SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
Commission File Number 33-46104-FW
THERMOENERGY CORPORATION
(EXACT NAME OF REGISTRATION AS SPECIFIED IN ITS CHARTER)
Arkansas 71-00659511
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification Number)
323 Center Street, Suite 1300
Little Rock, Arkansas 72201
(Address of principal executive offices including Zip Code)
Registrant's telephone number, including area code:
(501) 376-6477
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Exchange on Which Registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Each Class
None
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x . No _______.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in any amendment to this Form 10-K. [ x
].
As of December 22, 1997, there were 3,402,968 shares of common stock
issued and outstanding. The aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant as of December 22, 1997 is
explained in Item 5.
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PART I
Item 1 BUSINESS
The Company was incorporated in Arkansas on January 19, 1988, under the
name Innotek Corporation, at the direction of the Board of Directors and
majority shareholders of American Fuel and Power Corporation ("AFP"). In 1986,
AFP executed an agreement with Battelle concerning development of the STORS and
NitRem technologies. However, since AFP's primary business was motor fuel
additives and industrial lubricants, AFP sublicensed the technologies to the
Company, under an agreement requiring that 70% (approximately 1,543,750 shares)
of the Company's initial outstanding common stock be issued and subsequently
distributed to AFP shareholders. The Company subsequently entered a license
agreement with Battelle Memorial Institute which supersedes the previous
agreement between Battelle and AFP. On December 12, 1996 the Company changed its
name from Innotek Corporation to ThermoEnergy Corporation. (See Certain
Relationships and Related Transactions).
The Company is the exclusive worldwide (except STORS in Japan) licensee
for certain environmental technologies developed by Battelle. These technologies
are primarily aimed at solving waste water problems for broad-based markets.
These technologies include two chemical process technologies known as the
Sludge-To-Oil Reactor System (STORS(TM)) and Nitrogen Removal (NitRem(TM)). The
third technology, a dual-shell pressure balance vessel, known as the Dual-Shell
Reactor(TM) ("DSR"), is the unique reactor equipment in which the STORS and
NitRem chemistries are conducted (collectively, STORS, NitRem and DSR are
referred to as the "Technologies"). The Company's applications of the
Technologies eliminate damaging organic and nitrogenous contaminants from
municipal, DoD 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,
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operating as a stand alone technology, can convert virtually any hazardous or
nonhazardous 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
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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 SBVWD. 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
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reimbursed for administrative and operating costs from the two demonstration
projects underway and is negotiating similar arrangements for the third
demonstration project.
In October 1994, the Company and Sam Houston State University, doing
business as the Texas Regional Institute for Environmental Studies ("TRIES"),
signed an agreement to undertake a demonstration project to evaluate the
nitrogen removal process and NitRem's ability to economically and safely treat
residual water streams produced from the manufacture of various explosives, such
as trinitrotoluene ("TNT") redwater, DNT contaminated wastewater, and various
RCRA waste streams within the Department of Defense industrial base and the
Department of Defense Commercial Facilities. TRIES holds the contract with the
DoD, Department of Army, and the Company has subcontracted with TRIES for the
project. The NitRem DSR unit was delivered to the project site, Radford Army
Ammunition Plant, Radford, Virginia, in June 1997, began July 21, 1997. Testing
and processing of the DoD RAPP test material was concluded on September 5, 1997.
The Company has received the final test results and report from TRIES.
Preliminary results indicate that the NitRem DSR reduces DNT in contaminated
wastewater to a level which could be discharged without further wastewater
treatment. Based on these preliminary results, the Company anticipates marketing
NitRem to the DoD. See "Business - NitRem Removal Demonstration - United States
Department of the Army Program."
In July 1996, the Company signed a No Cost Test Agreement ("New York
Agreement") with the City of New York, Bureau of Clean Water - Department of
Public Works. The purpose of the New York Agreement is to allow the City of New
York to evaluate the Company's nitrogen removal processes, including NitRem and
any other nitrogen removal process the Company may acquire, and its ability to
satisfy the City of New York's nitrogen removal requirement imposed on the City
of New York by new federal and state wastewater discharge standards. Successful
laboratory and pilot plant results from testing actual samples of New York
City's centrate discharge led to the design of this demonstration project.
Pursuant to the New York Agreement, Foster Wheeler Environmental Corporation
will manage this demonstration project which is scheduled to begin in January
1998. The Company's role in this demonstration project will be limited to
providing the Technologies, design and installation of the facility. This will
be the first collaborative effort between the Company and Foster Wheeler
Environmental Corporation to demonstrate this nitrogen removal process. See
"Business Nitrogen Removal Demonstration - New York City Project".
In September 1996, a $3,000,000 federal grant was appropriated by
Congress for use by the San Bernardino Valley Water District ("SBVWD") for the
design, construction and operation of a large-scale STORS wastewater treatment
demonstration facility. Assuming the negotiations have been
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completed between the Company and SBVWD for the construction of this project,
the capacity for this demonstration will have a through put capacity equal to or
greater than 75% of the wastewater treatment facilities currently operating
within the United States. The Company anticipates that it will be responsible
for the design and installation and will subcontract for the construction and
operation of the SBVWD demonstration facility. However, there is no assurance
that the Company will enter into a definitive project arrangement with SBVWD, or
that such arrangement, if entered into, will be on terms and conditions that are
sufficiently favorable to the Company to enable it to generate profits. To
date, while the Company has discussed the project with several municipal users
within the SBVWD, no municipality has yet agreed to host the project. 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.
The Company registered 125,000 shares of common stock with the
Securities and Exchange Commission on June 24, 1992. The Company subsequently
sold 93,129 shares of stock, issued 6,438 shares in satisfaction of notes
payable with related accrued interest, and terminated the offering effective
January 5, 1994. 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.
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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 had
until January 31, 1998 to commercialize either STORS or NitRem or the DSR.
"Commercialization" as defined in the License Agreement is the construction and
continuous operation of at least one facility with the capacity of ten dry ton
equivalent or 1,000 gallons of liquid per day including a full scale
demonstration facility. 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. Mitsui is not related to Orango.
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.
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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 San Bernardino Project will be
funded by the U.S. EPA. Consequently, the Company's operations continue to
depend upon its ability to attract adequate capital, so that it may in turn
acquire the technical and operational expertise and services required for
commercial and/or demonstration facilities of either the STORS or NitRem
technologies. With regard to STORS, no facilities have yet been built, outside
Japan, on a commercial basis.
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Until large-scale STORS 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 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 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 with the goal of
convincing either a United States governmental agency or private industry to
fund a full scale demonstration facility of the STORS technologies. See "STORS
Demonstration".
With regard to the Company's NitRem technologies, a large-scale
demonstration facility has been constructed and operated for a sufficient period
of time to produce operating data which the Company believes it can rely upon in
approximating capital needs for a NitRem facility. See "Nitrogen Removal
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 following projects and although the Company will be reimbursed for
administrative and operating costs, it will not receive any revenues or earnings
from these demonstration projects.
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STORS DEMONSTRATION
STORS is a thermochemical liquefaction process which uses alkaline
digestion to dissolve sewage sludge. In the process the sludge is subjected to
temperatures ranging from 265 degrees to 350 degrees Centigrade and pressures
high enough to prevent boiling. Under these conditions, Aldol Condensation
occurs, breaking the sludge into low molecular weight components which recombine
to form aromatic compounds. Carbon dioxide and water are eliminated during the
dissolution, yielding a hydrophobic product (light oil) with a much higher
heating content than the starting sludge. The oil product has a heating value
equal to 80% - 90% of that of diesel, and accounts for up to 50% of the organics
contained in the influent. The char, or ash, product has a heating value of
about 1500-2500 cal/g; however, it represents such a small percentage (less than
5%) of the by-product that it is of little economic value.
A retrofit STORS physical municipal waste water plant, which is an
existing plant to which the Company adds the STORS technology, will consist of
one or more reactor units, supported by ancillary equipment, including pumps,
holding tanks, valve, computerized controls, heat exchangers and centrifuges. A
retrofit of a small STORS facility, e.g. 20 million gallons per day, is
projected to cost approximately $8 million. A large scale facility, capable of
handling 500,000,000 gpd or greater, has a projected cost range of $65,000,000
to $100,000,000 depending on specific site conditions and sludge constituency
(i.e. % of industrial vs. residential, % metals, etc.).
Alternatively, a new STORS waste water treatment facility, which is a
greenfield project or a facility built from the ground up, would have capital
costs equal to a retrofit STORS system, in addition to the cost for supporting
waste water treatment equipment including, but not limited to, screens/filters
for incoming sewage, commutators, thickeners and clarifiers. However, this
equipment would be significantly smaller than that needed for current
conventional waste water treatment systems utilizing digestors and
denitrification equipment, representing a substantial savings in land and
capital equipment.
To sell a full scale commercial STORS waste water treatment system to a
municipality, a demonstration plant must be built at and integrated with a
working waste water treatment facility and operated for a long enough period of
time to generate engineering data sufficient for the initiation of construction
of a full scale commercial system. This requires a "host" city willing to join
with the Company and Battelle in such a project and participate by contracting
to have a STORS system located at one of its waste water treatment facilities.
