As filed with the Securities and Exchange Commission on April 1,
1997
Registration No. 333-21613
=================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 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. /X/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Each Class of to be Price per Offering Registration
Securities to be registered Registered Unit(1) Price(1) Fee
- --------------------------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C>
Series A Common Stock,
$.001 par value(2) 1,840,000 $7.00(1) $12,880,000(1) $ 3,903.03
Redeemable Series A Common
Stock Purchase Warrants 1,840,000 $0.10 $ 184,000 $ 55.76
Series A Common Stock
issuable on exercise of
Redeemable Series A
Common Stock Purchase
Warrants (3) 1,840,000 $10.50 $19,320,000 $ 5,854.55
Representative's Warrants(4) 160,000 $ .0001 $ 16 $ (5)
Series A Common Stock
issuable upon exercise
of Representative's
Warrants (4) 160,000 $8.40 $ 1,344,000 $ 407.27
Redeemable Series A Common
Stock Purchase Warrants
issuable upon exercise of
Representative's Warrant (4) 160,000 $0.12 $ 19,200 $ 5.82
Series A Common Stock issuable
upon exercise of Warrants
issuable upon exercise of
Representative's Warrants (5) 160,000 $10.50 $ 1,680,000 $ 509.09
Total $35,427,216 $10,735.52
</TABLE>
(1) Estimated sales for purposes of computing the registration fee
pursuant to Rule 457(a).
(2) Includes 240,000 shares of Series A Common Stock which the
Underwriters have the option to purchase to cover over-
allotments, if any.
(3) Reserved for issuance upon exercise of Redeemable Series A
Common Stock Purchase Warrants.
(4) To be issued to the Representative of the Underwriters at the
Closing.
(5) No fee required.
(6) Reserved for issuance upon exercise of Representative's
Warrants.
(7) 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.
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.
PROSPECTUS SUBJECT TO COMPLETION, DATED APRIL __, 1997
THERMOENERGY CORPORATION
/ LOGO /
1,600,000 Shares of Series A Common Stock and
1,600,000 Redeemable Series A Common Stock Purchase Warrants
ThermoEnergy Corporation, an Arkansas corporation ("Company"),
hereby offers ("Offering") 1,600,000 shares of Series A Common
Stock, par value $.001 per share ("Common Stock"), and 1,600,000
Redeemable Series A Common Stock Purchase Warrants ("Warrants").
The Common Stock and the Warrants are sometimes hereinafter
together referred to as the "Securities". Until the completion of
this Offering, the Common Stock and the Warrants offered hereby may
only be purchased together on the basis of one share of Common
Stock and one Warrant, but will trade separately immediately after
this Offering. Each Warrant entitles the registered holder thereof
to purchase one share of Common Stock at an initial exercise price
of $____ per share [150% of the public offering price per share],
subject to adjustment, at any time commencing ________, 1997 until
________, 2001. 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 closing sale price of the Common Stock as reported on the
Nasdaq SmallCap Market ("Nasdaq") equals or exceeds $____ 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".
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
$6 and $7 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". The Common Stock and the Warrants have been
approved for listing on Nasdaq under the symbols "THMO" and
"THMO.W", respectively.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A
HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE
"RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION ON PAGE 17."
----------------------
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 Proceeds to
Price to Public and Commission(1) the Company(2)
--------------- ----------------- --------------
<S> <C> <C> <C>
Per Share _______ _______ _______
Per Warrant _______ _______ _______
Total (3) _______ _______ _______
</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
160,000 shares of Common Stock and/or 160,000 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 240,000 additional shares of Common Stock
and/or 240,000 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
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-
ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET
PRICE OF THE COMMON STOCK OR THE WARRANTS OFFERED HEREBY AT A LEVEL
ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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]
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
1,600,000 shares of Common Stock upon exercise of the Warrants,
(iii) the issuance of up to 160,000 shares of Common Stock and
160,000 Warrants upon exercise of the Representative's Warrants,
(iv) the issuance of up to 160,000 shares of Common Stock upon
exercise of Warrants underlying the Representative's Warrants, and
(v) the issuance of up to 1,574,595 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 material 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, TNT 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
is scheduled to be delivered to the project site, Radford Army
Ammunition Plant, Radford, Virginia, in April 1997, with operations
to begin in May 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 - NitRem 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 process 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 the second
quarter of 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, the San Bernardino Valley Water District
("SBVWD") was awarded a $3,000,000 federal matching grant 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 "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.
The Offering
Securities Offered . . . . . . . 1,600,000 shares of Series A
Common Stock and 1,600,000
Redeemable Series A Common
Stock Purchase Warrants.
Terms of Warrants. . . . . . . . Each Warrant entitles the
holder thereof to purchase, at
any time commencing ________,
1997 until ________, 2001, one
share of Common Stock at a
price of $____ 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/ask price of
the Common Stock as reported on
Nasdaq equals or exceeds $____
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). . . . . . . 3,156,965 shares of Series B
Common Stock and 1,574,595
Series B Warrants.
Securities to be outstanding
after the Offering (1)(2)(3) . . 1,600,000 shares of Series A
Common Stock and 1,600,000
Series A Warrants.
3,206,965 shares of Series B
Common Stock and 1,574,595
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
Warrants . . . . . . . . . . . . THMO.W
- ----------------------
(1) Stockholders of the Company have approved two, four-to-one
reverse stock splits which have not 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 50,000 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 _________,
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, 50,000 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.
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 8.
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 December 31, 1996, for the three months ended December 31,
1995 and 1996 and for the period cumulative during the development
stage through December 31, 1996 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 three months ended December 31, 1996
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 (4):
<TABLE>
<CAPTION>
Cumulative Cumulative
during during
development Three Months development
stage through Ended stage through
Year Ended September 30
September 30 December 31 December 31
------------------------------------------------------- ---
- --------- ---------------- -------------
1992 1993 1994 1995 1996
1996 1995 1996 1996
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
Operating
Revenues $ 0 $ 0 $ 0 $ 0 $ 0 $
0 $ 0 $ 0 $ 0
Operating
Expenses 0 0 0 0 0
0 0 0 0
General and
Administrative 533,284 1,195,722 721,496 756,341 520,364
4,834,502 150,320 211,010 5,045,512
Research and
Development 33,000 0 48,500 123,000 0
627,266 0 0 627,266
-------- ---------- -------- -------- -------- -
- --------- -------- -------- ----------
Loss from
Operations (566,284) (1,195,722) (769,996) (879,341) (520,364)
(5,461,768) (150,320) (211,010) (5,672,778)
Interest
Income 15,972 1,908 2,714 2,391 6,942
60,785 1,497 2,313 63,098
Interest
Expense (12,439) (14,107) (145) (20,048) (38,199)
(140,418) (8,705) (13,087) (153,505)
-------- ---------- -------- -------- -------- -
- --------- -------- -------- ----------
Net Loss $(562,751) $(1,207,921) $(767,427) $(896,998) $(551,621)
$(5,541,401) $(157,528) $(221,784) $(5,763,185)
======== ========== ======== ======== ========
========== ======== ======== ==========
Net loss per
share(1)(2) $ (.01) $ (.02) $ (.01) $ (.01) $ (.01) $
(.09) $ (.00) $ (.00) $ (.10)
Pro forma
net loss
per share(2) (.15) $ (.32) $ (.20) $ (.24) $ (.15) $
(1.50) $ (.04) $ (.06) $ (1.56)
Cash
Dividends
paid $ 0 $ 0 $ 0 $ 0 $ 0 $
0 $ 0 $ 0 $ 0
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1996
------------------ -------------------------
Actual As Adjusted(3)
------ --------------
<S> <C> <C> <C>
Working capital
(deficit) $(1,699,904) $(1,921,282) $6,124,000
Total assets 173,333 183,579 6,677,579
Total liabilities 1,867,575 2,099,605 414,605
Stockholders'
equity (deficit) (1,694,242) (1,916,026) 6,783,974
</TABLE>
- --------------------
(1) Net loss per share is calculated on the basis of the weighted
average shares of Common Stock outstanding 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) Reflects the net loss per share 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.
