hereof payable by certified or
official bank check in New York Clearing House funds. Upon
surrender of a Representative's Warrant Certificate with the
annexed Form of Election to Purchase duly executed, together with
payment of the Exercise Price for the Securities purchased at the
Company's principal offices in Indianapolis, Indiana, the
registered holder of a Representative's Warrant Certificate
("Holder" or "Holders") shall be entitled to receive a
certificate or certificates for the shares of Common Stock and/or
Warrants so purchased. The purchase rights represented by each
Representative's Warrant Certificate are exercisable at the
option of the Holder thereof, in whole or in part (but not as to
fractional shares of Common Stock and/or Warrants underlying the
Representative's Warrants). Representative's Warrants may be
exercised to purchase all or part of the shares of Common Stock
together with an equal or unequal number of the Warrants
represented thereby. If the Company redeems all of the Warrants
sold in the Public Offering, then thereafter the Representative's
Warrants may not be exercised to purchase any Warrants unless
such exercise is accompanied by the simultaneous exercise of all
such Warrants being purchased. In the case of the purchase of
less than all of the shares of Common Stock and/or Warrants
purchasable under any Representative's Warrant Certificate, the
Company shall cancel said Representative's Warrant Certificate
upon the surrender thereof and shall execute and deliver a new
Representative's Warrant Certificate of like tenor for the
balance of the shares of Common Stock and/or Warrants purchasable
thereunder.
4.2 In addition to the method of payment set forth in
Section 4.1 and in lieu of any cash payment required thereunder,
the Warrantholder shall have the right at any time and from time
to time to exercise the Warrant(s) in full or in part by
surrendering the Warrant Certificate in the manner specified
herein in exchange for the number of shares of Common Stock equal
to the quotient derived from dividing the numerator (which shall
be an amount equal to the difference between: (i) the number of
shares of Common Stock or other Securities as to which the
Warrant is being exercised multiplied by the per share Market
Price, and (ii) the number of shares of Common Stock or other
Securities as to which the Warrant is being exercised multiplied
by the per share Market Price, and (ii) the number of shares of
Common Stock or other Securities as to which the Warrant is being
exercised multiplied by the Exercise Price) by the denominator
which shall be the per share Market Price of the Common Stock.
Solely for the purpose of this Section 4.2, Market Price shall be
calculated either: (i) on the date on which the form of election
attached hereto is deemed to have been sent to the Company
pursuant to Section 10 hereof ("Notice Date") or (ii) as the
average of the Market Prices for each of the five trading days
preceding the Notice Date, whichever of (i) or (ii) is greater.
5. Issuance of Certificates.
-------------------------
Upon the exercise of the Representative's Warrant, the
issuance of certificates for shares of Common Stock and/or
Warrants or other securities, properties or rights underlying
such Representative's Warrant shall be made forthwith (and in any
event within five (5) business days thereafter) without charge to
the Holder thereof including, without limitation, any tax which
may be payable in respect of the issuance thereof, and such
certificates shall (subject to the provisions of Sections 7 and 9
hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the
Company shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery
of any such certificates in a name other than that of the Holder
and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
The Representative's Warrant Certificates and the
certificates representing the shares of Common Stock and/or
Warrants or other securities, property or rights issued upon
exercise of the Representative's Warrant shall be executed on
behalf of the Company by the manual or facsimile signature of the
then present President or any Vice President of the Company under
its corporate seal reproduced thereon, attested to by the manual
or facsimile signature of the then present Secretary or any
Assistant Secretary of the Company. Representative's Warrant
Certificates shall be dated the date of execution by the Company
upon initial issuance, division, exchange, substitution or
transfer.
6. Transfer of Representative's Warrant.
-------------------------------------
The Representative's Warrant shall be transferable only on
the books of the Company maintained at its principal office,
where its principal office may then be located, upon delivery
thereof accompanied by a Form of Assignment (the form of which is
included in Exhibit A hereto) duly endorsed by the Holder or by
its duly authorized attorney or representative accompanied by
proper evidence of succession, assignment or authority to
transfer. Upon any registration of transfer, the Company shall
execute and deliver the new Representative's Warrant to the
person entitled thereto.