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In May of 1996, ThermoEnergy and Battelle representatives met with
officials at San Bernardino Valley Water District ("SBVWD") to discuss siting of
a full-scale STORS demonstration project in the San Bernardino area. The SBVWD
agreed to host the project and the Company has met with several local and
federal officials in an effort to locate a "host" city. Subsequently, the United
States House and Senate approved, in PL 104-204, September 26, 1996, a
$3,000,000 federal grant to the SBVWD for the design, construction and
operation of a large-scale STORS Waste Water Treatment Demonstration Facility.
The General Accounting Office has authorized the EPA's San Francisco office, to
disburse the funds accordingly and to administer this grant for the SBVWD
project. Assuming the negotiations have been completed between the Company and
SBVWD for the construction of this project, the Company anticipates this
demonstration plant will have a throughput capacity equal to or larger than 75%
of currently operating waste water treatment facilities within the United
States. The Company anticipates that it will be responsible for the design and
installation, and will subcontract for the construction and operation of the
demonstration facility.
The EPA continues to maintain discretionary control over the
disbursement of the $3,000,000 federal grant discussed above. While it
is currently the EPA's intention to disburse the funds for the SBVWD project, it
is possible that the EPA, in its sole discretion, may redirect these funds for
use on a full-scale STORS demonstration project in another EPA region.
NITROGEN REMOVAL DEMONSTRATION
NitRem is a noncatalytic, hydrothermal process that converts, under
heat and pressure, aqueous phase nitrogenous compounds (i.e., nitrates,
nitrites, amines and ammonia) found in industrial and municipal waste into
nitrogen gas, water, oxygen and carbon dioxide. The chemistry is similar to
gas-phase thermal deNOx except that it is conducted in the liquid or
supercritical phases. The NitRem process typically operates in the near-critical
regime where temperatures range between 325 degrees and 375 degrees Centigrade
and pressures range from 2500 - 3000 psi.
Capital costs for a NitRem industrial process system is expected to
range from $300,000 to $10,000,000. The determining factors for costs are (a)
the specific waste stream, (b) through-put, and (c) the specific compliance
standard to be achieved. However, many large manufacturing facilities, such as
large refineries or chemical process plants, may need more than one NitRem
system to handle a variety of waste streams generated by different plant
operations.
Other uses for NitRem systems, including commercial/government ships
and oil drilling platforms, require specialized designs that could add up to 30
to 40% in additional capital costs.
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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, one which completed its demonstration in September 1997 and the
other scheduled to begin demonstrations the first quarter 1998.
United States Department of the Army Program
ThermoEnergy and Sam Houston State University, doing business as the
Texas Regional Institute for Environmental Studies ("TRIES") signed an agreement
in October 1994 allowing ThermoEnergy to demonstrate its NitRem technology to
evaluate the nitrogen removal process and its ability to economically and safely
treat TNT redwater, DNT contaminated wastewater and various other RCRA waste
streams within the Department of Defense ("DoD") industrial base and DoD
commercial facilities. ThermoEnergy is the lead subcontractor on this project.
The first NitRem commercial scale DSR unit was demonstrated at the
Radford Army Ammunition Plant, in Radford, Virginia. The $5,000,000 NitRem
demonstration project has been completed and been approved by the Army Armament
Research Development Command ("ARDEC"). Pursuant to a purchase order issued by
ARDEC, ThermoEnergy engaged Glitsch Process System Inc. (a wholly-owned
subsidiary of Foster Wheeler Corporation) to fabricate the NitRem unit. The
demonstration unit was delivered to Radford on June 16, 1997 and began testing
and processing DoD waste streams July 21, 1997. Under the Company's supervision,
this demonstration facility was used to process a number of different hazardous
waste streams resulting from the manufacture of explosives, including TNT, DNT,
HMX and RDX. This NitRem system has been designed as a mobile system in order to
process additional waste streams from other Department of Defense sites.
Testing and processing of the of the DoD RAPP test material was
concluded on September 5, 1997. The final results and report from TRIES
indicates that the NitRem DSR reduces DNT in contaminated wastewater to a level
which could be discharged without further wastewater treatment. Based on these
preliminary results, the Company anticipates marketing NitRem to the DoD.
New York City Project
The second commercial scale nitrogen removal demonstration project is a
team effort between ThermoEnergy, Foster Wheeler Environmental Corporation and
the City of New York to test the Company's capability to cost-effectively
eliminate the concentrated ammonia discharge, or centrate, from eight of New
York City's
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fourteen waste water treatment facilities. The City of New York currently
produces over three million gallons of centrate daily, which the City projects
will reach five million gallons daily by 2001. This concentrated ammonia waste
stream is a leading cause of eutrophication in the Long Island Sound. Laboratory
tests conducted on actual samples of New York City centrate in May of 1996, and
June of 1997, by Battelle successfully resulted in eliminating the ammonia
present in the centrate. The City of New York and the Company signed a No Cost
Test Agreement in July 1996 which allows the Company to demonstrate, on site,
the Company's nitrogen removal processes, including NitRem and other such
nitrogen removal processes as the Company may acquire. The demonstration
facility will be managed by Foster Wheeler Environmental Corporation. The unit,
designed as a mobile unit, is scheduled to begin operation in January 1998 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 own finance,design, build and manage the overall demonstration
project. In addition, should New York City decide to use the Company's
technologies in a large-scale commercial project, the Company anticipates that
Foster Wheeler will be the prime contractor for the design, construction and
installation of equipment for the project facility and the Company will provide
design assistance, deliver the Technologies and oversee the operations of the
project.
STRATEGIC CORPORATE RELATIONSHIPS
In September 1994, the Company and Foster Wheeler USA Corporation
executed a non-binding Worldwide Marketing Agreement whereby both companies have
agreed to jointly market, develop and commercialize the Technologies on a
non-exclusive basis. The companies have agreed in principle to work together to
develop marketing strategies, identify potential projects and develop joint
proposals. The agreement contemplates that when a potential project is
identified, the Company will provide Foster Wheeler USA Corporation with the
necessary process and design information, and Foster Wheeler USA Corporation
will design, procure and construct the required processing facilities for any
contracts awarded. Under the agreement, each party is subject to confidentiality
obligations. The initial term of the agreement is ten years and the agreement
will be automatically extended in three-year periods thereafter. The agreement
may be terminated by the mutual agreement of the parties. The Company and Foster
Wheeler USA Corporation are working on a marketing strategy for private sector
business, initially targeting the pharmaceutical, pulp and paper and
petrochemical industries in the U.S. and Europe. In addition, the Company and
Foster Wheeler USA Corporation have begun a joint marketing effort within the
Department of Navy Surface Systems Command.
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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.
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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.
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,
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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.
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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 year ended September
30, 1997. Payment under licenses expenditures for the Company were $0, $0,
$123,000, and $48,500 for the years ended September 30, 1997, 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 1, 1997, the Company had a total of 2 employees, both
full-time: the Chairman and Chief Executive Officer and the President. Both of
the Company's employees have entered into agreements with the Company requiring
them not to disclose the Company's proprietary information, assigning to the
Company all rights to inventions made during their employment, and prohibiting
them from competing with the Company. The Company's employees are not
represented by any labor union. The Company believes that relations with its
employees are satisfactory.
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Item 2
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.
Item 3
LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company or
its properties are subject.
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ITEM 4. SUBMISSION OF MATERIALS TO A VOTE OF SECURITY
HOLDERS.
The Annual Meeting of the Shareholders of the Company's was held on
September 7, 1997. Andrew T. Melton and Dr. Paul A. Loeffler were elected
directors of the Company. The shareholders also (i) approved the Company's 1997
Stock Option Plan and (ii) ratified the appointment of Kemp & Company as
independent public accountants for the fiscal year ending September 30, 1997.
The results of the voting were as follows:
Abstain/
For Against Withheld
Election of Directors:
Andrew T. Melton 2,363,998 - 8,338
Dr. Paul A. Loeffler 2,364,455 - 7,881
Approval of 1997
Stock Option Plan 1,958,327 55,913 32,153
Appointment of Kemp
& Company 2,335,183 612 7,681
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no public market for the Company's common stock. No dividends
have been declared by the Company since inception.
The Amended and Restated Articles of Incorporation of the Company
authorize capital stock consisting of 75,000,000 shares of Common Stock, $0.001
par value, of which 10,000,000 shares are designated as Series A Common Stock
and of which 65,000,000 shares are designated Series B Common Stock. In
addition, the Company's authorized capital stock consists of 10,000,000 shares
of Series Preferred Stock, $1.00 par value ("Preferred Stock"). As of December
22, 1997, there were no shares of Series A Common Stock issued and outstanding,
3,402,968 shares of Series B Common Stock outstanding and no shares of Preferred
Stock issued and outstanding.
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As of December 22, 1997 the number of record holders of the Company's Series B
Common Stock was 1,149.
ITEM 6.