(3) Gives effect to the initial application of the estimated net
proceeds from this Offering. See "Use of Proceeds".
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 December 31, 1996, the Company had an accumulated
stockholders' deficit of $(1,694,242) and $(1,916,026),
respectively, and a working capital deficit of $(1,699,904) and
$(1,921,282), respectively. The Company also made advances to
management and related accrued period interest payments of $122,200
and $11,451, respectively, as of December 31, 1996. Additionally,
as of January 31, 1997, the Company had outstanding indebtedness in
an aggregate principal amount of $500,000 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 material 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 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".
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 personnel and materials to support the Company's
efforts to commercialize the Technologies and pursue demonstration
projects. Battelle charges the Company a negotiated fee for such
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 60 % of the net proceeds of this Offering has
been allocated for working capital and general corporate purposes.
In addition, approximately 15% 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 the
approximately 25% 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 January
31, 1997 for consulting, legal, professional and accounting fees
and other general obligations of the Company, including $100,000 to
the officers for deferred compensation and back pay accumulated
since 1994 (after offsetting $142,000 of advances to officers and
related accrued interest pursuant to the 1991 Board of Directors
resolution which provided for the right of offset); 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, 3,156,965 shares of Series B Common Stock would be
eligible for sale 90 days after the date of this Prospectus,
however, all 3,156,965 shares are subject to the Series B
restrictive terms of the class. Additionally, an aggregate of
1,574,595 shares of Series B Common Stock issuable upon the
exercise of the Series B Warrants and 50,000 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 two years 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 ___ shares of Series
B Common Stock (includes all Series B Warrants). Sales of
substantial amounts of Series B Common Stock in the public market
could adversely affect the market price of the Common Stock. See
"Principal Stockholders"; "Shares Eligible for Future Sale".
Future sales of Common Stock by stockholders (including option
and warrant holders) under Rule 144 of the Securities Act, or
through the exercise of the Warrants or 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. Also, all officers and directors of the
Company have entered into a 12 month lock-up agreement with the
Underwriter, prohibiting sales of Company securities 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 the Company
meets the Lock-Up Period (as defined in "Description of Securities
- - Common Stock") has been met, 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 and
Warrant Prices
Prior to this Offering, there has been no public market for
the Common Stock or the Warrants, and there can be no assurance
that an active trading market for any of the Securities will
develop or, if developed, be sustained after the Offering. 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 $4.84 per
share, or approximately 77.1%, 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 ________, 1997, holders of the
Warrants may exercise their right to acquire Common Stock and pay
an exercise price of $_____ per share, subject to adjustment upon
the occurrence of certain dilutive events, until ________, 2001,
after which date any unexercised 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 Warrants are subject to
redemption at $.05 per Warrant on 30 days' prior written notice
provided that the average closing bid/ask price of the Common Stock
as reported on Nasdaq equals or exceeds $_____ 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".
USE OF PROCEEDS
The net proceeds to the Company from the sale of the
Securities offered hereby, at an assumed public offering price of
$6.25 per share of Common Stock and $.10 per Warrant, after
deduction of underwriting discounts and other estimated offering
expenses are estimated to be approximately $8,700,000
(approximately $________ 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 $5,194,000 60%
Repayment of Bridge Financing(1) 1,314,000 15
Strategic Alliances and Technology(2) 1,000,000 12
Other Current Liabilities(3) 492,000 6
Fees and Expenses Associated with
Public Offering(4) 400,000 4
Research and Development(5) 300,000 3
--------- ---
$8,700,000 100%
</TABLE>
- -----------------------
(1) Represents repayment of $1,235,000 plus interest as of January
31, 1997 for bridge financing, including $500,000 to repay 11
noteholders who advanced loans to the Company in December 1996 and
January 1997 and $735,000 to repay loans from certain shareholders.
The notes for $500,000 have a term of the earlier of six months or
three days after the closing of a public offering. The notes for
$735,000 have 48 month terms.
(2) Includes expenditures regarding formation of strategic
alliances and/or joint ventures, including additional personnel,
professional fees and administrative overhead, as well as costs
associated with technology demonstrations for new applications
and/or fields of use.
(3) Represents payment of current liabilities of the Company as of
January 31, 1997 for consulting, legal, professional and accounting
fees and other general obligations of the Company, including
$100,000 to the officers for deferred compensation and back pay
accumulated since 1994 (after offsetting $142,000 of advances to
officers and related accrued interest pursuant to the 1991 Board of
Directors resolution which provided for the right of offset).
(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 expenditures of the Company associated with the
Offering.
(5) 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.
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 December 31, 1996, 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
$6.25 per share of Common Stock and $.10 per Warrant and net of
estimated offering expenses and underwriting discounts), the
implementation of the two, four-to-one reverse stock splits
approved by stockholders on March 2, 1994 and December 12, 1996,
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.
<TABLE>
<CAPTION>
December 31, 1996
----------------------
Actual As Adjusted
------ -----------
<S> <C> <C>
Short Term Debt:
Notes payable to stockholders
(See Note 2 of Notes to
Financial Statements Unaudited) $ 920,000 $
========== =========
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; 1,600,000 shares
issued and outstanding, as
adjusted 0 1,600
Series B Common stock(1);
authorized 65,000,000 shares;
3,240,793 shares issued and
3,156,965 shares outstanding;
3,290,793 (2) shares issued
and 3,206,965 shares(2)
outstanding, as adjusted 3,241 3,291(1)
Additional paid-in capital 3,843,918 12,543,868
Accumulated deficit (5,763,185) (5,763,185)
Total stockholders' equity
(deficit) (1,916,026) 6,783,974
Total capitalization $(1,916,026) $6,783,974
========== =========
</TABLE>
- -----------------------
(1) Reflects the Company's two, four-to-one reverse stock splits.
(2) Includes 50,000 shares of Series B Common Stock issuable to
note holders of bridge loans made during the period from December
1996 through the date of this Prospectus, upon completion of this
Offering.
DILUTION
At December 31, 1996, the Company's negative net tangible book
value was $(1,916,026). The net tangible book value of the Company
is the tangible assets less total liabilities. After giving effect
to the implementation of the two, four-to-one reverse stock splits
approved by stockholders on March 2, 1994 and December 12, 1996,
and to the sale by the Company of the Securities offered hereby, at
an assumed public offering price of $6.25 per share of Common Stock
and $.10 per 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 December 31, 1996 would have been
approximately $6,783,974, or $2.12 per share. This represents an
increase in net tangible book value per share of $2.73 to the
Company's existing stockholders and an immediate dilution of $4.13
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 $6.25
Negative net tangible book
value per share before the
Offering(1) $(0.61)
Increase per share attributable
to payments by new stockholders 2.02
Pro forma net tangible book value
per share after the Offering $1.41
----
Dilution per share to new
stockholders $4.84
====
</TABLE>
- ----------------------
(1) Reflects the effect of the two, four-to-one reverse stock
splits approved by stockholders March 2, 1994 and December 12,
1996.