7. Restriction On Transfer of Representative's Warrant.
----------------------------------------------------
The Holder of a Representative's Warrant Certificate, by its
acceptance thereof, covenants and agrees that the
Representative's Warrant is being acquired as an investment and
not with a view to the distribution thereof, and that the
Representative's Warrant may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, in whole or in part, for
one year from the date hereof, except to officers or partners of
the Underwriters, or by operation of law.
8. Exercise Price.
---------------
8.1 Initial and Adjusted Exercise Price.
------------------------------------
Except as otherwise provided in Section 11 hereof, the
initial exercise price of each Representative's Warrant shall be
$____ per share of Common Stock [120% of the initial public
offering price per share of Common Stock] and $.12 per Warrant.
The adjusted exercise price shall be the price which shall result
from time to time from any and all adjustments of the initial
exercise price in accordance with the provisions of Section 11
hereof. Any transfer of a Representative's Warrant shall
constitute an automatic transfer and assignment of the
registration rights set forth in Section 9 hereof with respect to
the Securities or other securities, properties or rights
underlying the Representative's Warrants.
8.2 Exercise Price.
---------------
The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the
context or unless otherwise specified.
9. Registration Rights.
--------------------
9.1 Registration Under the Securities Act of 1933.
----------------------------------------------
Each Representative's Warrant Certificate and each
certificate representing shares of Common Stock and/or Warrants
and any of the other securities issuable upon exercise of the
Representative's Warrant (collectively, the "Warrant Shares")
shall bear the following legend unless (i) such Representative's
Warrant or Warrant Shares are distributed to the public or sold
to the underwriters for distribution to the public pursuant to
Section 9 hereof or otherwise pursuant to a registration
statement filed under the Securities Act of 1933, as amended (the
"Act"), or (ii) the Company has received an opinion of counsel,
in form and substance reasonably satisfactory to counsel for the
Company, that such legend is unnecessary for any such
certificate:
THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS CERTIFICATE
AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO
THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES),
OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE
REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S WARRANT
REPRESENTED BY THE CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH
THE REPRESENTATIVE'S WARRANT AGREEMENT REFERRED TO HEREIN.
9.2 Piggyback Registration.
-----------------------
If, at any time commencing after the effective date of
the Registration Statement relating to the Public Offering and
expiring five (5) years thereafter, the Company proposes to
register any of its securities under the Act (other than in
connection with a merger, or the offering of debt, or pursuant to
Form S-4 or Form S-8 it will give written notice by registered
mail, at least twenty (20) days prior to the filing of each such
registration statement, to the Holders of the Representative's
Warrants and/or the Warrant Shares of its intention to do so. If
any of the Holders of the Representative's Warrants and/or
Warrant Shares notify the Company within ten (10) days after
mailing of any such notice of its or their desire to include any
such securities in such proposed registration statement, the
Company shall afford such Holders of the Representative's
Warrants and/or Warrant Shares the opportunity to have any such
Representative's Warrants and/or Warrant Shares registered under
such registration statement. In the event that the managing
underwriter for said offering advises the Company in writing that
in its opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in such
offering without causing a diminution in the offering price or
otherwise adversely affecting the offering, the Company will
include in such registration (a) first, the securities the
Company proposes to sell, (b) second, the securities held by the
entities, if any, that made the demand for registration, (c)
third, the Representative's Warrants and/or Warrant Shares
requested to be included in such registration which in the
opinion of such underwriter can be sold, pro rata among all
proposed selling shareholders.
Notwithstanding the provisions of this Section 9.2, the
Company shall have the right at any time after it shall have
given written notice pursuant to this Section 9.2 (irrespective
of whether a written request for inclusion of any such securities
shall have been made) to elect not to file any such proposed
registration statement or to withdraw the same after the filing
but prior to the effective date thereof.