SELECTED FINANCIAL DATA
To be filed by Amendment pursuant to Rule 12b-25.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
To be filed by Amenment pursuant to Rule 12b-25.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is contained in Item 14 to this
report.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE
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PART III
Item 10
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The names and ages of the executive officers, key employees and
directors of the Company, and their positions with the Company, are as follows:
NAME AGE(1) POSITION
Dennis C. Cossey 51 Chairman of the Board,
Chief Executive Officer,
Secretary and Director
Primo L. Montesi 62 President and Director
Louis J. Ortmann, DDS 60 Director
J. Donald Phillips 63 Director
Andrew T. Melton 51 Director
Dr. Paul A. Loeffler 50 Director
Jerald H. Sklar 60 Director
(1) As of September 30, 1997.
Dennis C. Cossey has served as Chief Executive Officer and Director of
the Company since 1988 and Chairman of the Board since 1990. Prior to joining
the Company, Mr. Cossey served in executive and sales positions at a number of
companies, including IBM Corporation and Peter Kiewit and Sons Engineering. Mr
Cossey is a member of the American Society of Naval Engineers, the U.S. Naval
Institute, the Society of Naval Architects and Marine Engineers and the
Association of Energy Engineers.
Primo L. Montesi has served as President, Chief Operating Officer and
Director of the Company since 1988.
Louis J. Ortmann, DDS, currently is a Director of Louis J. Ortmann Dental
Clinic, Inc. Dr. Ortmann has been practicing dentistry for the last 30 years.
Dr. Ortmann has served as a Director of the Company since September 1991.
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J. Donald Phillips is an insurance executive in Little Rock, Arkansas,
and currently National Sales Manager for Citizen's Fidelity Insurance
Corporation, an Arkansas-based insurance company. Mr. Phillips has been employed
by Citizen's Fidelity Insurance Corporation since November 1989. Mr. Phillips
has served as Director of the Company since November 1990.
Andrew T. Melton was a vice president with Merrill Lynch Capital Markets in
Little Rock, Arkansas. He has served in this position from 1995 to September
1997. Mr. Melton is also Chief Executive Officer and the principal shareholder
of Solomon Financial, Inc., a company he started in January, 1997, specializing
in financing Canadian imports to the U.S. Mr. Melton is a certified public
accountant and received an MBA in finance and a Bachelor of Science degree in
economics from Louisiana Tech University. From 1986 to 1994, Mr. Melton served
as Executive Vice President, Chief Financial Officer and Treasurer of Worthen
Banking Corporation, Little Rock Arkansas. Mr. Melton has served as a director
of the Company since his election September 5, 1997.
Dr. Paul A. Loeffler is a professor of chemistry at Sam Houston State
University, Huntsville, Texas. He has been in this position since 1985, and has
been with the chemistry department of Sam Houston State University since 1975.
Dr. Loeffler received his Ph.D. and M.A. in organic chemistry from Rice
University. Dr. Loeffler also serves as a member of the Board of Directors and
is the associate director of the Texas Regional Institute for Environmental
Studies ("TRIES") in Huntsville, Texas. Dr. Loeffler has served with TRIES since
1992. Dr. Loeffler has served as a director of the Company since his election on
September 5, 1997.
Jerald H. Sklar, is a member of Waring Cox, PLC, Memphis, Tennessee, where
he has practiced since being admitted to the bar in 1965, concentrating in
corporate, financial and transactional work. He received a B.A. from Washington
& Lee University and an LL.B. from Vanderbilt University. Mr. Sklar is also a
principal in Ruby Avenue, LLC, a family business that develops and owns
residential and commercial real estate, and Crestwood Partners, L.P., which
invests in operating businesses. Mr. Sklar has served as a director of the
Company since his election on September 5, 1997.
The Board of Directors of the Company consists of seven Directors. Up
to seven people may serve on the Board of Directors. Directors are elected at
the Company's Annual Meeting of Shareholders. Seven Directors serve staggered
three year terms, with two Directors elected each year, and one Director serves
a five year term. Louis J. Ortmann and J. Donald Phillips were elected on May 3,
1995 and will serve three year terms until May 1998 or until their successors
are duly elected. Primo L. Montesi was elected May 1, 1996 and will serve a
three year term until May 1999 or until his successor is duly elected. Thomas
Randall Kemp
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was also elected as a director May 1, 1996 to serve a three year term. Mr. Kemp
resigned April 15, 1997 at the request of the Company to ensure the continued
independency of the Company's auditors. On September 5, 1997, the Board of
Directors elected Jerald H. Sklar to fill the vacancy created by Mr. Kemp's
resignation. Mr. Sklar will serve until May of 1999 or until his successor is
duly elected. Dennis Cossey was elected to a five year term on May 1, 1996 and
will serve until May 2001 or until his successor is duly elected. Andrew T.
Melton and Dr. Paul A. Loeffler were elected on September 5, 1997 and will serve
three years until the 2000 Annual Meeting of Shareholders or until their
successors are duly elected.
Item 11
EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid
by the Company for the years ended September 30, 1997, 1996, and 1995 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
Name and Annual Compensation
Principal Position Year Salary Bonus
Dennis Cossey,
Chief Executive Officer and 1997 $121,855(1)
Secretary 1996 $110,777(1) --
1995 $ 95,120(1) --
Primo L. Montesi, President 1997 $121,855(1)
1996 $110,777(1) --
1995 $ 95,120(1) --
(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. All of the reported amount
at September 30, 1997, was accrued and not paid.
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Employment Agreements
The employment agreements of Messrs. Cossey and Montesi provide a base
salary of $72,000 with 10 percent annual increases (which have been effective as
of January 1 of each year precedent, until the salary of each individual reaches
$175,000). Messrs. Cossey and Montesi also were subject to discretionary
incentive compensation of up to 50 percent of the base salary of each individual
determined by the Compensation Committee. Deferred compensation aggregating
$______, $16,678, $16,000 and $11,677 was accrued during the years ended
September 30, 1997, 1996, and 1995, respectively, pursuant to the interest
provisions of the compensation agreements.
The Company is the sole beneficiary of a $500,000 and a $200,000 key
man life insurance policy on the lives of Messrs. Cossey and Montesi,
respectively.
In addition to the Company's last annual shareholders meeting on
September 5, 1997, the directors conducted 2 regular and 13 special Board
meetings in the last fiscal year. During fiscal year 1997, all directors
attended at least 75% of the meetings of the Board of Directors and committees
of which they are members.
The Board of Directors has established four standing committees. Messrs.
Phillips, Melton and Loeffler serve on the Executive Compensation Committee and
Mr. Melton is
its chairman. The function of the Executive Compensation Committee includes
reviewing the Company's executive salary structure and approving salary and
bonus awards to certain key employees. Messrs. Sklar, Ortmann and Montesi serve
on the Stock Option Committee, the chairman of which is Mr. Sklar. The Stock
Option Committee will review and administer the 1997 Stock Option Plan when
funded and any Incentive Stock Option plans, if any, when proposed and adopted.
Messrs. Phillips, Ortmann and Sklar serve on the Audit Committee. Mr. 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. Messrs. Cossey, Montesi, Melton,
Phillips and Loeffler serve on the Executive Committee, the chairman of which is
Mr. Cossey. The Executive Committee meets on a monthly basis or as deemed
necessary to oversee the operations of the Company.
Stock Options
On January 3, 1997, as amended on January 30, 1997, the Board of Directors
adopted the Company's 1997 Stock Option Plan (the 1997 Plan), subject to
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approval by the Shareholders to: (i) permit incentive stock options under
Section 422 of the Code to be granted from the Series B Common Stock of the
Company; (ii) to provide for automatic grant provisions for non-employee
directors. The number of shares available for grant under the 1997 Plan is
750,000 Series B Common Shares. Except for automatic grants to non-employee
directors, no other grants have been made. The automatic grants are for
non-qualified options of 1,000 shares of Series B Common Stock to be awarded,
automatically, without further action by the Board or the Stock Option Committee
on the third business day following the day of each annual meeting of the
stockholders of the Corporation for each person who is then a member of the
Board of Directors and who is not an employee of the Corporation or any of its
subsidiaries. Each 1,000 share option granted to a non-employee Director will
become exercisable beginning one (1) year from the date of the annual meeting of
shareholders on which the date of the options were granted. If a non-employee
Director is elected by the Board of Directors to begin serving as Director on a
date not coincident with the annual meeting date, the Director will be granted
the initial 1,000 share option as of the date of the first meeting at which he
or she serves as Director; however, his or her options will become first
exercisable beginning one (1) year from the date of the annual meeting at which
he or she is first elected by the stockholders and he or she will not receive an
additional grant of options upon his first election to the Board. The five
non-employee directors have received options for 1,000 shares, however, because
no market for the Company's shares exist, the exercise price for these shares
has not been determined by the Stock Option Committee.
With respect to the qualified or "incentive stock options", as defined
in Section 422 of the Internal Revenue Code of 1986, as amended. The Plan
provides that the exercise price of each option must be at least equal to 100%
of the fair market value of the common stock as of the date such option is
granted and requires that all such options have an expiration date not later
than the date which is one (1) day before the tenth anniversary of the date of
the grant of such options. However, with certain limited exceptions and in event
that the option holder ceases to be associated with the Company, or engages in
or is involved with any business similar to that of the Company, such option
holder's incentive options immediately terminate.