In the event the Underwriter's Overallotment Option is
exercised in full, the pro forma net tangible book value per share
at December 31, 1996 would have been approximately $1.72 and the
dilution of net tangible book value per share to new stockholders
would have been approximately $4.53. See "Underwriting."
The following table sets forth 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 50,000 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 to be purchased by investors in
this Offering at an assumed initial public offering price of $6.25
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 1,600,000 33.29% $10,000,000(1) 80.82% $6.25
Existing
stockholders 3,206,965 66.71 2,373,129(2) 19.18 $ .74
--------- ------ ---------- ------
Total 4,804,965 100.00% $12,373,129 100.00%
========= ====== ========== ======
</TABLE>
- ---------------------
(1) Attributes no value to Warrants.
(2) See "Certain Relationships and Related Transactions".
SELECTED FINANCIAL DATA
The selected 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 selected financial data
as of December 31, 1996, for the three months ended December 31,
1995 and 1996 and for the period cumulative during the development
stage through December 31, 1996 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 three months ended December 31, 1996
are not necessarily indicative of the results of operations to be
expected for the entire year. The selected 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 Cumulative
during during
development Three Months development
stage through Ended stage through
Year Ended September 30
September 30 December 31 December 31
------------------------------------------------------- ---
- --------- ---------------- -------------
1992 1993 1994 1995 1996
1996 1995 1996 1996
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
Operating
Revenues $ 0 $ 0 $ 0 $ 0 $ 0 $
0 $ 0 $ 0 $ 0
Operating
Expenses 0 0 0 0 0
0 0 0 0
General and
Administrative 533,284 1,195,722 721,496 756,341 520,364
4,834,502 150,320 211,010 5,045,512
Research and
Development 33,000 0 48,500 123,000 0
627,266 0 0 627,266
-------- ---------- -------- -------- -------- -
- --------- -------- -------- ----------
Loss from
Operations (566,284) (1,195,722) (769,996) (879,341) (520,364)
(5,461,768) (150,320) (211,010) (5,672,778)
Interest
Income 15,972 1,908 2,714 2,391 6,942
60,785 1,497 2,313 63,098
Interest
Expense (12,439) (14,107) (145) (20,048) (38,199)
(140,418) (8,705) (13,087) (153,505)
-------- ---------- -------- -------- -------- -
- --------- -------- -------- ----------
Net Loss $(562,751) $(1,207,921) $(767,427) $(896,998) $(551,621)
$(5,541,401) $(157,528) $(221,784) $(5,763,185)
======== ========== ======== ======== ========
========== ======== ======== ==========
Net loss per
share(1)(2) $ (.01) $ (.02) $ (.01) $ (.01) $ (.01) $
(.09) $ (.00) $ (.00) $ (.10)
Pro forma
net loss
per share(2) (.15) $ (.32) $ (.20) $ (.24) $ (.15) $
(1.50) $ (.04) $ (.06) $ (1.56)
Cash
Dividends
paid $ 0 $ 0 $ 0 $ 0 $ 0 $
0 $ 0 $ 0 $ 0
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1996
------------------ -------------------------
Actual As Adjusted(3)
------ --------------
<S> <C> <C> <C>
Working capital
(deficit) $(1,699,904) $(1,921,282) $6,124,000
Total assets 173,333 183,579 6,677,579
Total liabilities 1,867,575 2,099,605 414,605
Stockholders'
equity (deficit) (1,694,242) (1,916,026) 6,783,974
</TABLE>
- --------------------
(1) Net loss per share is calculated on the basis of the weighted
average shares of Common Stock outstanding 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) Reflects the net loss per share after giving effect to the
two, four-to-one reverse stock splits approved by the Company's
stockholders on March 2, 1994 and December 12, 1996.
(3) Gives effect to the initial application of the estimated net
proceeds from this Offering. See "Use of Proceeds".
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 material 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 to be
delivered to the 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
Three months ended December 31, 1996 compared to three months
ended December 31, 1995
For the three months ended December 31, 1996, the Company
incurred a net loss of $221,784 as compared to $157,528 for the
three months ended December 31, 1995.
General and administrative expenses and travel expenses
increased during the period ended December 31, 1996 compared to
December 31, 1995 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 $387,835 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.
Research and development expenses 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 2,000,000 shares of common stock at a price of $1.00
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 1,490,050
shares were sold at a price of $1.00 per share and an additional
103,000 shares were issued at $1.00 per share in satisfaction of
notes payable and related accrued interest.
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 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 $1,000,000 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.
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 24,700,000 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 trinitrotoluene ("TNT")
redwater, TNT 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
is scheduled to be delivered to the project site, Radford Army
Ammunition Plant, Radford, Virginia, in April 1997, with operations
to begin in May 1997. TRIES holds the contract with the DoD,
Department of Army, and the Company has subcontracted with TRIES
for the project. See "Business - NitRem 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 process 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 the
second quarter of 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 - NitRem Demonstration - New York City Project".
In September 1996, the San Bernardino Valley Water District
("SBVWD") was awarded a $3,000,000 federal matching grant 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. 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 2,000,000 shares of common stock with
the Securities and Exchange Commission on June 24, 1992. The
Company subsequently sold 1,490,050 shares of stock, issued 103,000
shares in satisfaction of notes payable with related accrued
interest, and terminated the offering effective January 5, 1994.
On October 23, 1996, 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 "NitRem
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
(<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.
NITREM 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, and (b) 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, TNT 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. The Army Command has
issued a purchase order for the new unit. Glitsch Process System
Inc. (a wholly-owned subsidiary of Foster Wheeler Corporation) are
currently fabricating the NitRem unit. 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. The
demonstration unit is scheduled to be delivered to Radford in
April, 1997, with operations to begin in May, 1997. 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 NitRem'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 by Battelle successfully resulted in NitRem 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 nitrogen removal process.
The demonstration facility will be managed by Foster Wheeler
Environmental Corporation. The unit, designed as a mobile unit, is
scheduled to begin operation in the second quarter of 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 NitRem system 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 three months ended December 31, 1996. Research and
development 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 December 31, 1996, 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.
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 50 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
Thomas Randall Kemp 43 Director
Louis J. Ortmann, DDS 60 Director
J. Donald Phillips 63 Director
</TABLE>
- -----------------------
(1) As of December 31, 1996.
(2) Positions will be assumed upon completion of the Offering.
Dennis Cossey has served as Chief Executive Officer and
Director of the Company since 1988 and Chairman of the Board since
1990.
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. 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. Mr. Franz has served as
a Director of the Company since March 1994.
Thomas Randall Kemp was certified as a public accountant in
1976. Over the past five years, Mr. Kemp has been self-employed,
primarily serving as a business consultant and office administrator
for various businesses in central Arkansas. Mr. Kemp has served as
a Director of the Company since 1992.
Louis J. Ortmann, DDS, currently is a Director of Louis J.
Ortmann Dental Clinic, Inc. Dr. Ortmann has been practicing
dentistry for 25 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 served as Director of the Company since
November 1990.