9.3 Demand Registration.
--------------------
(a) At any time commencing one (1) year after the
effective date of the Registration Statement relating to the
Public Offering (the "Registration Statement") and expiring five
(5) years from the effective date of the Registration Statement,
the Holders of the Representative's Warrants and/or Warrant
Shares representing a "Majority" (as hereinafter defined) of the
Representative's Warrants and/or Warrant Shares shall have the
right (which right is in addition to the registration rights
under Section 9.2 hereof), exercisable by written notice to the
Company, to have the Company prepare and file with the Securities
and Exchange Commission (the "Commission"), on one occasion, a
registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel
for the Company and counsel for the Holders, in order to comply
with the provisions of the Act, so as to permit a public offering
and sale by such Holders and any other Holders of the
Representative's Warrant and/or Warrant Shares who notify the
Company within fifteen (15) days after the Company mails notice
of such request pursuant to Section 9.3(b) hereof (collectively,
the "Requesting Holders") of their respective Warrant Shares for
the earlier of (i) nine (9) consecutive months, or (ii) until the
sale of all of the Warrant Shares requested to be registered by
the Requesting Holders.
(b) The Company covenants and agrees to give
written notice of any registration request under this Section 9.3
by any Holder or Holders representing a Majority of the
Representative's Warrants and/or Warrant Shares to all other
registered Holders of the Representative's Warrants and the
Warrant Shares within ten (10) days from the date of the receipt
of any such registration request.
(c) Intentionally omitted.
(d) Notwithstanding anything to the contrary
contained herein, if the Company shall not have filed a
registration statement for the Warrant Shares within the time
period specified in Section 9.4(a) hereof pursuant to the written
notice specified in Section 9.3(a) of the Holders of a Majority
of the Representative's Warrants and/or Warrant Shares, the
Company, at its option, may repurchase (i) any and all Warrant
Shares at the higher of the Market Price (as defined in Section
9.3(e)) per share of Common Stock or per Warrant, as the case may
be, on (x) the date of the notice sent pursuant to Section 9.3(a)
or (y) the expiration of the period specified in Section 9.4(a)
and (ii) any and all Representative's Warrants at the Market
Price of the Common Stock and Warrants purchasable upon exercise
thereof less the aggregate exercise price payable upon such
exercise. Such repurchase shall be in immediately available
funds and shall close within two (2) days after the expiration of
the period specified in Section 9.4(a).
(e) Definition of Market Price.
---------------------------
As used herein, the phrase "Market Price" at any
date shall be deemed to be the last reported sale price, or, in
case no such reported sale takes place on such day, the average
of the last reported sale prices for the last three (3) trading
days, in either case as officially reported by the principal
securities exchange on which the shares of Common Stock and/or
Warrants is listed or admitted to trading, or, if the shares of
Common Stock and/or Warrants is not listed or admitted to trading
on any national securities exchange, the average closing bid
price as furnished by the NASD through The Nasdaq Stock Market,
Inc. ("Nasdaq") or similar organization if Nasdaq is no longer
reporting such information, or if the shares of Common Stock
and/or Warrants or Common Stock is not quoted on Nasdaq, as
determined in good faith by resolution of the Board of Directors
of the Company, based on the best information available to it.
9.4 Covenants of the Company With Respect to
Registration.
----------------------------------------
In connection with any registration under Sections 9.2
or 9.3 hereof, the Company covenants and agrees as follows:
(a) In connection with any registration under
Section 9.3 hereof, the Company shall use its best efforts to
file a registration statement within one hundred and twenty (120)
days of receipt of any demand therefor, and to have any
registration statements declared effective at the earliest
possible time, and shall furnish each Holder desiring to sell
Warrant Shares such number of prospectuses as shall reasonably be
requested.
(b) The Company shall pay all costs (excluding
fees and expenses of a single counsel for all Holders up to a
$25,000 maximum and any underwriting or selling commissions),
fees and expenses in connection with all registration statements
filed pursuant to Sections 9.2 and 9.3(a) hereof including,
without limitation, the Company's legal and accounting fees,
printing expenses and blue sky fees and expenses.