Executive Bonus Plan
On January 3, 1997, the Company's Board of Directors established a
five-year Executive Bonus Plan (the "Bonus Plan") to reward executive officers
and other key employees based upon the Company achieving certain performance
levels. Under the Bonus Plan, commencing with the Company's 1997 fiscal year and
for each of the four fiscal years thereafter, the Company will have discretion
to award bonuses in an aggregate amount in each fiscal year equal to 1% of the
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Company's net sales revenues for each fiscal year, provided and on condition
that the Company achieves a net profit before taxes of not less than 5% of net
sales in each year, and provided that the aggregate bonuses in each year (out of
the maximum amount of 1% of annual net sales) shall not be in excess of the
proportion by which the Company's net profit before taxes is greater than 5% of
net sales but less than 15% of net sales. The Compensation Committee of the
Board of Directors of the Company will determine the allocable amounts or
percentages of the bonus pool which may be paid annually to participants. For
fiscal 1997, no persons were entitled to receive bonus payments.
Bonuses under the Bonus Plan are not exclusive of other bonuses that
may be awarded by the Board of Directors of the Compensation Committee from time
to time.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee for the Board of Directors (the "Committee") is
composed of three outside directors. Decisions on compensation of the Company's
executives generally are made by the Committee and are reviewed by the full
Board. Set forth below is a report submitted by the Committee addressing the
Company's compensation policies for 1995 as they affected Dennis C. Cossey, the
Company's Chairman of the Board and Chief Executive Officer, and Mr. P. L.
Montesi, the Company's President and Chief Operating Officer.
The Compensation Committee and the management of the Company are
committed to the principle that pay should be commensurate with performance and
attainment of predetermined financial and strategic objectives. The base
salaries of the Company's executives are contained in long-term employment
agreements, but are reviewed each year by the Committee in an attempt to compare
qualifications, experience and responsibilities at other companies of similar
size engaged in the same or similar business as that of the Company. It is
customary for companies to rely to a large degree on longer term incentive
programs to motivate the employees to perform to the full extent of their
abilities for the benefit of the Company's shareholders. The Company has adopted
an incentive stock option plan under which no grants have been made to
employees. The current long-term employment contract of the Company's executives
contains provisions giving the Compensation Committee discretion to award
performance bonuses to the Company's executives in an amount no greater than 50%
of their particular employment contract base compensation. The overall
philosophy for annual incentive compensation for the executives is to provide no
benefits when financial objectives are not achieved and to provide increasing
awards when financial objectives are achieved. These objectives are designed to
increase shareholder value. The Committee seeks to implement executive
compensation policies which provide competitive levels of compensation
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while integrating pay with the Company's annual and long term performance
goals, reward above average corporate performance, recognize individual
initiative and achievements that will eventually assist the Company in
attracting and retaining qualified executives. The Committee considers the total
compensation (earned or potentially available) of each of the named officers in
establishing each element of compensation.
In view of the Company's inability to generate revenues for year ended
September 30, 1997, the Compensation Committee recommends that employment
contracts and compensation terms for Messrs. Cossey and Montesi remain the same.
Each year the Company's Board of Directors reviews the recommendations
of the Compensation Committee. In 1997, the Committee's recommendations were
adopted and implemented without change.
December 19, 1997.
COMPENSATION COMMITTEE
Andrew Melton, Chairman
J. Donald Phillips Dr. Paul A. Loeffler
AUDIT COMMITTEE REPORT
Upon recommendation of the Audit Committee, the Board has appointed the
independent accounting firm of Kemp & Company as auditors of the Company for
Fiscal 1997. Shareholder ratification requires the affirmative vote of the
holders of a majority of the Common Shares represented and entitled to vote at
the Annual Meeting.
December 19, 1997.
AUDIT COMMITTEE
J. Donald Phillips, Chairman
Louis J. Ortmann Jerald H. Sklar
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Performance Graph
Set forth below is a line graph comparing the yearly percentage change
in the cumulative total shareholder return on the Company's common stock against
the cumulative total returns of the U.S. NASDAQ Stock Market and the H & Q Total
Return Growth Index for the Company's last five fiscal years. The graph assumes
that the value of the investment in the Company's common stock and each index
was $100.00 at September 30, 1992, all with dividends reinvested. The
information contained in the graph is not deemed to be incorporated by reference
into any filings of the Company under the Securities Act of 1933 or the
Securities Exchange Act of 1934 that were made prior to the date of this Form
10-K or in any future filings except to the extent the Company specifically
incorporates same by reference.
Comparison of Five-Year Cumulative Total Return
THE H&Q TOTAL RETURN GROWTH INDICES
Annual Data Series
SCALED PRICES
DATES COMPANY H&Q GROWTH NASDAQ-U.S.
Sept. 92 100.00 100.00 100.00
Sept. 93 100.00 130.87 130.98
Sept. 94 100.00 131.85 132.06
Sept. 95 100.00 220.36 182.40
Sept. 96 100.00 263.89 216.44
Sept. 97 100.00 277.87 297.11
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(1) The cumulative total shareholder return on the Company's common stock
registered under Section 12 of the Exchange Act is undeterminable at
this point and is therefore represented as a flat return for the
Company's last five fiscal years. Consistent with previous Securities
and Exchange Act filings of the Company's and representations contained
in Part II, Item 5 of this filing, the aggregate market value of the
Company's common stock is undeterminable and therefore the components
of the registrant's cumulative total shareholder return on its common
stock as provided Regulation S-K 402(I) are undeterminable since there
is no public market for the Company stock and no dividends have been
declared by the Company in the past five fiscal years. The offering
price of any and all stock heretofore sold by the Company was based
upon the Company's needs for capital and not upon other generally
accepted criteria of value. The initial public offering price bears no
specific relationship to the Company's assets, earnings, book value or
other generally accepted criteria of value and should not be considered
as an indication of market value for purpose of calculating the
cumulative total shareholder return on the Corporation's common stock.
(2) Hambrect & Quist has developed both a Technology and a Growth Index to
support the observance and analysis of long-term trends within the
broadly defined technology sector. Hambrecht & Quist Growth Index is
comprised of the publicly traded stocks of 200 Technology Companies.
The Technology Index is representative of the overall industry at any
point in time, while the Growth Index allows H & Q to observe the
performance of this "peer group" separately. Hambrecht & Quist, Inc.
is located in New York and San Francisco, California. The inclusion of
these indices represents the Company's good faith effort to select as
close as possible an industry or line of business index available for
comparison as the Company does not believe it can reasonably identify
a peer group of issuers with similar market capitalization.
[INTENTIONALLY LEFT BLANK]
34
<PAGE>
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table sets forth, as of December 22, 1997, the holdings
of each person who held of recent, or was known by the Company to own
beneficially, more than five percent of any class of the Company's voting
security, each director of the Company and all directors and officers of the
Company as a group. Unless otherwise indicated, the following persons have sole
voting and investment power with respect to the number of shares set forth
opposite their name.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES % OF OUTSTANDING
BENEFICIAL OF COMMON STOCK(1) SHARES OF COMMON
STOCK (2)
<S> <C> <C>
P.L. Montesi
22 Greenway Drive
Little Rock, AR 72212 260,603(3) 8.03
Dennis Cossey
11706 Pleasant Ridge Drive
Little Rock, AR 72212 259,040(4) 7.99
J. Donald Phillips
218 Belmont
No. Little Rock, AR 72216 6,250 *
Louis J. Ortmann
3832 Victoria Road
Festus, MO 63028 21,438(5) *
Andrew T. Melton
11825 Hinson Road
Suite 102
Little Rock, AR 72212 -- --
Dr. Paul A. Loeffler
128 Royal Oaks
Huntsville, TX 77340 -- --
Jerald H. Sklar
50 N. Front Street, Suite 1300
Memphis, TN 38103 88,215(6) 2.72
All Officers and Directors as a Group
(7 Persons) 645,313(7) 19.89
Centerpoint Power Corporation of
VA
8228 Smithfield Road
Springfield, VA 22152 701,875(8) 17.8
35
<PAGE>
Frank T. Rayner
P.O. Box 16532
Panama City, FL 32406 228,302(9) 7.04
Robert Trump
167 E. 61st Street
New York, NY 10021 644,595(10) 18.29
</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. Computed
based on the number of shares of common stock outstanding as of
December 22, 1997 plus securities deemed outstanding pursuant to
Rule 13d-3(d)(1) under the Exchange Act.
(2) Computed based on the number of shares of Series B Common Stock
outstanding as of december 22, 1997. Except as indicated in the
footnotes
set forth below, the persons named in the table, to the Company's
knowledge, have sole voting and investment power with respect to all
shares of Series B Common Stock shown as beneficially owned by them.