Election of Board of Directors
The Board of Directors of the Company consists of six
Directors. Up to seven people may serve on the Board of Directors.
Directors are elected at the Company's Annual Meeting of
Shareholders. Six 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 and
Thomas Randall Kemp were elected May 1, 1996 and will serve three
year terms until May 1999 or until their successors are 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. The Company has not
filled this vacancy.
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. Thomas Randall Kemp and P.L. Montesi serve on the
Executive Compensation Committee, the chairman of which is Randall
Kemp. 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, Randall
Kemp, 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 100,000 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 1996 $110,777(1) --
and 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 (scheduled May 7, 1997). The Plan provides that
Officers and/or key employees and non-employee Directors of the
Company may receive incentive Stock Options and Non-Qualified Stock
Options to purchase up to an aggregate of 750,000 shares of Company
Series B Common Stock. The Board of Directors awarded, effective
upon completion of this Offering, stock options under the Plan to
certain key executive officers the right to purchase an aggregate
of 505,000 shares of Series B Common Stock, all of which provide
for an exercise price at the initial offering price per share.
Stock Options for 150,000 shares of Series B Common Stock were
granted to each Messrs. Cossey and Montesi, respectively, and are
exercisable at the rate of 33-1/3% of the number of options granted
in each of calendar years 1998 through 2000, inclusive, and unless
unexercised, expire ten (10) years from the date of the grant,
subject to prior termination in accordance with any applicable
stock agreements. Stock options for 100,000 shares of Series B
Common Stock were granted contingent upon completion of this
Offering to each Messrs. Fassbender and Barket, respectively, whose
employment will be effective upon completion of this Offering are
exercisable at the rate of 20% of the number of options granted in
each calendar year 1998 through 2002, inclusive, and unless
unexercised, expire ten (10) years from date of grant, subject to
prior termination in accordance with any applicable stock
agreements. In addition, the Plan provides for non-qualified
options of 1,000 shares of Series B Common Stock to be awarded,
automatically, without further action by the Board or the Stock
Option Committee on the third business day following the day of
each annual meeting of the stockholders of the Corporation for each
person who is then a member of the Board of Directors and who is
not an employee of the Corporation or any of its subsidiaries.
Each 1,000 share option granted to a non-employee Director will
become exercisable beginning one (1) year from the date of the
annual meeting of shareholders on which the date of the options
were granted. If a non-employee Director is elected by the Board
of Directors to begin serving as Director on a date not coincident
with the annual meeting date, the Director will be granted the
initial 1,000 share option as of the date of the first meeting at
which he or she serves as Director; however, his or her options
will become first exercisable beginning one (1) year from the date
of the annual meeting at which he or she is first elected by the
stockholders and he or she will not receive an additional grant of
options upon his first election to the Board.
With respect to the qualified or "incentive stock options", as
defined in Section 422 of the Internal Revenue Code of 1986, as
amended. The Plan provides that the exercise price of each option
must be at least equal to 100% of the fair market value of the
common stock as of the date such option is granted and requires
that all such options have an expiration date not later than the
date which is one (1) day before the tenth anniversary of the date
of the grant of such options. However, with certain limited
exceptions and in event that the option holder ceases to be
associated with the Company, or engages in or is involved with any
business similar to that of the Company, such option holder's
incentive options immediately terminate.
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)
Four Non-Employee
Directors 5,000 Non-Qualified 1% (1)
All Executive
Officers and
Directors as a
Group (which would
be 9 persons) 505,000 100% (1)
</TABLE>
(1) Exercise price per share equals price of Common Stock in
Offering.
Executive Bonus Plan
On January 3, 1997, the Company's Board of Directors
established a five-year Executive Bonus Plan (the "Bonus Plan") to
reward executive officers and other key employees based upon the
Company achieving certain performance levels. Under the Bonus
Plan, commencing with the Company's 1997 fiscal year and for each
of the four fiscal years thereafter, the Company will have
discretion to award bonuses in an aggregate amount in each fiscal
year equal to 1% of the Company's net sales revenues for each
fiscal year, provided and on condition that the Company achieves a
net profit before taxes of not less than 5% of net sales in each
year, and provided that the aggregate bonuses in each year (out of
the maximum amount of 1% of annual net sales) shall not be in
excess of the proportion by which the Company's net profit before
taxes is greater than 5% of net sales but less than 15% of net
sales. The Compensation Committee of the Board of Directors of the
Company will determine the allocable amounts or percentages of the
bonus pool which may be paid annually to participants; provided,
that for fiscal 1997, the following persons shall (subject to their
continued full-time employment with the Company) be entitled to
receive the following percentages of the bonus payments, if any,
payable in respect of fiscal 1997:
<TABLE>
<CAPTION>
Name of Participant Percentage of Available Bonus Pool
------------------- ----------------------------------
<S> <C>
Dennis C. Cossey 20%
P.L. Montesi 20%
Alexander Fassbender 15%
Gary P. Barket 15%
Other Employees 30%
</TABLE>
Bonuses under the Bonus Plan are not exclusive of other
bonuses that may be awarded by the Board of Directors of the
Compensation Committee from time to time.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the
date of this Prospectus with respect to (i) the beneficial
ownership of the Common Stock of the Company by each beneficial
owner of more than 5% of the outstanding shares of 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 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 Beneficially Before After
of Beneficial Owner Owned(1)(2) Offering Offering
- ------------------- ----------- -------- --------
<S> <C> <C> <C>
P.L. Montesi
22 Greenway Drive
Little Rock, AR 72212 317,103(3) 8.25 6.53
Dennis Cossey
11706 Pleasant Ridge Drive
Little Rock, AR 72212 309,040(4) 8.20 6.36
J. Donald Phillips
218 Belmont
No. Little Rock, AR 72216 6,250 * *
Louis J. Ortmann
3832 Victoria Road
Festus, MO 63028 21,437(5) * *
Gerald J. Franz
232 Center Street
Little Rock, AR 72201 9,375(6) * *
Thomas Randall Kemp
232 Center Street
Little Rock, AR 72201 63 * *
Alexander Fassbender 625 * *
Battelle Pacific Northwest
Laboratories
Battelle Blvd.
Richland, WA 99352
All Officers and Directors
as a Group (8 Persons) 663,893 20.98 13.51
Centerpoint Power
Corporation of VA
8228 Smithfield Road
Springfield, VA 22152 701,875(7) 18.19 12.74
Frank T. Rayner
P.O. Box 16532
Panama City, FL 32406 233,302(8) 7.23 4.85
Robert Trump
167 E. 61st Street
New York, NY 10021 492,413(9) 13.79 9.31
</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 Common Stock
outstanding as of ___________. 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 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 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 Common Stock owned by his wife. Includes
1,875 Warrants purchased February 20, 1996 for $150
exercisable at $2.40 per share for restricted stock
within forty-eight months from date of purchase and
assumes the exercise of all Warrants. Includes 6,500
shares of Series B Common Stock received upon repayment
of December 1996 loan to the Company. See "Certain
Relationships and Related Transactions". Also includes
50,000 shares vesting, subject to stockholder approval,
under the Company's 1997 Stock Option Plan.
(4) Includes 1,875 Warrants purchased February 20, 1996 for
$150 exercisable at $2.40 per share for restricted stock
within forty-eight months from date of purchase and
assumes the exercise of all Warrants. Also includes
50,000 shares 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. Does not
include 26,563 shares of common stock owned by Dr.
