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, 1998
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 ].
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As of December 22, 1998, there were 3,402,968 shares of common stock
outstanding (excluding 83,829 of treasury shares held by Company). The aggregate
market value of the Registrant's Common Stock held by non-affiliates of the
Registrant as of December 22, 1998 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 three chemical process technologies known as the
Sludge-To-Oil Reactor System (STORS(TM)), Nitrogen Removal (NitRem) and Ammonia
Recovery Process ("ARP"). The fourth technology, a dual-shell pressure balance
vessel, known as the Dual-Shell Reactor(TM)("DSR"(TM)), is the unique reactor
equipment in which the STORS and NitRem chemistries are conducted (collectively,
STORS, NitRem, ARP 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.
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NitRem is a hydrothermal process, similar in operation to STORS, applied to
processing solely aqueous waste streams. When operating in conjunction with
STORS, NitRem can process waste water to near drinking water standards, allowing
for the recovery and reuse of this valuable resource. In addition, NitRem,
operating as a stand alone technology, can convert virtually any hazardous or
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".
ARP is a patent-pending process designed to recover ammonia from dilute
waste streams. The removed and concentrated ammonia can thereafter be converted
to nitrogen (N2) or recovered as a salt, such as ammonium sulfate (NH2)2SO4),
packaged and sold worldwide as a commercial grade fertilizer. ARP's primary
market is municipal wastewater treatment and treating wastewater discharge from
concentrated animal farming operations, such as for the dairy, beef, poultry or
pork industry.
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
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eutrophication. Section 320 of the Clean Water Act lists 16 estuaries of
national significance that require priority attention, with provisions for
additional estuaries to be added in the near future. The economics involved in
meeting these new mandates are forcing POTW operators to seek new, alternative
treatment and recycling technologies in order to achieve compliance at an
affordable cost.
According to the Environmental Business Journal's ("EBJ"), Annual Industry
Overview, Vol. IX, April, 1996, the U.S. environmental industry reached $180
billion in revenues in 1995, posting a growth of 4.3% over 1994. The four
largest of EBJ's fourteen environmental industry segments, in terms of revenues
generated by private- and public-sector entities related to environmental
infrastructure, are solid waste management, wastewater treatment works, water
utilities and resource recovery. These four segments represent 57% of total
environmental industry revenues. The single largest sector of this market is
waste water treatment works, accounting for $27 billion annually, a market which
posted an annual average growth of 7.1% between 1989 and 1995.
The EPA, in its 1992 Needs Survey Report to Congress, 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 an ARP or
STORS/NitRem waste water treatment facility make it an attractive option for
municipalities, such as New York City and Colton, California. 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.
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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. On September 9, 1998, the Company agreed to
form ThermoEnergy Environmental Corporation ("TENC") with Foster Wheeler
Environmental Corporation ("FWENC") of Livingston, New Jersey to pursue clean
water projects worldwide. The new company combines the Company's
state-of-the-art clean water technologies with FWENC's engineering expertise and
global presence to pursue industrial and municipal water/wastewater projects
around the world and is the Company's first joint venture. The Company will own
49.9% of TENC and has granted a worldwide sublicense of the ARP technology to
TENC for municipal and agricultural livestock production facilities.
The Company 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 has completed one project demonstration for NitRem/DSR, and has
projects underway to demonstrate ARP and STORS . The Company will not be
required to make capital contributions to any such projects and the Company will
not receive any revenues or earnings from these demonstration projects. The
Company will be reimbursed for administrative and operating costs from the STORS
demonstration projects.
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. Results
indicate that the NitRem DSR reduces DNT in contaminated wastewater to a level
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which could be discharged without further wastewater treatment. Based on these
results, the Company is actively 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.