The numbers shown include shares that are not currently outstanding but
which certain stockholders are entitled to acquire or will be entitled
to acquire within sixty (60) days. Such shares are deemed to be
outstanding for the purpose of computing the percentage of outstanding
Series B Common Stock owned by the particular stockholder and by the
group, but are not deemed to be outstanding for the purpose of
computing the percentage of ownership of any other person.
(3) Does not include 2,188 shares of Series B Common Stock owned by Mr.
Montesi's wife distributed to her on February 9, 1993, pursuant to her
status as a shareholder of common stock of American Fuel and Power
Company ("AFP") in like amount. Pursuant to shareholder action of the
Company May 21, 1988, the Company agreed to issue to AFP stockholders
one share of the Company's common stock for each share of AFP common
stock outstanding as of April 15, 1988. Mr. Montesi's wife was one of
such shareholders of AFP entitling her to stock of the Company. Mr.
Montesi disclaims beneficial ownership of the shares of Series B Common
Stock owned by his wife. Includes 1,875 Series B Warrants purchased
February 20, 1996 for $150 exercisable at $2.00 per share for
restricted stock within forty-eight months from date of purchase and
assumes the exercise of all Series B Warrants. Does not include
36
<PAGE>
6,500 shares of Series B Common Stock to be received upon repayment of
a January 1997 loan to the Company.
(4) Includes 1,875 Series B Warrants purchased February 20, 1996 for $150
exercisable at $2.00 per share for restricted stock within forty-eight
months from date of purchase and assumes the exercise of all Warrants.
(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 7,600 shares of Series B Common Stock to be
received upon repayment of a June 1997 loan to the Company. Does not
include shares owned by Dr. Ortmann's wife: 26,563 shares of Series B
Common Stock, Series B Warrants purchased September 17, 1996 by Mrs.
Ortmann for $339.40 exercisable at $2.00 per share for 4,244 shares of
Common Stock within forty-eight months from date of purchase, and 5,000
shares of Series B Common Stock to be received upon repayment of an
August 14, 1997 loan to the Company. Dr. Ortmann disclaims beneficial
ownership of the shares of Common Stock owned by his wife.
(6) Represents shares owned by Waring Cox, PLC.
(7) Does not include 5,000 share of Series B Common Stock to be received
upon exercise of options granted under the Company's 1997 Stock Option
Plan to non-employee directors. Each non-employee director of the
Company received options for 1,000 shares of the Company's Series B
Common Stock, on September 5, 1997. These options were granted under
the Company's 1997 Stock Option Plan and vest September 5, 1998.
(8) Assumes the exercise of warrants by Centerpoint for 701,875 shares of
Series B Common Stock.
(9) Does not include 5,000 shares of Series B Common Stock to be received
upon repayment of a December 1996 loan to the Company.
(10) Includes a total of 282,822 warrants and 361,773 shares of Series B
Common Stock. This includes 392,168 warrants purchased at par value
exercisable at $8.00 per share within ten years of (62,500 December
22, 1992; 125,000 April 1, 1993; 208,344 July 15, 1993) and does not
include the exercise of warrants by Mr. Trump, 58,825 of which were
exercised in August 1994. Includes an additional 62,500 warrants
purchased October 14, 1994 for $.02 exercisable at $2.00 per share for
restricted stock within 48 months and assumes the exercise of all
warrants by Mr. Trump.
37
<PAGE>
Includes an additional 25,000 shares of restricted common stock
purchased May 10, 1995 at $0.50 per share and an additional 25,000
warrants purchased May 10, 1995 at par value exercisable at $2.00 per
share for restricted stock which were exercised in June, 1995. Includes
an additional 6,250, 5,000 and 12,500 Warrants purchased March 20,
1996, May 17, 1996 and August 28, 1996, respectively, for $500, $400,
and $1,000 exercisable at $2.00 per share for restricted stock within
forty-eight months from date of each purchase and assumes the exercise
of all warrants. Includes 245,596 shares of Series B Common Stock
issued to Mr. Trump in July 1997 in consideration of (i) an additional
$100,000 capital contribution to the Company, (ii) the conversion of
$391,192 in short-term debt to equity, and (iii) the cancellation of
195,596 Series B Warrants exercisable at $8.00 per share.
Escrow Agreement
All the directors and officers of the Company, and a 5% or more
shareholder who were considered a promoter of the Company, on the effective date
of the initial public offering that was subsequently terminated January 5, 1994,
placed their shares in an escrow account with Worthen Trust Company. According
to the terms of the Escrow Agreement, these shareholders could not sell their
respective shares of Series B Common Stock for a minimum period of twenty-four
months commencing on the effective date of the public offering. That term was
completed June 24, 1994. Additionally, the shares are being held in escrow for a
maximum period of five years from the effective date or until the Company has
met certain financial requirements as provided for in the Escrow Agreement.
Shareholders owning shares of Series B Common Stock held under the Escrow
Agreement continue to have all voting rights to which the shares are entitled.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Organization and Capitalization of the Company
During and subsequent to fiscal year 1993 the Company distributed
1,416,236 shares of the Company's Series B Common Stock to individual
shareholders of AFP in satisfaction of the Company's obligation pursuant to a
Sublicense Agreement between the Company and AFP effective March 30, 1988. As of
the date of this Prospectus, 127,515 shares remain in a voting trust for the
benefit of additional AFP shareholders. The Company acquired the right to some
shares of such stock from several former AFP shareholders, and 83,829 shares of
such stock were issued to the Company from the voting trust.
38
<PAGE>
The Company issued Series B Warrants at price equal to par value to
Robert Trump of New York for 62,500 shares as of December 23, 1992, 125,000
shares as of April 1, 1993 and 208,344 shares as of July 15, 1993. The related
Warrant Agreements provide for an exercise period of ten years from the date of
issuance at a price of $8.00 per share. The exercise price is subject to an
adjustment in the event that the Company issues shares of Series B Common Stock
at a price per share which is less than the Series B Warrant price or the
current market value of such shares. On October 14, 1994, the Company sold
62,500 Series B Warrants to Mr. Trump at a price of $0.08 per warrant
exercisable within a period of 48 months at a price of $2.00 per share. The
Warrant Agreement is related to $245,000 in Bridge Financing provided to the
Company by Mr. Trump by a term note at market rates prepayable at any time
within 48 months without penalty, from the proceeds of a public offering. On
April 25, 1995, the Board of Directors accepted a proposal from Mr. Trump to
purchase 25,000 shares of Series B Common Stock at $2.00 per share and purchase
25,000 Series B Warrants at par value per warrant exercisable at $2.00 per
share. The effect of the Company selling Series B Common Stock at $2.00 per
share (adjusted for the December 12, 1996 four-to-one reverse stock split)
activated the terms in prior warrant agreements adjusting the price of 525,000
unexercised warrants to $2.00 per share. The amount discussed above includes an
additional 6,250, 5,000 and 12,500 warrants purchased March 20, 1996, May 17,
1996 and August 28, 1996, respectively, for $500, $400 and $1,000 exercisable at
$2.00 per share for restricted stock within forty-eight months from date of each
purchase and assures the exercise of all warrants. In addition, on July 25,
1997, the Company issued 245,596 shares of Series B Common Stock to Mr. Trump in
consideration of (i) an additional $100,000 capital contribution to the Company,
(ii) the conversion of $391,192 in short-term debt to equity, and (iii) the
cancellation of 195,596 Series B Warrants owned by Mr. Trump.
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
39
<PAGE>
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.
40
<PAGE>
(7) The License Agreement makes explicit the right of any STORS and
NitRem facility owner to continue using the Technologies at that facility even
after the expiration of the License Agreement.
As new applications for the Technologies were developed by Battelle,
the Company entered into additional agreements with Battelle to expand the
applicable license fields for the Technologies. In October 1993, the Company and
Battelle entered into an option agreement for the Company to apply NitRem to
nitrogen bearing waste from explosives and propellent manufacturers. The Company
paid $25,000 for the option. This option was extended in 1994, and in July 1995,
the Company and Battelle entered into a license agreement for this license
field. This extension of the license field allows the Company to market NitRem
to the Department of Defense, and defense manufacturers ("defense license
field"). The Company paid Battelle a license fee of $25,000 cash and shares of
Series B Common Stock having a value of $80,000. Battelle may terminate this
license during April 1999, and during any subsequent April thereafter, if the
Company has not generated royalties to Battelle for the defense license field in
the amount of $5,000 for the preceding calendar year.
On July 7, 1995, the Company and Battelle entered into another license
agreement to apply NitRem to waste from industrial processes, excluding nitrogen
bearing waste from explosives and propellent manufacturers. This includes waste
from agriculture and food processing operations, petroleum refining, metal
working, chemical, pharmaceutical and materials manufacture, textile processing,
and similar waste from government operations ("industrial license field"). The
Company paid Battelle a license fee of Series B Common Stock having a value of
$75,000 to Battelle. This license also may be terminated by Battelle during
April 1999, and during any subsequent April thereafter, if the Company has not
generated royalties to Battelle for the industrial license field in the amount
of $5,000 for the preceding calendar year.