Ortmann's wife or 4,244 Warrants purchased September 17,
1996 for $339.40 exercisable at $2.40 per share for
restricted 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.
(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 received
upon repayment of December 1996 loan to the Company.
(9) Includes 395,937 warrants purchased at par value
exercisable at $13.60 per share within ten years of
(62,500 December 22, 1992; 125,000 April 1, 1993; 208,344
July 15, 1993) and assumes 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 $2.40 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 $2.40 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
$2.40 per share for restricted stock within forty-eight
months from date of each purchase and assumes the
exercise of all warrants.
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 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 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 22,659,773 shares of the Company's 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, 2,040,227 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 1,341,250 shares of stock were issued to the
Company from the voting trust.
The Company issued Common Stock 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 Common Stock at a
price per share which is less than the Warrant price or the current
market value of such shares. On October 14, 1994, the Company sold
62,500 Restricted Common Stock 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 restricted common stock at $2.00
per share and purchase 25,000 warrants at par value per warrant
exercisable at $2.00 per share. The effect of the Company selling
restricted shares of 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 25,000, 20,000 and 50,000
warrants purchased March 20, 1996, May 17, 1996 and August 28,
1996, respectively, at $0.08 exercisable at $2.00 per share for
Series B Common Stock within forty-eight months from date of each
purchase and assures the exercise of all warrants.
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 300,000 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 personnel and materials to support the Company's
efforts to commercialize the Technologies and pursue demonstration
projects. Battelle charges the Company a negotiated fee for such
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 150,000 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 restricted 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 December of 1996, as
part of the Company's $500,000 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
$500,000 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.
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
December 31, 1996, there were no shares of Series A Common Stock
issued and outstanding, 51,852,693 shares of Series B Common Stock
issued, 50,511,443 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 February 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."
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 A Purchase Warrants. The following is a brief summary
of certain provisions of the Redeemable Series A Purchase Warrants
issued in connection with the Offering ("Warrants"). Reference is
made to the actual text of the Warrant Agreement between the
Company and ___________________ (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 Warrants. See "Additional Information."
Exercise Price and Terms. Each Warrant entitled 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 $__________ per share,
subject to adjustment in accordance with the anti-dilution and
other provisions referred to below. The holder of any Warrant may
exercise such Warrant by surrendering the certificate representing
the 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 Warrants may be exercised at any time in whole or
in part at the applicable exercise price until expiration of the
Warrants. No fractional shares will be issued upon the exercise of
the Warrants.
Adjustments. The exercise price and the number of shares of
Common Stock purchasable upon the exercise of the 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 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 Warrant.
Redemption Provisions. Commencing ___________, 1998, the
Warrants are subject to redemption at $.05 per Warrant on 30 days'
prior written notice provided that the average closing sale price
of the Common Stock as reported on Nasdaq equals or exceeds
$__________ per share [150% of the 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 Warrants, such
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 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 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
Warrants become wholly void and of no value. If a market for the
Warrants develops, the holder may sell the Warrants instead of
exercising them. There can be no assurance, however, that a market
for the Warrants will develop or continue.
Modification of Warrants. The Company and the Warrant Agent
may make such modifications to the 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 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 Warrants, without the consent of
two-thirds of the warrantholders.
The 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 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 Warrants. Although the Company will use its best
efforts 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, there can be no assurance
that it will be able to do so.
The 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
Warrants in the aftermarket or may move to jurisdictions in which
the shares underlying the Warrants are not so registered or
qualified during the period that the Warrants are exercisable. In
this event, the Company would be unable to issue shares to those
persons desiring to exercise their Warrants, and holders of
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.
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 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 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.
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,
2323 Bryan Street, Suite 2300, Dallas, Texas, 75201.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have
4,806,965 shares of Series A and Series B Common Stock outstanding,
of which only the 1,600,000 shares offered hereby (and the
1,600,000 Warrants) (1,840,000 shares and 1,840,000 Warrants if the
Overallotment Option is exercised) will be transferable without
restriction under the Securities Act. The other 3,206,965
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 two
years, 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 three 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 and
the Warrants 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, issue, agree or
offer 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:
<TABLE>
<CAPTION>
Number of
Underwriters Units
------------ ---------
<S> <C>
National Securities Corporation
Total 1,600,000
=========
</TABLE>
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 $_____ per share and $_____ per
Warrant. Such dealers may reallow a concession not in excess of
$_____ 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
$50,000 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 240,000 shares of Series A Common Stock and/or
an additional 240,000 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 and one Warrant) 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 160,000 shares of Common Stock
and/or up to 160,000 Warrants (the "Representative's Warrants").
The Representative's Warrants are initially exercisable at a price
of $_______ per share and $_______ per Warrant for a period of four
years, commencing ________, 1997 and are restricted from sale,
transfer, assignment or hypothecation for a period until _________,
1997, except to 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 Underwriting Agreement provides that the Representative
has a right of first refusal for a period of three years after the
date of this Prospectus with respect to any sale of securities by
the Company or any of its present or future subsidiaries; provided,
however, that the Company may terminate such right of first refusal
upon the payment of $150,000 to the Representative in the event the
Company elects to proceed with a firm commitment public offering
through another investment banking firm.
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 Securities. 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.
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 consistent 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 5% of the
aggregate exercise price of such Warrants if (a) the market price
of the Common Stock is lower than the exercise price, (b) the
Warrants are held in a discretionary account, or (c) the Warrants
are exercised in an unsolicited transaction where the holder of the
Warrant 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 Rule 10b-6 under the Exchange 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 by
exemption (xi) to Rule 10b-6 before the 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 by Rule 10b-6 during the periods
described above, the Representative has undertaken to waive
unconditionally its rights to receive a commission on the exercise
of such Warrants.
The foregoing is a summary of the principal terms of the
agreements described above and do 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 and for the three months
ended December 31, 1996 (unaudited) 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 December 31, 1996 (unaudited)
and September 30, 1996 F-22
Statements of Operations cumulative during
development stage through December 31, 1996
(unaudited) and for the three months ended
December 31, 1996 and December 31, 1995 (unaudited) F-23
Statements of Changes in Stockholders' Equity
(Deficit) for the periods ended September 30, 1988
through September 30, 1996 and the three months
ended December 31, 1996 (unaudited) F-24
Statements of Cash Flows cumulative during
development stage through December 31, 1996
(unaudited) and for the three months ended
December 31, 1996 and December 31, 1995 (unaudited) F-28
Notes to Financial Statements - December 31, 1996
(unaudited) F-29
<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 for 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.
/s/ Kemp & Company
Little Rock, Arkansas
December 4, 1996
<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>
September 30,
-----------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash $ 62,333 $ 52,524
Advances to officers (Note 6) 96,200 62,200
Accrued interest receivable -
officers (Note 6) 9,138 2,196
---------- ----------
Total Current Assets 167,671 116,920
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:
Authorized - 75,000,000 shares;
issued - 51,852,693 shares;
outstanding - 50,511,443 51,853 51,853
Additional paid-in capital 3,795,306 3,789,966
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
Research and development
(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:
Loss From Operations $ (.09) $ (.01) $ (.01) $ (.01)
Net Loss $ (.09) $ (.01) $ (.01) $ (.01)
</TABLE>
See notes to financial statements.