(c) The Company will use its commercially
reasonable efforts to take all necessary action which may be
required in qualifying or registering the Warrant Shares included
in a registration statement for offering and sale under the
securities or blue sky laws of such states as reasonably are
requested by the Holder(s), provided that the Company shall not
be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business
under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of
the Warrant Shares to be sold pursuant to any registration
statement and each person, if any, who controls such Holders
within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including
all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act or otherwise,
arising from such registration statement but only to the same
extent and with the same effect and subject to the same
procedures as are provided by the provisions pursuant to which
the Company has agreed to indemnify each of the Underwriters
contained in Section 7 of the Underwriting Agreement.
(e) The Holder(s) of the Warrant Shares to be
sold pursuant to a registration statement, and their successors
and assigns, shall severally, and not jointly, indemnify the
Company, its officers and directors and each person, if any, who
controls the Company within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, against all loss, claim,
damage or expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any
claim whatsoever) to which they may become subject under the Act,
the Exchange Act or otherwise, arising from information furnished
by or on behalf of such Holders, or their successors or assigns,
for specific inclusion in such registration statement to the same
extent and with the same effect as the provisions contained in
Section 7 of the Underwriting Agreement pursuant to which the
Underwriters have agreed to indemnify the Company.
(f) Nothing contained in this Agreement shall be
construed as requiring the Holder(s) to exercise their
Representative's Warrant prior to the initial filing of any
registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of
any securities other than the Warrant Shares to be included in
any registration statement filed pursuant to Section 9.3 hereof,
without the prior written consent of National Securities
Corporation or as otherwise required by the terms of any existing
registration rights granted prior to the date of this Agreement
by the Company to the holders of any of the Company's securities.
(h) The Company shall furnish to each Holder
participating in the offering and to each underwriter, if any, a
signed counterpart, addressed to such Holder or underwriter, of
(i) an opinion of counsel to the Company, dated the effective
date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the
date of the closing under the underwriting agreement), and (ii) a
"cold comfort" letter dated the effective date of such
registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the
closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the
Company's financial statements included in such registration
statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial
statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to underwriters in
underwritten public offerings of securities.
(i) The Company shall as soon as practicable after
the effective date of the registration statement, and in any
event within 15 months thereafter, make "generally available to
its security holders" (within the meaning of Rule 158 under the
Act) an earnings statement (which need not be audited) complying
with Section 11(a) of the Act and covering a period of at least
12 consecutive months beginning after the effective date of the
registration statement.
(j) In connection with any registration under
Section 9.3 hereof, the Company shall enter into an underwriting
agreement with the managing underwriters selected for such
underwriting by Holders holding a Majority of the Warrant Shares
requested to be included in such underwriting, which may be the
Representative. Such agreement shall be satisfactory in form and
substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties
and covenants by the Company and such other terms as are
customarily contained in agreements of that type used by the
managing underwriter. The Holders shall be parties to any
underwriting agreement relating to an underwritten sale of their
Warrant Shares and may, at their option, require that any or all
the representations, warranties and covenants of the Company to
or for the benefit of such underwriters shall also be made to and
for the benefit of such Holders. Such Holders shall not be
required to make any representations or warranties to or
agreements with the Company or the underwriters except as they
may relate to such Holders and their intended methods of
distribution.
(k) For purposes of this Agreement, the term
"Majority" in reference to the Representative's Warrants or
Warrant Shares, shall mean in excess of fifty percent (50%) of
the then outstanding Warrant Shares (calculated as provided in
the following sentence) that (i) are not held by the Company, an
affiliate, officer, creditor, employee or agent thereof or any of
their respective affiliates, members of their family, persons
acting as nominees or in conjunction therewith and (ii) have not
been resold to the public pursuant to a registration statement
filed with the Commission under the Act. For purposes of the
preceding sentence, the Holder of a Representative's Warrant
shall be deemed the holder of the aggregate number of Warrant
Shares that acquirable upon exercise thereof.
10. Obligations of Holders.
-----------------------
It shall be a condition precedent to the obligations of the
Company to take any action pursuant to Section 9 hereof that each
of the selling Holders shall:
(a) Furnish to the Company such information regarding
themselves, the Warrant Shares held by them, the intended method
of sale or other disposition of such securities, the identity of
and compensation to be paid to any underwriters proposed to be
employed in connection with such sale or other disposition, and
such other information as may reasonably be required to effect
the registration of their Warrant Shares.