On February 15, 1995, the final payment from the Company of $75,000 was due
and payable to Battelle under the License Agreement, as amended. Due to the
financial condition of the Company at that time, the Company was unable to pay
the fee. In addition, the Company also owed Battelle reimbursement of expenses
advanced by Battelle to cover travel, research, development and associated costs
for technical staff at Battelle engaged in the marketing of the Technologies for
the Company. Due to the financial condition of the Company, Battelle agreed, in
lieu of cash payment, to accept 18,750 shares of restricted common stock of the
Company representing a value of $150,000 based on the Company's last net
restricted stock sale at that point in time as full and total payment of all
license fees and expenses due from the Company. The License Agreement, when
combined with the additional two licenses for defense and industrial license
fields, grants the Company the exclusive worldwide rights to STORS and NitRem
for all fields of use (except STORS in Japan).
41
<PAGE>
The Company is totally dependent upon the engineering, laboratory, research
and development skills and expertise of Battelle to supervise the design and
implementation of a STORS or NitRem demonstration facility, for the conducting
of laboratory analysis and characterization of various waste streams to be
processed through a STORS or NitRem unit, to collect and analyze process
equipment and performance data generated during a STORS and/or NitRem
demonstration test, and for on-going research and development of the STORS and
NitRem processes. The Company must rely on Battelle's engineers to work with the
Company's strategic partners to supervise the design and implementation of the
demonstration projects. Although Battelle has no contractual obligation to
support the Company's efforts to commercialize the Technologies, as the Licensor
of the Technologies, it has been Battelle's practice to support the Company, as
its Licensee, in such efforts. Battelle has provided services including legal
services to maintain Technology patents, laboratory services, engineering and
marketing personnel, materials and research and development to support the
Company's efforts to commercialize the Technologies and pursue demonstration
projects. The Company has reimbursed Battelle an aggregate of $64,000 over the
last three years in connection with such support services.
42
<PAGE>
Centerpoint Power Corporation
In October 1988, the Company engaged the services of Centerpoint Power
Corporation, a Virginia corporation, ("Centerpoint"), through a General
Compensation and Stock Warrant Agreement, to provide assistance in locating
capital financing and/or public funding of a STORS and/or NitRem demonstration
facility. The Company executed an amended agreement with Centerpoint in April
1991 which had an expiration date of October 1994. In January 1992, the
agreement was amended regarding stock warrant rights. In 1993, the Board of
Directors extended the Compensation Agreement with Centerpoint for an additional
three years to April 22, 1996 and extended the time for exercising warrant
rights for an additional five years to April, 2001, in consideration of the
funding to be provided by the U.S. Army, Department of Defense for the Sam
Houston State University, doing business as, the Texas Regional Institute for
Environmental Studies ("TRIES")/Army Redwater Project.
Rodman Grimm, President of Centerpoint, served on the Board of
Directors of the Company from March 2, 1994 until his resignation December 28,
1996 (for personal reasons).
McKeown & Franz, Inc.
The Company entered into an agreement with McKeown & Franz, Inc.
("MFI"), in March, 1992, a New York based environmental services firm to assist
in the promotion of its nitrogen removal technology to the City of New York. MFI
agreed to forego its retainer in return for a success fee and an equity position
in the Company should an agreement to develop the nitrogen removal be executed
with the City of New York. According to the agreement, MFI would be entitled to
receive 9,375 shares of Common Stock, plus an option to buy additional stock
upon the Company's signing an agreement with the City of New York for a city
sponsored pilot scale demonstration project. In May 1993, the Board of Directors
authorized the issuance of 9,375 shares of Series B Common Stock to McKeown &
Franz, Inc. pursuant to the terms of the March, 1992 contract in connection with
MFI procuring the agreement with New York City to host a full scale nitrogen
removal demonstration facility at the City's largest waste water facility. Due
to the lack of capital and the inability of the Company to form a strategic
alliance to move forward with the New York City project, the Company has not
acted on the original demonstration agreement with the City of New York.
However, in July of 1996, the Company executed a no-cost test agreement with the
City of New York allowing the Company to demonstrate, on-site, the services and
capabilities of the nitrogen removal process. This demonstration project will be
the first joint project between the Company and Foster Wheeler Environmental
Corporation. Additional efforts by MFI contributed to the Company obtaining such
no-cost test agreement. MFI is also in a position to receive additional
compensation based on a percentage of the overall capital cost of the NitRem
demonstration facility and the procurement of one or more full scale facilities
as part or all of New York City's nitrogen disposal processes if MFI secures
funding for such projects.
43
<PAGE>
Gerald Franz served as a director of the Company from March 2, 1994, to
the expiration of his term, September 5, 1997.
Other Transactions
Mr. Montesi loaned the Company $65,000 in January of 1997, as part of
the Company's $676,000 bridge financing. In addition to repayment of the loan
with interest, Mr. Montesi 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 $676,000 bridge financing. In addition to repayment of the loan with
interest, Mr. Rayner will receive 5,000 shares of Series B Common Stock. Dr.
Louis Ortmann loaned the Company $76,000 in June of 1997, as part of the
Company's $676,000 bridge financing. In addition to repayment of the loan with
interest, Dr. Ortmann will receive 7,600 shares of Series B Common Stock.
Dr. Paul A. Loeffler, a director of the Company, elected on September
5, 1997 to a three year term expiring at the Annual Meeting of Shareholders
2000, or until his successor is duly elected, is a member of the board of
directors of the Texas Regional Institute for Environmental Studies in
Huntsville, Texas, and is also the associate director of TRIES. TRIES is the
prime contractor with the U.S. Army for the Company's Radford Army Munitions
Plant Demonstration Project. See "Business - Nitrogen Removal Demonstration -
United States Department of the Army Program".
Mr. Jerald Sklar, was elected by the Board of Directors on September 5,
1997, to complete the unexpired term of Thomas Randall Kemp. Mr. Sklar is a
member of Waring Cox, PLC, counsel to the Company. Waring Cox, PLC also owns
88,215 shares of Series B Common Stock.
Future Transactions
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.
44
<PAGE>
ITEM 14.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND
REPORTS ON FORM 8-K
(a)
(1) and (2) Financial Statements and Financial Statement
Schedules. To be filed by Amendment, pursuant to
Rule 12b-25
1. Balance Sheets
September 30, 1997 and 1996.
2. Statements of Operations -- years ended September 30, 1997,
1996 and 1995 and cumulative during development stage through
September 30, 1997.
3. Statements of changes in stockholders'
equity (deficit) -- periods ended
September 30, 1988 through
September 30, 1997.
4. Statements of cash flows -- years ended September 30, 1997,
1996 and 1995 and cumulative during development stage through
September 30, 1997.
5. Notes to financial statements.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(a)(3) Exhibits.
Number assigned
in regulation
S-K, Item 601 Description of Exhibit
3.1** Amended and Restated Articles of Incorporation.
3.2** Amended and Restated Bylaws of the Company.
4.1** Form of Stock Certificate - Series A Common Stock.
4.2** Form of Stock Certificate - Series B Common Stock.
45
<PAGE>
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.
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<PAGE>
10.19** No Cost Test Agreement Between City of New York - Department
of Clean Water and Registrant dated July 26, 1996.
10.20** Memorandum of Understanding Between Foster Wheeler
Environmental Corporation and Mitsui Company (U.S.A.) Inc.
dated October, 1996.
10.21** Subcontract between Sam Houston State University and the
Company dated October 31, 1994.
10.22** Modification Number 001 Subcontract SHSU - 5000 - 002 between
Sam Houston State University and the Company dated August,
1996.
10.23(1) 1997 Stock Option Plan
27.1 Financial Data Schedule (to be filed by amendment pursuant to
Rule 12b-25).
28.1* Form of Security Escrow Agreement.
* Incorporated by reference from the Company's Registration
Statement on Form S-18, File No. 33-46104-FW, effective June
24, 1992.
** Incorporated by reference from the Company's Registration
Statement on Form SB-2, File No. 333-21613.
(1) Management Contract or Compensatory Plan or Arrangement.
(2) Incorporated by reference from the Company's Form 10-Q of
March 31, 1993.
(3) Incorporated by reference from the Company's Form 10-Q of June
30, 1993.
(4) Incorporated by reference from the Company's Form 10-K of
September 30, 1993.
(5) Incorporated by reference from the Company's Form 10KA of
September 30, 1993.
(6) Incorporated by reference from the Company's Form 10-Q of
March 31, 1995.
(7) Incorporated by reference from the Company's Form 10-Q of June
30, 1995.
(8) Incorporated by reference from the Company's Form 10-Q of
March 31, 1996.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of
the period covered by this Report.