<PAGE> F-6
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, (35,285,714 shares
at $.005 per share) $35,285 $ 145,015 $ $ 180,300
Net loss (290,483) (290,483)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1988 35,285 145,015 (290,483) (110,183)
Conversion of $412,000 of
debentures and accrued
interest, September 1989
(4,901,350 shares) 4,902 452,099 457,001
Net loss (338,985) (338,985)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1989 40,187 597,114 (629,468) 7,833
Net loss (255,036) (255,036)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1990 40,187 597,114 (884,504) (247,203)
Conversion of $63,000 of
unsecured debentures
and accrued interest at
10%, March 1991, (708,566
shares) 709 70,148 70,857
Issuance of stock, May -
June 1991, (6,206,078
shares: 5,866,078 at $.10
per share; 340,000 shares
at $.05 per share) 6,206 597,401 603,607
Issuance of stock for
interest, June 1991,
(22,000 shares at $.10
per share) 22 2,178 2,200
<PAGE> F-7
Issuance of stock for
expenses incurred by
stockholders, July 1991
(81,295 shares at $.10
per share) 81 8,048 8,129
Net loss (670,179) (670,179)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1991 47,205 1,274,889 (1,554,683) (232,589)
Issuance of stock, October -
December 1991 (2,414,800
shares at $.10 per share) 2,415 239,065 241,480
Shares purchased in
rescission offer
(168,985 shares) (169) (16,730) (16,899)
Issuance of stock, public
offering, August -
September 1992 (5,500
shares at $1.00 per share) 5 5,495 5,500
Net loss (562,751) (562,751)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1992 49,456 1,502,719 (2,117,434) (565,259)
Issuance of stock, public
offering October 1992 -
September 1993 (1,484,550
shares at $1.00 per
share) 1,485 1,483,065 1,484,550
Issuance of stock for
exercise of stock options,
May 1993 (40,000 shares
at $.10 per share) 40 3,960 4,000
<PAGE> F-8
Issuance of warrants to
stockholder 6,333 6,333
Conversion of $103,000 of
notes payable to stock-
holders and accrued
interest, December 1992
(103,000 shares) 103 102,897 103,000
Issuance of stock for
consulting services, June
1993 (150,000 shares at
$1.00 per share) 150 149,850 150,000
Net loss (1,207,921) (1,207,921)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1993 51,234 3,248,824 (3,325,355) 25,297)
Issuance of warrants to
stockholders 226,000 226,000
Issuance of stock for
exercise of stock options,
March 1994 (60,000 shares
at $.10 per share) 60 5,940 6,000
Issuance of stock for
exercise of warrants by
stockholder, August 1994
(58,825 shares at $.85
per share) 59 49,942 50,001
Net loss (767,427) (767,427)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1994 51,353 3,530,706 (4,092,782) (510,723)
<PAGE> F-9
Issuance of warrants to
stockholders 9,760 9,760
Issuance of stock, May 1995
(100,000 shares at $.50
per share) 100 49,900 50,000
Issuance of stock for
exercise of warrants by
stockholder, June 1995
(100,000 shares at $.50
per share) 100 49,900 50,000
Issuance of stock for
expenses, July 1995
(300,000 shares at $.50
per share) (Note 7) 300 149,700 150,000
Net loss (896,998) (896,998)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1995 51,853 3,789,966 (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 $51,853 $3,795,306 $(5,541,401) $(1,694,242)
====== ========= ========== ==========
</TABLE>
See notes to financial statements
<PAGE> F-10
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:
Purchases 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>
See notes to financial statements.
<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 (the "Company"), formerly Innotek
Corporation, as incorporated in January 1988, for the purpose of
marketing and developing certain environmental technologies. The
Company is currently working toward commercialization of a sewage
sludge recycling technology called Sludge-to-Oil Reactor System, or
STORS, and the commercialization of a nitrogen removal technology
called 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
owns the worldwide licensing rights to both STORS and NitRem,
except for STORS in Japan, pursuant to exclusive license agreements
with Battelle.
The Company was formed for the transfer of technology from
American Fuel and Power Corporation ("AFP") in 1988 to continue
development of the STORS technology under assignment of the license
from AFP, the original licensee. Management of the AFP division
developing the STORS technology become management of the Company
concurrent with the terms of the transfer. The license was
assigned to the Company under an agreement requiring that 70
percent of the Company's initial outstanding Common Stock,
approximately 24,700,000 shares, be issued to AFP for distribution
to AFP stockholders (see Note 7).
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Property and equipment
Property and equipment are depreciated over the estimated
useful life of each asset. Depreciation is computed primarily
using accelerated methods.
<PAGE> F-12
Loss per common share
Loss per common share is computed by dividing the net loss for
the period by the weighted average number of shares outstanding
during the period. Stock options and warrants issued within twelve
months of the initial public offering filing date (February 27,
1992, 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 60,792,870, 60,417,801, 60,213,488, and
59,178,718 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.
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 as research and
development expenses.
<PAGE> F-13
The license agreements, which requires 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 entered into a memorandum of understanding with
Foster Wheeler and Mitsui & Co. (U.S.A.) Inc. in September 1996 to
pursue various water and waste water projects in Brazil, Mexico and
Peru. In April 1996, the Company entered into a teaming agreement
with Roy F. Weston, Inc. to jointly pursue both municipal and
governmental projects using the Technologies. In March 1996, the
Company executed a marketing agreement with a Georgia corporation
for the purpose of marketing the Technologies in Georgia and
Florida (see Note 7). The Company entered into a ten-year
worldwide marketing agreement with Foster Wheeler USA Corporation
in September 1994, for the purpose of marketing, developing and
commercializing the Technologies. The agreement provides for
three-year extensions after the initial period and conditions for
changing or terminating the arrangement.
The Company entered into the agreements referred to above 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
<PAGE> F-14
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 750,000 warrants, at
$.02 per warrant for 750,000 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.
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>
<PAGE> F-15
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.
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 and are
classified as current assets since the right of offset against
accrued deferred compensation exists (see discussion of deferred
compensation below). 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
<PAGE> F-16
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. 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.
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 and Exchange Commission for the sale of 2,000,000 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
1,490,050 shares were sold at a price of $1 per share and 103,000
shares were issued at $1 per share in satisfaction of notes payable
and related accrued interest.
<PAGE> F-17
In 1993, the Company issued 150,000 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
1,000,000 shares of the Company's Common Stock at $.25 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 100,000 shares of
Common Stock at $.50 per shares and warrants for 100,000 shares of
Common Stock (exercise price of $.50 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 300,000 shares of the Company's
Common Stock, at $.50 per share (based on the price for the May
1995 sale of the Company's Common Stock), to Battelle in lieu of a
cash payment for $75,000 of license fees and $75,000 of expenses.
During the year ended September 30, 1994, the Company issued
Common Stock warrants, at prices ranging from $.10 to $.20 per
warrant, to stockholders for 1,630,000 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 6,333,500 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 $.80 to $.90
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 $.50 during
the year ended September 30, 1995 due to the sale of Common Stock
in May 1995 for $.50 per share. During the year ended September
30, 1995, a stockholder exercised warrants for 58,825 shares at
$.85 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
266,975 and 483,025 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 $.60 per
share, subject to adjustment in the event that the Company issues
shares of
<PAGE> F-18
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 $.50 due to the sale of
Common Stock in May 1995 for $.50 per share.