The Company has decided to demonstrate the capabilities of its newly
acquired ARP technology at New York City's Staten Island wastewater treatment
facility. On August 4, 1998, the Company signed an agreement FWEC to provide up
to $500,000 funding necessary to demonstrate the ARP technology and to design,
fabricate and operate the ARP pilot plant. It is thereafter anticipated that any
commercial business derived from the successful demonstration of ARP will be
engaged through TENC. This will be the first collaborative effort between the
Company and Foster Wheeler Environmental Corporation to demonstrate this
nitrogen removal process pursuant to the New York agreement. 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. In March, 1998, the SBVWD selected the City of Colton,
California to host the STORS demonstration project. The Company will not be
required to make capital contributions to this project and the Company will not
receive any revenues or earnings. The Company will be reimbursed for
administrative and operating costs for this project. The design plans for the
STORS project have been completed. The Company anticipates subcontracting with
FWENC to fabricate, install and operate the STORS demonstration unit. Once in
operation, the Colton STORS facility will have a larger processing capacity than
70% of the existing municipal wastewater plants in the U.S. The demonstration
project is scheduled to begin in the second quarter of 1999.
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
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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,
NitRem, ARP nor the DSR have ever been utilized on a large-scale commercial
basis, and there is no assurance that either STORS, NitRem, ARP 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, ARP 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, ARP, a process
designed to recover ammonia from dilute wastestreams and convert it to either N2
or ammonium sulfate, and the DSR, the pressure vessel through which the STORS
and NitRem technologies are conducted. 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. ARP's primary market is municipal wastewater and wastewater discharge
from concentrated animal farming operations.
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.
<PAGE>
"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. This requirement was fulfilled with the successful
demonstration of the Radford Army Ammunition Project for the Department of
Defense. 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, ARP 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.
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%
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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.
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 Colton STORS demonstration project scheduled for the
second quarter 1999.
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
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volume of the waste stream will determine the number of reactors necessary for
either a STORS or NitRem processing facility.
ARP is a patent-pending process designed to recover ammonia from dilute
waste streams. The removed and concentrated ammonia can thereafter be converted
to nitrogen (N2) or recovered as a salt, such as ammonium sulfate (NH2)2SO4),
packaged and sold worldwide as a commercial grade fertilizer. ARP's primary
market is municipal wastewater treatment and treating wastewater discharge from
concentrated animal farming operations, such as in the dairy, beef, poultry or
pork industry. As a nitrogen/ammonia recovery technology, ARP is adaptable to
greenfield projects as well as for retro-fitting existing wastewater treatment
facilities for virtually any size population base. The capital cost of an ARP
facility can range from $1,500,000 to $80,000,000 and has a market potential of
500 municipalities world wide, through privatization or direct equipment sales.
The ARP technology was sublicensed to TENC September 9, 1998 for worldwide
municipal and agricultural livestock production facilities for the purpose of
jointly developing, marketing and utilizing the ARP technology. (See "Certain
Relationships and Related Transactions")
The Company does not currently possess the technical, operational or
financial resources necessary to construct or operate STORS, NitRem or ARP
facilities at either a demonstration or commercial facility level. The Radford
Army Ammunition Plant and the New York City demonstration projects were funded
by the U.S. Army and Foster Wheeler, respectively. The Colton STORS 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, NitRem or ARP
technologies. With regard to STORS, no facilities have yet been built, outside
Japan, on a commercial basis.
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".
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With regard to the Company's NitRem technologies, the large-scale
demonstration facility at the Radford Army Ammunition Plant and was 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".
Unlike NitRem, which destroys ammonia and other nitrogenous compounds, ARP,
as an alternative wastewater treatment process, removes and reuses the ammonia
from municipal, industrial and agricultural wastewater. Over the past decade,
the ever increasing levels of nitrogen/ammonia being discharged to our nations
fresh water resources has reached alarming proportions. Excess nitrogen/ammonia
concentration results in the acceleration or eutrophication, or the starvation
of oxygen in water. When phosphorus is added to the equation, the result is know
as "nutrient loading". For the first time, the U.S. EPA is preparing to
establish federal guidelines limiting the levels of nutrient loading for
industrial and municipal wastewater discharge. Currently operating municipal
wastewater treatment facilities require advance treatment processes to oxidize
excess ammonia to nitrites (nitrification) and, ultimately, to nitrogen gas,
(denitrification), prior to the release of treated water to surface streams.