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<PAGE>
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
THERMOENERGY CORPORATION
By: /s/ P. L. Montesi
P. L. Montesi
President, Chief Operating Officer,
Director and Principal Financial Officer
Signature Title Date
/s/ Dennis C. Cossey Chairman, Chief Executive December 29, 1997
Dennis C. Cossey Officer, Secretary and Director
(Principal Executive Officer)
/s/Primo L. Montesi President and Director December 29, 1997
- -------------------------- (Principal Financial Officer)
Primo L. Montesi
/s/ J. Donald Phillips Director December 29, 1997
- --------------------------
J. Donald Phillips
/s/ Dr. Louis J. Ortmann Director December 29, 1997
- --------------------------
Dr. Louis J. Ortmann
- -------------------------- Director December --, 1997
Andrew T. Melton
- -------------------------- Director December --, 1997
Dr. Paul A. Loeffler
- -------------------------- Director December --, 1997
Jerald H. Sklar
48
<PAGE>
THERMOENERGY CORPORATION
1997 STOCK OPTION PLAN
1. PURPOSE
The purpose of the ThermoEnergy Stock Option Plan (the "Plan"), as
amended is to advance the interest of ThermoEnergy Corporation, an
Arkansas Corporation (the "Corporation"), by stimulating the efforts of
key employees on behalf of ThermoEnergy, heightening the desire of key
employees to continue in employment with ThermoEnergy, assisting
ThermoEnergy in competing effectively with other enterprises for
services of new employees necessary for the continued improvement of
operations, and to attract and retain the best available personnel for
services as Directors of the Corporation. This Plan permits (a) the
grant of incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") and (b) provides
for options which are non-incentive stock options pursuant to Code
Section 422.
2. DEFINITIONS
(a) "The Board" means the Board of Directors of the Corporation.
(b) "Committee" means the Stock Option Committee appointed by the
Board of Directors from among its members.
(c) "Disablement" means a physical condition arising from an
illness or injury which renders an individual incapable of
performing work; the determination of the Committee as to an
individual's disablement shall be made in accordance with the
standards and procedures of the Corporation's then current
long-term disability plan and shall be conclusive on all of
the parties.
(d) "Plan" means the ThermoEnergy Stock Option Plan.
(e) "Agreement" means the document which evidences the grant of
any benefit under the Plan and which sets forth the benefit
and terms, conditions and provisions of, and restrictions
relating to, such benefit.
(f) "Employee" means any person employed by the employer.
3. PARTICIPANTS
Participants in the Plan shall be those key ThermoEnergy employees to
whom options may be granted from time-to-time by the Committee.
Participants shall also include non-employee Directors of the
Corporation to whom options are granted in accordance with Section 6.
No options shall be granted to any person if immediately after the
grant of such option such person would own stock, including stock
subject to outstanding options held by him or her, amounting to more
than ten percent (10%) of the total combined voting power or value of
all classes of stock of the Corporation or any subsidiary.
4. EFFECTIVE DATE AND TERMINATION OF PLAN
This Plan was approved by the Board January 3, 1997, amended on January
30, 1997 and shall become effective upon approval by holders of a
majority of the Common Shares present in person or by proxy and
entitled to vote at the next Annual Meeting of Shareholders, May 7,
1997. Options may be granted under the Plan prior to receipt of such
approval, provided that, in the event such
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approval is not obtained, the Plan and all options granted under the
Plan shall be null and void and of no force and effect. The Plan shall
terminate when all the shares of stock subject to options granted under
this Plan shall have been acquired through the exercise of such options
or on May 7, 2007, whichever is earlier or at such earlier time as the
Board of Directors may determine. Termination of the Plan will not
affect the rights and obligations arising under options theretofore
granted and then in effect.
5. SHARES SUBJECT TO THE PLAN AND OPTIONS
The stock subject to options authorized to be granted under the Plan
shall consist of 750,000 Series B shares of the Corporation's Common
Stock, $0.001 par value, or the number and kind of shares of stock or
other securities which shall be substituted or adjusted for such shares
as provided in Section 7. Such shares may be authorized and unissued
shares of the Corporation's Common Stock. All or any shares of stock
subject to an option plan for which any reason terminates unexercised
may again be subject to an option under the Plan.
6. GRANT TERMS AND CONDITIONS OF OPTIONS
Options may be granted at any time and from time-to-time prior to the
termination of the Plan to those key employees of ThermoEnergy who, in
the Committee's judgment, are largely responsible through their
judgment, interest, ability and special efforts for the successful
conduct of ThermoEnergy's operations. However, no participant shall be
granted options in any year to purchase a number of shares of the
Corporation's Common Stock in excess of one percent (2%) of the number
of shares of the Corporation's Common Stock outstanding on April 1 of
1997.
Options are granted on the third business day following the day of each
annual meeting of the stockholders of the Corporation, to each person
who is then a member of the Board and who is then not an employee of
the Corporation or any of its subsidiaries ("a non-employee Director")
shall automatically, without further action by the Board or the
Committee be granted a "non-statutory stock option" (that is a stock
option which does not qualify under Section 422 or 423 of the Internal
Revenue Code of 1986) to purchase 1,000 shares of Common Stock. If the
number of shares then remaining available for the grant of stock
options under the Plan is not sufficient for each non-employee Director
to be granted an option for 1,000 shares (for the number of adjusted or
substituted shares pursuant to Section 7), then each non-employee
Director shall be granted an option for a number of whole shares equal
to the number of shares then remaining available divided by the number
of non-employee Directors, disregarding any fractions of a share.
No participant shall have any rights as a stockholder with respect to
any shares of stock subject to option hereunder until said shares have
been issued. Each option shall be evidenced by a written stock option
agreement which will expressly identify the option as an incentive
stock option or as a non-qualified stock option. Furthermore, the grant
of an incentive option pursuant to this Plan shall in no way be
construed as an alternative to the right of a optionee to purchase
stock pursuant to any present of future grant of a non-qualified option
under any of ThermoEnergy's current or future stock option plans.
Options granted pursuant to the Plan need not be identical, but, each
option is subject to the terms of the Plan and must contain and be
subject to the following terms and conditions:
(a) Price: The purchase price under each option granted to
employees shall be established by the Committee. In no event
will the option price be less than 100% of the fair market
value of the stock on the date of the grant. The option price
must be paid in full at the time of the exercise. The price
may be paid in cash, cash equivalents or secured notes
acceptable to the Committee, by arrangements with a broker
which is acceptable to the Committee where
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payment of the option price is made pursuant to an irrevocable
direction to the broker to deliver all or part of the proceeds
from the sale of the option shares to the Corporation, by the
surrender of shares of Common Stock owned by the optionee
exercising the options and having a fair market value on the
date of exercise equal to the option price or in any
combination of the foregoing.
(b) Duration and Exercise or Termination of Option:
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Each option granted to an employee shall be exercisable in such
manner and at such times as the Committee shall determine or as
follows: (1) new employees - 20% and (2) current employees -
33-1/3%. Each option granted may expire within a period of
ten (10) years from the grant date. An employee's stock option
agreement may provide for accelerated exercisability in the
event of the employee's Death, Disablement or Retirement or
other events in accordance with policies established by the
Committee and may provide for expiration prior to the end of
its term in the event of the termination of the employee's
service.
Each 1,000 share option granted to a non-employee Director
will become exercisable beginning one year from the date of
the annual meeting of stockholders on which date 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 an annual meeting date, that 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 options will become first exercisable beginning one year
from the date of the annual meeting at which he 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 by the stockholders.
(c) Tax and Securities Laws: Subject to the provisions and
limitations of this Plan, and subject to applicable
securities, tax and other laws and regulations, options may be
granted at such time or times and pursuant to such terms and
conditions as may be determined by the Committee during the
period this Plan is in effect.
(d) Payments: Shares to be purchased upon the exercise of any
option shall be paid for, in full, in cash or by certified
check payable to the order of the Company (or in certificates
of stock issued by the Company, which stock shall be assigned
a fair value by the Committee in its discretion) and delivered
to the Company at the time of such exercise.
(e) Option Agreements: Each Option granted under the Plan shall be
evidenced by a Stock Option Agreement between the Company and the
employee. The Committee shall initially make all decisions as to the
form of Stock Option Agreement to be entered into with each optionee.
All forms of Stock Option Agreement shall contain such provisions,
restrictions and conditions as are not inconsistent with this Plan but
need not be identical. The provisions of this Plan shall be set forth
in full or incorporated by reference in each Stock Option Agreement.
(f) Disability/Disablement: In the case of an employee who becomes
permanently disabled within the meaning of Section 22(e)(3) of the Code
while in the employ of the Company, or its parent or any subsidiary of
the Company, any option which was exercisable on the date when such
employee became disabled may be exercised within one (1) year after
such employee ceases employment (but in no event later than the
termination date of the option) after which time any unexercised
portion of all outstanding options shall expire.
(g) Death: In the event of the death of an optionee while in the
employ of the Company, its parent or any subsidiary of the
Company, the executors, administrators, legatees or
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distributees of the estate of the optionee shall have the
right to exercise any options which become exercisable prior
to the optionee's death but only within a period of three (3)
months from the date of the optionee's death (but in no event
later than the termination date of the option), after which
time any unexercised portion of all outstanding options shall
expire. In the event an option is exercised by the executors,
administrators, legatees or distributees of the estate of the
optionee, under Subsection (f) or (h) of this Section 4, the
Company shall be under no obligation to issue Shares hereunder
unless and until the Company is satisfied that the person (or
persons) exercising the option is the duly appointed legal
representative of the optionee's estate or the proper legatee
or distributee thereof.