An agreement with Centerpoint Power Corporation (CPC)
specifies compensation at an hourly rate plus expenses for services
rendered and grants CPC stock warrants for 11,230,000 shares of
Common Stock (which were registered in connection with the
Company's public offering), exercisable at one 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 250,000
warrants for 250,000 shares of the Company's Common Stock
exercisable within 10 years from the date of granting the warrants
at a price of $.50 per share within 90 days upon the signing of an
agreement with a customer to purchase or utilize the Technologies.
In connection with the assignment of the license for the STORS
technology from AFP, 24,700,000 shares of the Company's Common
Stock were issued to AFP. The shares were placed in a Voting Trust
and during 1993 began to be distributed to the AFP stockholders.
The Company owns 1,341,250 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 100,000 shares at ten
cents 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 at the March 2, 1994 annual meeting of stockholders.
However, the reverse stock split has not been implemented as of
September 30, 1996 (see Note 11).
At September 30, 1996, approximately 20,135,000 shares of
Common Stock were reserved for future issuance under warrant
agreements.
<PAGE> F-19
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 since 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 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,
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. As
described more
<PAGE> F-20
fully in Note 3, the Company has entered into marketing agreements
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 for a period of not
less than 150 consecutive calendar days nor more than 200
consecutive calendar days from the start-up of the demonstration.
The Company will provide the technology and, in conjunction with
Battelle, assist in the design, engineering and operation of 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,
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.
<PAGE> F-21
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 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. A special stockholders' meeting has been
scheduled during December 1996 in order to obtain stockholders'
approval of these matters.
Management anticipates that the Company will obtain bridge
financing of approximately $300,000 to fund the operations of the
Company until the completion of the proposed offering.
<PAGE> F-22
THERMOENERGY CORPORATION
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
------------ -------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash $ 44,672 $ 62,333
Advances to officers 122,200 96,200
Accrued interest receivable -
officers 11,451 9,138
---------- ----------
Total Current Assets 178,323 167,671
Property and equipment, at cost:
Equipment 14,818 14,818
Furniture and fixtures 4,991 4,991
Less accumulated depreciation (14,553) (14,147)
---------- ----------
5,256 5,662
---------- ----------
$ 183,579 $ 173,333
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 329,651 $ 360,288
Accrued expenses:
Salaries 417,024 364,314
Consulting fee 100,000 100,000
Other 112,990 92,513
---------- ----------
630,014 556,827
Deferred compensation 219,940 215,460
Notes payable to stockholders
(Note 2) 920,000 735,000
---------- ----------
Total Current Liabilities 2,099,605 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 -
51,852,693 shares; outstanding -
50,511,443 shares 51,853 51,853
Additional paid-in capital 3,795,306 3,795,306
Deficit accumulated during the
development stage (5,763,185) (5,541,401)
---------- ----------
(1,916,026) (1,694,242)
---------- ----------
$ 183,579 $ 173,333
========== ==========
</TABLE>
See notes to financial statements.
<PAGE> F-23
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
During
Development Three Months Ended December 31,
Stage Through -------------------------------
December 31, 1996 1996 1995
----------------- ---- ----
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Operating expenses:
General and
administrative $ 4,260,040 $ 176,208 $ 131,543
Research and development 627,266
Travel and entertainment 785,472 34,802 18,777
---------- -------- --------
5,672,778 211,010 150,320
---------- -------- --------
Loss From Operations (5,672,778) (211,010) (150,320)
---------- -------- --------
Other Income (Expense)
Interest income 63,098 2,313 1,497
Interest expense (153,505) (13,087) (8,705)
---------- -------- --------
(90,407) (10,774) (7,208)
---------- -------- --------
Net Loss $(5,763,185) $(221,784) $(157,528)
========== ======== ========
Per Common Share (Note 4)
Loss from operations $ (.10) $ (.00) $ (.00)
Net loss $ (.10) $ (.00) $ (.00)
</TABLE>
See notes to financial statements.
<PAGE> F-24
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Periods Ended September 30, 1988 Through September 30, 1996
and the Three Months Ended December 31, 1996 (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, (35,285,714 shares
at $.005 per share) $35,285 $ 145,015 $ $ 180,300
Net loss (290,483) (290,483)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1988 35,285 145,015 (290,483) (110,183)
Conversion of $412,000 of
debentures and accrued
interest, September 1989
(4,901,350 shares) 4,902 452,099 457,001
Net loss (338,985) (338,985)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1989 40,187 597,114 (629,468) 7,833
Net loss (255,036) (255,036)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1990 40,187 597,114 (884,504) (247,203)
Conversion of $63,000 of
unsecured debentures
and accrued interest at
10%, March 1991,
(708,566 shares) 709 70,148 70,857
Issuance of stock, May -
June 1991, (6,206,078
shares: 5,866,078 at
$.10 per share; 340,000
shares at $.05 per share) 6,206 597,401 603,607
Issuance of stock for
interest, June 1991,
(22,000 shares at $.10
per share) 22 2,178 2,200
<PAGE> F-25
Issuance of stock for
expenses incurred by
stockholders, July 1991
(81,295 shares at $.10
per share) 81 8,048 8,129
Net loss (670,179) (670,179)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1991 47,205 1,274,889 (1,554,683) (232,589)
Issuance of stock, October -
December 1991 (2,414,800
shares at $.10 per share) 2,415 239,065 241,480
Shares purchased in
rescission offer (168,985
shares) (169) (16,730) (16,899)
Issuance of stock, public
offering, August -
September 1992 (5,500
shares at $1.00 per share) 5 5,495 5,500
Net loss (562,751) (562,751)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1992 49,456 1,502,719 (2,117,434) (565,259)
Issuance of stock, public
offering October 1992 -
September 1993 (1,484,550
shares at $1.00 per share) 1,485 1,483,065 1,484,550
Issuance of stock for
exercise of stock options,
May 1993 (40,000 shares at
$.10 per share) 40 3,960 4,000
<PAGE> F-26
Issuance of warrants to
stockholder 6,333 6,333
Conversion of $103,000 of
notes payable to stock-
holders and accrued
interest, December 1992
(103,000 shares) 103 102,897 103,000
Issuance of stock for
consulting services, June
1993 (150,000 shares at
$1.00 per share) 150 149,850 150,000
Net loss (1,207,921) (1,207,921)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1993 51,234 3,248,824 (3,325,355) (25,297)
Issuance of warrants to
stockholders 226,000 226,000
Issuance of stock for
exercise of stock
options, March 1994
(60,000 shares at $.10
per share) 60 5,940 6,000
Issuance of stock for
exercise of warrants by
stockholder, August 1994
(58,825 shares at $.85
per share) 59 49,942 50,001
Net loss (767,427) (767,427)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1994 51,353 3,530,706 (4,092,782) (510,723)
<PAGE> F-27
Issuance of warrants to
stockholders 9,760 9,760
Issuance of stock, May
1995 (100,000 shares at
$.50 per share) 100 49,900 50,000
Issuance of stock for
exercise of warrants by
stockholder, June 1995
(100,000 shares at $.50
per share) 100 49,900 50,000
Issuance of stock for
expenses, July 1995
(300,000 shares at $.50
per share) (Note 7) 300 149,700 150,000
Net loss (896,998) (896,998)
------ --------- ---------- ----------
Balance (deficit),
September 30, 1995 51,853 3,789,966 (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 51,853 3,795,306 (5,541,401) (1,694,242)
Net loss (221,784) (221,784)
------ --------- ---------- ----------
Balance (deficit),
December 31, 1996
(Unaudited) $51,853 $3,795,306 $(5,763,185) $(1,916,026)
====== ========= ========== ==========
</TABLE>
See notes to financial statements
<PAGE> F-28
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
During
Development Three Months Ended December 31,
Stage Through -------------------------------
December 31, 1996 1996 1995
----------------- ---- ----
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Operating activities:
Net loss $(5,763,185) $(221,784) $(157,528)
Items not requiring
(providing) cash:
Depreciation 14,553 406 700
Expenses funded by
Common Stock issuance 543,187
Other 3,341
Changes in:
Advances to officers (321,183) (26,000) (14,000)
Other receivables (11,451) (2,313) (1,497)
Accounts payable 329,651 (30,637) 29,964
Accrued expenses 630,014 73,187 46,507
Deferred compensation 418,922 4,480 4,261
---------- -------- --------
Net cash used in
operating activities (4,156,151) (202,661) (91,593)
---------- -------- --------
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 1,200
Proceeds from notes
payable 1,174,609 185,000 58,800
Proceeds from convertible
debentures 475,000
Payments on notes payable (154,609)
Other 108,410
---------- -------- --------
Net cash provided by
financing activities 4,223,972 185,000 60,000
---------- -------- --------
Increase (decrease) in
cash 44,672 (17,661) (31,593)
Cash, beginning of period 0 62,333 52,524
---------- -------- --------
Cash, end of period $ 44,672 $ 44,672 $ 20,931
========== ======== ========
</TABLE>
See notes to financial statements.