(b) Notify the Company, at any time when a prospectus
relating to the Warrant Shares covered by a registration
statement is required to be delivered under the Act, of the
happening of any event with respect to such selling Holder as a
result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
11. Adjustments to Exercise Price and Number of Securities.
-------------------------------------------------------
The Exercise Price in effect at any time and the number and
kind of securities purchased upon the exercise of the
Representative's Warrant shall be subject to adjustment from time
to time only upon the happening of the following events:
11.1 Stock Dividend, Subdivision and Combination.
--------------------------------------------
In case the Company shall (i) declare a dividend or
make a distribution on its outstanding shares of Common Stock in
shares of Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock into a greater number of
shares, or (iii) combine or reclassify its outstanding shares of
Common Stock into a smaller number of shares, the Exercise Price
in effect at the time of the record date for such dividend or
distribution or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that it
shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number
of shares of Common Stock outstanding after giving effect to such
action, and the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior to such action.
Such adjustment shall be made successively whenever any event
listed above shall occur.
11.2 Adjustment in Number of Securities.
-----------------------------------
Upon each adjustment of the Exercise Price pursuant to
the provisions of this Section 11, the number of Warrant Shares
issuable upon the exercise at the adjusted Exercise Price of each
Representative's Warrant shall be adjusted to the nearest number
of whole shares of Common Stock by multiplying a number equal to
the Exercise Price in effect immediately prior to such adjustment
by the number of Warrant Shares issuable upon exercise of the
Representative's Warrant immediately prior to such adjustment and
dividing the product so obtained by the adjusted Exercise Price.
11.3 Definition of Common Stock.
---------------------------
For the purpose of this Agreement, the term "Common
Stock" shall mean (i) the class of stock designated as Common
Stock in the Articles of Incorporation of the Company as amended
as of the date hereof, or (ii) any other class of stock resulting
from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to
no par value, or from no par value to par value.
11.4 Merger or Consolidation.
------------------------
In case of any consolidation of the Company with, or
merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any
reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute
and deliver to the Holder a supplemental warrant agreement
providing that the Holder of each Representative's Warrant then
outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Representative's Warrant) to
receive, upon exercise of such Representative's Warrant, the kind
and amount of shares of stock and other securities and property
receivable upon such consolidation or merger by a holder of the
number of shares of Common Stock for which such Representative's
Warrant might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such supplemental
warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 11. The above
provision of this subsection shall similarly apply to successive
consolidations or mergers.
11.5 No Adjustment of Exercise Price in Certain Cases.
-------------------------------------------------
No adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the
Representative's Warrant or the Warrant Shares;
(b) Upon the issuance or sale of Common Stock (or
any other security convertible, exercisable, or exchangeable into
shares of Common Stock) upon the direct or indirect conversion,
exercise, or exchange of any options, rights, warrants, or other
securities or indebtedness of the Company outstanding as of the
date of this Agreement or granted pursuant to any stock option
plan of the Company in existence as of the date of this
Agreement, pursuant to the terms thereof; or
(c) If the amount of said adjustment shall be less
than two cents ($.02) per share, provided, however, that in such
case any adjustment that would otherwise be required then to be
made shall be carried forward and shall be made at the time of
and together with the next subsequent adjustment which, together
with any adjustment so carried forward, shall amount to at least
two cents ($.02) per Representative's Warrant.
12. Exchange and Replacement of Representative's Warrant
Certificates.
----------------------------------------------------
Each Representative's Warrant Certificate is exchangeable,
without expense, upon the surrender thereof by the registered
Holder at the principal executive office of the Company for a new
Representative's Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same
number of Warrant Shares in such denominations as shall be
designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation
of any Representative's Warrant Certificate, and, in case of
loss, theft or destruction, of indemnity or security reasonably
satisfactory to it and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and
cancellation of the Representative's Warrant, if mutilated, the
Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
13. Elimination of Fractional Interests.
------------------------------------
The Company shall not be required to issue certificates
representing fractions of shares of Common Stock upon the
exercise of the Representative's Warrant, nor shall it be
required to issue scrip or pay cash in lieu of fractional
interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Common Stock or other
securities, properties or rights.