Given the expensive nature of current treatment methods there is significant
interest in the development of cost effective, alternative nitrification
/denitrification technology. ThermoEnergy's new Ammonia Recovery Process (ARP)
is a new state of the art system that addresses many of the shortcomings of
current treatment methods.
ARP requires little space, significantly lower front-end capital costs as
well as lower variable (operating) costs. ARP not only effectively removes
nitrogen/ammonia from the discharge stream, it converts this liability into an
asset in the form of ammonium sulfate; a commercial grade fertilizer that can be
sold in worldwide markets. In addition, the utilization of ARP as existing
wastewater treatment facilities can potentially increase the treatment plants
throughput capacity up to 25%.
RECENT DEVELOPMENTS
The Company plans to continue its commercialization efforts during the next
fiscal year for the STORS, NitRem and ARP 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.
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
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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.
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
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water facility. For example, the Company believes that STORS and NitRem offer
POTWs a more cost-effective basis for tertiary water treatment, allowing the
recovery and reuse of water processed through the waste water treatment plant
with a minimal amount of processing. STORS removes nitrogen, heavy metals,
phosphorus, many toxic compounds and produces a high energy fuel. Industrial
wastewater often poses the same issues as does municipal wastewater. In
addition, there is a large volume of toxic slurries and solutions which pose an
even greater problem for their generators than exists for municipalities. A
review of the regulatory and technical situation for industrial discharges was
presented in the industry journal "Chemical Engineering" in June of 1992: Part 1
- - New Environmental Regulations Pose Challenges for Industry, and Part 2 - A
Guide to Industrial Pretreatment. The review demonstrates the diversity of
wastewater issues faced by industrial facilities, and it is clear that the best
solution will vary by industry and even by facility. However, management
believes that there are many situations where either a robust technology,
insensitive to pollutant concentrations and solids content, or a high
destruction efficiency will be required. These situations will often become
sales opportunities for the Company.
Although the Company has an exclusive License Agreement with Battelle
for the STORS technology, STORS is not a patentable technology. The Japanese
company which originally sponsored the Battelle STORS research has continued its
own research in STORS technology for the Japanese market.
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.
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.
Subsequently, the United States House and Senate approved, in PL 104-204,
September 26, 1996, a
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$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. In March,
1998, the SBVWD selected the City of Colton, California to host the STORS
demonstration project. The Company will not be required to make capital
contributions to this project and the Company will not receive any revenues or
earnings. The Company will be reimbursed for administrative and operating costs
for this project. The design plans for the STORS project have been completed .
The Company anticipates subcontracting with FWENC to fabricate, install and
operate the STORS demonstration unit. Once in operation, the Colton STORS
facility will have a larger processing capacity than 70% of the existing
municipal wastewater plants in the U.S. The demonstration project is scheduled
to begin in the second quarter of 1999.
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.
<PAGE>
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 results, the
Company is actively 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 fourteen waste water treatment facilities. The City of New York
currently produces over three million gallons of centrate daily, which the City
<PAGE>
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, to wit: ARP. The
Company has decided to demonstrate the capabilities of its newly acquired ARP
technology at New York City's Staten Island wastewater treatment facility. On
August 4, 1998, the Company signed an agreement FWEC to provide up to $500,000
funding necessary to demonstrate ARP and to design, fabricate and operate the
ARP pilot plant. (See Strategic Corporate Relationships).