<PAGE> F-29
THERMOENERGY CORPORATION
(A DEVELOPMENT STATE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
UNAUDITED
NOTE 1: FINANCIAL STATEMENTS
The balance sheet as of December 31, 1996, the statements of
operations and cash flows cumulative during development stage
through December 31, 1996 and for the three months ended December
31, 1996 and 1995 and the statement of changes in stockholders'
equity (deficit) for the three months ended December 31, 1996, 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 December 31, 1996 and for all periods
presented have been made. Operating results for the three months
ended December 31, 1996 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 with
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 more favorable terms.
The notes payable have been classified as current liabilities since
management anticipates that they will be paid off within one year.
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 a proposed public offering
(see Note 3). 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 (see Note 3), to the holders of the notes,
in the ratio of one share for each $10
<PAGE> F-30
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.
At December 31, 1996, the Company had executed notes payable
to stockholders under this arrangement for an aggregate amount of
$185,000. During January 1997, an additional $315,000 of the notes
payable to stockholders were executed. The Company is committed to
issue 50,000 shares of Series B Common Stock, which are not subject
to the reverse stock splits more fully described in Note 3, 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 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,
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 will 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.
<PAGE> F-31
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 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 , which
are not subject to the reverse stock splits discussed in this Note,
for key employees and non-employee Directors of the Company.
Implementation of the Plan is subject to approval by stockholders.
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 at the March 2, 1994 annual meeting of stockholders.
The reverse stock splits have not been implemented.
NOTE 4: LOSS PER COMMON SHARE
Loss per common share is computed by dividing the net loss for
the period by the weighted average number of shares outstanding
during the period. Stock options and warrants issued within twelve
months of the initial public offering filing date (February 27,
1992) have been treated as outstanding for all periods presented.
<PAGE> F-32
The weighted average number of common shares used in the loss
per share computations were 59,224,384, 60,792,870 and 60,792,870
shares for the period cumulative since inception through December
31, 1996, and for the three months ended December 31, 1996 and
1995, respectively.
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 Note 3) 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,
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.
<PAGE> F-33
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
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 that 5% of net sales but less
that 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>
=================================================================
No dealer, salesperson or any other person that has been authorized
to give any information or to make any representation other than
those contained in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having
been authorized by the Company or any Underwriter. Neither the
delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that there has been
no change in the affairs of the Company since the date hereof or
that the information contained herein is correct as of any date
subsequent to the date hereof. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any
securities offered hereby by anyone in any jurisdiction in which
such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to
any person to whom it is unlawful to make such offer or
solicitation.
-----------------------------------
TABLE OF CONTENTS
PROSPECTUS SUMMARY. . . . . . . . . . . . . . . . . . . . . . 3
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . 8
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . 15
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . 16
CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . 16
DILUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 20
BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 33
PRINCIPAL STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . 38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 40
DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . . . . 43
SHARES ELIGIBLE FOR FUTURE SALE . . . . . . . . . . . . . . . 45
UNDERWRITING. . . . . . . . . . . . . . . . . . . . . . . . . 46
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 48
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . . . . . 48
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.
=================================================================
<PAGE>
=================================================================
THERMOENERGY CORPORATION
1,600,000 Shares of
Series A Common Stock
and
1,600,000 Redeemable
Series A Common Stock Purchase Warrants
(as Units, each consisting of one share
of Series A Common Stock and one Redeemable Series A Common Stock
Purchase Warrant)
------------------
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 $ 10,735.52
b. NASD filing fee 4,042.72
c. Blue Sky fees and expenses,
including legal fees
d. Printing and engraving
e. Legal fees and expenses
f. Accounting fees and expenses
g. Transfer agent and registrar
fees and expenses
h. Miscellaneous
=========
- ----------------------
* 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 warrants and shares of Common Stock 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 "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.
Item 27. Exhibits.
(a) Exhibits.
Number assigned
in regulation
S-B, Item 601 Description of Exhibit
- --------------- ----------------------
1.1 Underwriting Agreement, to be filed by Amendment.
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, to be
filed by Amendment.
4.2 Form of Stock Certificate - Series B Common Stock, to be
filed by Amendment.
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.
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, to be filed by Amendment.
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 small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933 (the "Act");
(ii) To 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) To include any additional or changed material
information with respect to the plan of distribution.
(2) That, for the purpose of determining any liability
under the Act, 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) To remove from registration by means of a post-
effective amendment 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 small business issuer 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.
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, as amended, the registrant has duly caused this Amendment No.
1 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 March ___, 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 ________, 1997
- ---------------------------- Officer, Secretary and
Dennis C. Cossey Director (Principal
Executive Officer)
/s/ Primo L. Montesi* President and Director ________, 1997
- ---------------------------- (Principal Financial
Primo L. Montesi Officer)
/s/ J. Donald Phillips* Director ________, 1997
- ----------------------------
J. Donald Phillips
/s/ Louis J. Ortmann* Director ________, 1997
- ----------------------------
Dr. Louis J. Ortmann
/s/ Thomas Randall Kemp* Director ________, 1997
- ----------------------------
Thomas Randall Kemp
Director ________, 1997
- ----------------------------
Gerald J. Franz
</TABLE>
*By: /s/ Dennis C. Cossey
----------------------------
Dennis C. Cossey,
Attorney-in-Fact
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. 1 to the Registration Statement on Form SB-2
(Registration No. 333-21613) and related Prospectus of ThermoEnergy
Corporation for the registration of 1,600,000 shares of its Series
A Common Stock and 1,600,000 Redeemable Series A Common Stock
Purchase Warrants.
/s/ Kemp & Company
Little Rock, Arkansas
March 31, 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 1 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
March 31, 1997