14. Reservation and Listing of Securities.
--------------------------------------
The Company shall at all times reserve and keep available
out of its authorized shares of Common Stock, solely for the
purpose of issuance upon the exercise of the Representative's
Warrant and the Warrants issuable upon exercise thereof, such
number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof. Every
transfer agent ("Transfer Agent") for the Common Stock and other
securities of the Company issuable upon the exercise of the
Representative's Warrant will be irrevocably authorized and
directed at all times to reserve such number of authorized shares
of Common Stock and other securities as shall be requisite for
such purpose. The Company will keep a copy of this Agreement on
file with every Transfer Agent for the Common Stock and other
securities of the Company issuable upon the exercise of the
Representative's Warrant. The Company will supply every such
Transfer Agent with duly executed stock and other certificates,
as appropriate, for such purpose. The Company covenants and
agrees that, upon exercise of the Representative's Warrant and
payment of the Exercise Price therefor, all shares of Common
Stock and other securities issuable upon such exercise shall be
duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any stockholder. As long as
the Representative's Warrant shall be outstanding, the Company
shall use its best efforts to cause all shares of Common Stock
issuable upon the exercise of the Representative's Warrant to be
listed (subject to official notice of issuance) on all securities
exchanges on which the Common Stock issued to the public in
connection herewith may then be listed and/or quoted on Nasdaq
SmallCap Market.
15. Notices to Representative's Warrant Holders.
--------------------------------------------
Nothing contained in this Agreement shall be construed as
conferring upon the Holders the right to vote or to consent or to
receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter,
or as having any rights whatsoever as a stockholder of the
Company. If, however, at any time prior to the expiration of the
Representative's Warrants and their exercise, any of the
following events shall occur:
(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them to
receive a dividend or distribution payable otherwise than in
cash, or a cash dividend or distribution payable otherwise than
out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for shares
of capital stock of the Company, or any option, right or warrant
to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or merger)
or a sale of all or substantially all of its property, assets and
business as an entirety shall be proposed; then in any one or
more of said events, the Company shall give written notice of
such event at least fifteen (15) days prior to the date fixed as
a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend,
distribution, convertible or exchangeable securities or
subscription rights, or entitled to vote on such proposed
dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of closing the transfer
books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken
in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any
proposed dissolution, liquidation, winding up or sale.
16. Warrants.
---------
The form of the certificate representing the Warrants (and
the form of election to purchase shares of Common Stock upon the
exercise of the Warrants and the form of assignment printed on
the reverse thereof) shall be substantially as set forth in
Exhibit "A" to the Warrant Agreement dated as of the date hereof
by and among the Company, the Representative and [American Stock
Transfer & Trust Company,] as warrant agent (the "Warrant
Agreement"). Each Warrant issuable upon exercise of the
Representative's Warrants shall evidence the right to initially
purchase a fully paid and non-assessable share of Common Stock at
an initial purchase price of $____ [150% of the initial public
offering price per share of Common Stock] from _________, 1998
[one year from the Closing Date of the Registration Statement]
until 5:30 p.m. New York time on _____________, 2002 [5 years
from the Closing Date of the Registration Statement] at which
time the Warrants, unless the exercise period has been extended,
shall expire. The exercise price of the Warrants and the number
of shares of Common Stock issuable upon the exercise of the
Warrants are subject to adjustment, whether or not the
Representative's Warrants have been exercised and the Warrants
have been issued, in the manner and upon the occurrence of the
events set forth in Section 8 of the Warrant Agreement, which is
hereby incorporated by reference and made a part hereof as if set
forth in its entirety herein. The Company covenants to, and
agrees with, the Holder(s) that without the prior written consent
of the Holder(s), which will not be unreasonably withheld, the
Warrant Agreement will not be modified, amended, canceled,
altered or superseded, and that the Company will send to each
Holder, irrespective of whether or not the Representative's
Warrants have been exercised, any and all notices required by the
Warrant Agreement to be sent to holders of the Warrants.