(h) Suspension or Termination of Option: If the Board of the
Corporation reasonably believes that a Participant other than
a non-employee Director has committed an act of misconduct as
described in this Section, the Participant's rights to
exercise any option may be suspended pending a determination
by the Board of Directors. If the Board of Directors
determines a Participant other than a non-employee Director
has committed an act of embezzlement, fraud, dishonesty,
nonpayment of any obligation owed to ThermoEnergy, breach of
fiduciary duty or deliberate disregard of ThermoEnergy rules
resulting in loss, damage or injury to ThermoEnergy, or if a
Participant makes an unauthorized disclosure of any
ThermoEnergy trade secret or confidential information, engages
in any conduct constituting unfair competition, induces any
ThermoEnergy customer to breach a contract with ThermoEnergy
or induces any principal for whom ThermoEnergy acts as agent
to terminate such agency relationship, neither the Participant
nor his or her estate shall be entitled to exercise any option
whatsoever. In making such determination, the Board of
Directors shall act fairly and shall give the Participant an
opportunity to appear and present evidence on his or her
behalf at a hearing before a committee of the Board of
Directors. For any participant who is an "Executive Officer"
for purposes of Section 16 of the Securities Exchange Act of
1934, the determination of the Board of Directors shall be
subject to the approval of the Committee.
(i) Termination of Non-Employee Director's Services: Subject to
Section 6.(b), upon the termination of the Participant's
service as a non-employee Director, his or her rights to
exercise an option then held shall be only as follows:
(1) Death. Upon the death of a non-employee Director
while in service as a non-employee Director of
ThermoEnergy, the non-employee Director's rights will
be exercisable by his or her estate or beneficiary at
any time during the twelve (12) months next
succeeding the date of death. The number of shares
exercisable by the estate or beneficiary will be the
total number of unexercised shares under the
non-employee Director's option at the date of his or
her death. If a non-employee Director should die
within thirty (30) days of his or her termination of
service as a non-employee Director with ThermoEnergy,
an option will be exercisable by his or her estate or
beneficiary at any time during the twelve (12) months
succeeding the date of termination, but only to the
extent of the number of shares as to which such
option was exercisable as of the date of such
termination. A non-employee Director's estate shall
mean his or her legal representative or other person
who so acquires the right to exercise the option.
(2) Disablement. Upon the disablement of a non-employee
Director, any option which he or she holds, whether
or not then exercisable, may be exercised after the
date of the Disablement within twelve (12) months.
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(3) Retirement. Upon Retirement of a non-employee
Director, the non-employee Director's rights to
non-qualified stock options may be exercised for a
period of twelve (12) months after Retirement.
(4) Other Reasons. Upon termination of a non-employee
Director's service as a non-employee Director for any
reason other than those stated above, the
non-employee Director may, within ninety (90) days
following such termination exercise the option to the
extent such option was exercisable on the date of
termination.
(j) Transferability of Option: Each option shall be transferable
only by will or the laws of descent and distribution and shall
only be exercisable by the Participant during his or her
lifetime.
(k) Modification or Assumption of Options: The Committee may
modify, extend or assume outstanding options (whether granted
by ThermoEnergy or by another issuer) in return for the grant
of new options for the same or a different number of shares
and at the same or a different exercise price.
(l) Other Terms and Conditions: Options may also contain such
other provisions, which shall not be inconsistent with any of
the foregoing terms, as the Committee shall deem appropriate.
No option, however, nor anything contained in the Plan shall
confer upon any Participant any right to continue in
ThermoEnergy's employ or service nor limit in any way
ThermoEnergy's right to terminate his or her employment or
service at any time.
7. ADJUSTMENTS OF AND CHANGES IN THE STOCK
In the event the Common Stock of the Corporation shall be changed into
or exchanged for a different number or kind of shares of stock or other
securities of the Corporation or of another corporation (whether by
reason of merger, consolidation, recapitalization, reclassification,
split-up, combination of shares, or otherwise), or if the number of
shares of Common Stock of the Corporation shall be increased through a
stock split or the payment of a stock dividend, then there shall be
substituted for or added to each share of Common Stock of the
Corporation theretofore appropriated or thereafter subject or which may
become subject to an option under the Plan, the number and kind of
shares of stock or other securities into which each outstanding share
of Common Stock of the Corporation shall so be changed, or for which
each such share shall be exchanged, or to which such share shall be
entitled, as the case may be. Outstanding options shall also be amended
as to price and other terms if necessary to reflect the foregoing
events. In the event there shall be any other change in the number or
kind of the outstanding shares of Common Stock of the Corporation, or
any stock or securities into which such Common Stock shall have been
changed, or for which it shall have been exchanged, then if the
Committee shall, in its sole discretion, determine that such change
equitably requires an adjustment in any option theretofore granted or
which may be granted under the Plan, such adjustment shall be made in
accordance with such determination.
No right to purchase fractional shares shall result from any adjustment
in options pursuant to this Section 7. In case of any such adjustment,
the shares subject to the option shall be rounded down to the nearest
whole share. Notice of any adjustment shall be given by the Corporation
to each Participant which shall have been so adjusted and such
adjustment (whether or not notice is given) shall be effective and
binding for all purposes of the Plan.
Any other provision hereof to the contrary notwithstanding (except
Section 6.(b)) in the event ThermoEnergy is a party to a merger or
other reorganization, outstanding options shall be subject to the
agreement of merger or reorganization. Such agreement may provide,
without limitation, for the
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assumption of outstanding options by the surviving corporation or its
parent, for their continuation by ThermoEnergy (if ThermoEnergy is a
surviving corporation), for accelerated vesting and accelerated
expiration, or for settlement in cash.
8. LISTING OR QUALIFICATION OF STOCK
In the event that the Board of Directors determines in its discretion
that the listing or qualification of the Plan shares on any securities
exchange or under any applicable law or governmental regulation is
necessary as a condition to the issuance of such shares under the
option, the option may not be exercised in whole or in part unless such
listing, qualification, consent or approval has been unconditionally
obtained.
9. AGREEMENT TO SERVE
Each Participant shall agree that he or she will remain in
ThermoEnergy's employ or service an a non-employee Director for at
least one year from the option grant date. Such provision does not
affect ThermoEnergy's right to terminate a Participant's employment or
service as a non-employee Director as any time or for any reason.
10. ADMINISTRATION AND AMENDMENT OF THE PLAN
The Plan shall be administered by the Committee. The Committee shall
consist of a minimum of two and a maximum of three disinterested
Directors of ThermoEnergy, who shall be appointed by the Board of
Directors. The Board shall fill vacancies and may from time to time
remove or add members. All members of the Committee will be
disinterested persons as defined in Rule 16b-3 under the Exchange Act.
A non-employee Director shall not fail to be "disinterested" solely
because he or she receives the grants described in Section 6. The
Committee shall, in addition to its other authority and subject to
provisions of this Plan, have authority in its sole discretion to
determine who are the officers and key employees of the Company
eligible to receive options under this Plan; which officers and key
employees shall in fact be granted an option or options; whether the
options shall be an incentive stock option or a non-qualified stock
option; the number of shares to be subject to each of the options; and,
the time or times at which the options shall be granted. The Board of
Directors may also appoint one or more separate committees of the Board
of Directors, each composed of one or more Directors of ThermoEnergy
who need not be disinterested, who may administer the Plan with respect
to employees who are not Executive Officers or Directors of
ThermoEnergy, and may grant options under the Plan to such employees
and may determine all terms of such options. The Board of Directors may
amend or terminate the Plan as desired, without further action by the
Corporation's stockholders except to the extent required by applicable
law.
Notwithstanding the above, the provisions of Section 6 relating to
non-employee Directors may not be amended more than once every six
months, except to comply with changes to the Code or the rules
thereunder.
11. TIME OF GRANTING OPTIONS
The effective date of each option granted hereunder shall be the date
on which the grant was made. Within a reasonable time thereafter,
ThermoEnergy will execute and deliver a written option agreement to the
Participant.
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12. WITHHOLDING
To the extent required by applicable federal, state, local or foreign
law, a Participant shall make arrangements satisfactory to the
Corporation for the satisfaction of any withholding tax obligations
that arise by reason of any option exercise or any sale of shares. The
Corporation shall not be required to issue shares until such
obligations are satisfied. The Committee may permit these obligations
to be satisfied by having the Corporation withhold a portion of the
shares of stock that otherwise would be issued to him or her upon
exercise of the option, or to the extent permitted, by tendering shares
previously acquired.
13. MERGER, CONSOLIDATION, REORGANIZATION AND LIQUIDATION
If the Company shall become a party to any corporate reorganization,
merger, liquidation, spinoff, or agreement for the sale of
substantially all of its assets and property, the Committee shall make
appropriate arrangements, which shall be binding upon the holders of
unexpired option rights, for the substitution of new options for any
unexpired options then outstanding under this Plan, or for the
assumption of any such unexpired options, to the extent that the
optionee's proportion and interest shall be maintained as before the
occurrence of such event.
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