17. Notices.
--------
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been
duly made and sent when delivered, or mailed by registered or
certified mail, return receipt requested:
(a) if to the registered Holder of the
Representative's Warrant, to the address of such Holder as shown
on the books of the Company; or
(b) if to the Company, to the address set forth in
Section 4 hereof or to such other address as the Company may
designate by notice to the Holders.
18. Supplements; Amendments; Entire Agreement.
------------------------------------------
This Agreement (including the Underwriting Agreement to the
extent portions thereof are referred to herein) contains the
entire understanding between the parties hereto with respect to
the subject matter hereof and may not be modified or amended
except by a writing duly signed by the party against whom
enforcement of the modification or amendment is sought. The
Company and the Representative may from time to time supplement
or amend this Agreement without the approval of any holders of
Representative's Warrant Certificates (other than the
Representative) in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective
or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder
which the Company and the Representative may deem necessary or
desirable and which the Company and the Representative deem shall
not adversely affect the interests of the Holders of
Representative's Warrant Certificates.
19. Successors.
-----------
All of the covenants and provisions of this Agreement shall
be binding upon and inure to the benefit of the Company, the
Holders and their respective successors and assigns hereunder.
20. Survival of Representations and Warranties.
-------------------------------------------
Notwithstanding any investigations made by or on behalf of
the parties to this Agreement, all representations, warranties
and agreements made by the parties to this Agreement herein shall
survive.
21. Governing Law.
--------------
This Agreement and each Representative's Warrant Certificate
issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be
construed in accordance with the laws of said State without
giving effect to the rules of said State governing the conflicts
of laws.
22. Severability.
-------------
If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provision of this Agreement.
23. Captions.
---------
The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor
should they be construed as, a part of this Agreement and shall
be given no substantive effect.
24. Benefits of this Agreement.
---------------------------
Nothing in this Agreement shall be construed to give to any
person or corporation other than the Company and the
Representative and any other registered Holder(s) of the
Representative's Warrant Certificates or Warrant Shares any legal
or equitable right, remedy or claim under this Agreement; and
this Agreement shall be for the sole and exclusive benefit of the
Company and the Representative and any other Holder(s) of the
Representative's Warrant Certificates or Warrant Shares.
25. Counterparts.
-------------
This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute
but one and the same instrument.
IN WITNESS OF, the parties hereto have caused this Agreement
to be duly executed, as of the day and year first above written.
ATTEST: THERMOENERGY CORPORATION
- ------------------------ By:
Secretary ------------------------
Name:
Title:
NATIONAL SECURITIES CORPORATION
By:
----------------------------
Name: Steven A. Rothstein
Title: Chairman<PAGE>
EXHIBIT A
[FORM OF REPRESENTATIVE'S WARRANT CERTIFICATE]
THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS CERTIFICATE AND
THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT
APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH
ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION
OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER
SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S WARRANT
REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH
THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, August , 2002
----
Representative's Warrant No.
------
Shares of Common Stock and/or Warrants
----- ----
WARRANT CERTIFICATE
This Warrant Certificate certifies that _________, or
registered assigns, is the registered holder of Warrants to
purchase initially, at any time from August _____, 1998 until
5:30 p.m., New York time on August , 2002 ("Expiration Date"),
up to ____ shares of Common Stock and/or _____ Series 1 Warrants
and/or _____ Series 2 Warrants at the initial exercise price,
subject to adjustment in certain events, of $ _____ [120% of
initial offering price per share] per share of Common Stock and
$_____ per Warrant (the "Exercise Price") upon surrender of this
Representative's Warrant Certificate and payment of the Exercise
Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Representative's Warrant
Agreement dated as of August ____, 1997 between the Company and
National Securities Corporation (the "Warrant Agreement").
Payment of the Exercise Price shall be made by certified or
official bank check in New York Clearing House funds payable to
the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time,
on the Expiration Date, at which time all Representative's
Warrant evidenced hereby, unless exercised prior thereto, shall
thereafter be void.
The Representative's Warrant evidenced by this Warrant
Certificate are part of a duly authorized issue of
Representative's Warrants issued pursuant to the Warrant
Agreement, which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of
rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning
the registered holders or registered holder) of the
Representative's Warrant.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of
the Company's securities issuable thereupon may, subject to
certain conditions, be adjusted. In such event, the Company
will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and
the number and/or type of securities issuable upon the exercise
of the Representative's Warrant; provided, however, that the
failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the
rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new
Warrant Certificate or Warrant Certificates of like tenor and
evidencing in the aggregate a like number of Representative's
Warrant shall be issued to the transferee(s) in exchange for this
Warrant Certificate, subject to the limitations provided herein
and in the Warrant Agreement, without any charge except for any
tax or other governmental charge imposed in connection with such
transfer.
Upon the exercise of less than all of the Representative's
Warrant evidenced by this Certificate, the Company shall
forthwith issue to the holder hereof a new Warrant Certificate
representing such numbered unexercised Representative's Warrant.
The Company may deem and treat the registered holder(s)
hereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing
hereon made by anyone), for the purpose of any exercise hereof,
and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any
notice to the contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them
in the Warrant Agreement.
This Warrant Certificate does not entitle any holder thereof
to any of the rights of a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of August , 1997
-----
ATTEST: THERMOENERGY CORPORATION
- ---------------------- By:
Secretary -----------------------
Name:
Title:
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase [ ]
shares of Common Stock and/or [ ] Series 1 Warrants and/or [ ]
Series 2 Warrants and herewith tenders in payment for such
securities a certified or official bank check payable in New York
Clearing House Funds to the order of ThermoEnergy Corporation
(the "Company") in the amount of $[ ], all in accordance with
the terms of Section 4 of the Representative's Warrant Agreement
dated as of August _____, 1997 between the Company and National
Securities Corporation. [Add cashless exercise provision.] The
undersigned requests that a certificate for such securities be
registered in the name of _____________________, whose address is
_________________________________________ and that such
certificate be delivered to _______________, whose address is
_________________________, and if said number of shares shall not
be all the shares purchasable hereunder, that a new Warrant
Certificate for the balance of the shares purchasable under the
within Warrant Certificate be registered in the name of the
undesigned warrantholder or his assignee as below indicated and
delivered to the address stated below.
Dated:
--------------------
Signature:
----------------------
(Signature must conform
in all respects to name
of holder as specified
on the face of the
Warrant Certificate.)
Address:
-------------------------
-------------------------
-------------------------
(Insert Social Security
or Other Identifying
Number of Holder)
Signature Guaranteed:
--------------------------------------------
(Signature must be guaranteed by a bank savings and loan
association, stockbroker, or credit union with membership in an
approved signature guaranty Medallion Program pursuant to
Securities Exchange Act Rule 17Ad-15.) <PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED, ____________________ hereby sells,
assigns and transfers unto [NAME OF TRANSFEREE] this Warrant
Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ______________
Attorney, to transfer the within Warrant Certificate on the books
of the within-named Company, with full power of substitution.
Dated:
-------------------
Signature:
------------------------
(Signature must conform
in all respects to name
of holder as specified
on the face of the
Warrant Certificate.)
Address:
-------------------------
-------------------------
-------------------------
(Insert Social Security
or Other Identifying
Number of Holder)
Signature Guaranteed:
--------------------------------------------
(Signature must be guaranteed by a bank savings and loan
association, stockbroker, or credit union with membership in an
approved signature guaranty Medallion Program pursuant to
Securities Exchange Act Rule 17Ad-15.)
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. 2 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
August 6, 1997
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 2 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
August 6, 1997
Exhibit 23.4
August 7, 1997
ThermoEnergy Corporation
323 Center Street, Suite 1300
Little Rock, Arkansas 72201
Gentlemen:
We hereby consent to the use of our name as your counsel in
connection with the Registration Statement on Form SB-2 (No.
333-21613) and in the Prospectus forming a part thereof. In giving
this consent, we do not thereby concede that we come within the
categories of persons whose consent is required by the Act or
the General Rules and Regulations promulgated thereunder.
Very truly yours,
WARING COX, PLC