On September 11, 1998, the Company agreed to form ThermoEnergy
Environmental Corporation with Foster Wheeler Environmental Corporation of
Livingston, New Jersey to pursue clean water projects worldwide. The new company
combines the Company's state-of-the-art clean water technologies with FWENC's
engineering expertise and global presence to pursue industrial and municipal
water/wastewater projects around the world and is the Company's first joint
venture. The Company will own 49.9% of TENC and has granted a worldwide
sublicense of the ARP technology to TENC for municipal and agricultural
livestock production facilities. It is anticipated that any commercial business
derived from the successful demonstration of ARP will be engaged through TENC.
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.
<PAGE>
On September 11, 1998, the Company agreed to form ThermoEnergy
Environmental Corporation with Foster Wheeler Environmental Corporation of
Livingston, New Jersey to pursue clean water projects worldwide. The new company
combines the Company's state-of-the-art clean water technologies with FWENC's
engineering expertise and global presence to pursue industrial and municipal
water/wastewater projects around the world and is the Company's first joint
venture. The Company will own 49.9% of TENC. The main purpose of the joint
venture, among other things, is to develop, market and utilize the ARP
technology. Concurrently with forming TENC, the Company entered into a
Shareholders agreement by an among FWENC, the Company and TENC and a worldwide
sublicense of the ARP technology to TENC for municipal and agricultural
livestock production facilities.
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.
<PAGE>
In April 1996, the Company entered into a non-binding Memorandum of
Understanding with Roy F. Weston, Inc. ("Weston") of West Chester, Pennsylvania,
which may be terminated by either company upon written notice to the other.
Weston is an engineering firm which participates in the development of large
scale civil engineering projects. The purpose of the memorandum is to provide a
preliminary framework for the joint pursuit by the companies of business
opportunities for the application of the Technologies. The memorandum
contemplates that Weston will provide engineering, construction management,
installation, operations and maintenance services in connection with such
projects, while the Company will provide the Technologies at a reasonable fee no
greater than the Company's most favored licensees. The memorandum incorporates
by reference a Proprietary Information Agreement dated August 22, 1995,
previously signed by the parties pursuant to which each company has agreed to
maintain in confidence all proprietary information furnished by the other.
In October 1996, the Company entered into a non-binding Memorandum of
Understanding ("MOU") with Foster Wheeler Environmental Corporation and Mitsui &
Co. (U.S.A.), Inc. ("Mitsui") regarding potential water and waste water projects
in Brazil, Mexico and Peru. The purpose of the MOU is to set forth the likely
roles of the companies in connection with any business involving the
Technologies. As contemplated by the MOU, ThermoEnergy Corporation would provide
the rights to use the Technologies for projects jointly developed in Brazil,
Mexico and Peru, Foster Wheeler Environmental Corporation would, on contract
awards, design, construct and, possibly, operate the Technologies at the
identified projects, and Mitsui would gather information regarding
opportunities, identify projects, and, possibly, seek to arrange financing for
various projects. The participants have held several meetings pursuant to the
MOU to discuss possible projects.
The Company has historically lacked the financial and other resources
necessary to market the Technologies or to build demonstration projects. The
Company believes that its working arrangement with strategic partners, such as
Foster Wheeler Environmental Corporation is the most efficient and effective way
to commercialize the Technologies.
<PAGE>
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, NitRem and ARP 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
<PAGE>
will involve the STORS, NitRem and ARP 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
completed tests on DoD wastes utilizing the NitRem pilot plant located at the
Radford Army Ammunition Plant in Radford, Virginia. As a result of these tests,
the Company formed TENC 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 radio nuclides 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
Hawthorne Army Ammunition Plant, Hawthorne, Nevada.
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 continue to form 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, NitRem and ARP
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 $25,000,
$25,000, and $0 for the years ended September 30, 1998, 1997, and
1996,respectively. The Company made payments to Battelle for support services in
1998 for $52,000; $72,000 in 1997 and $5,000 in 1996.
<PAGE>
Employees
As of December 1, 1998, the Company had a total of 3 employees, two
full-time: the Chairman and Chief Executive Officer and the President and one
part time: Executive Vice President and Senior Vice President of Corporate
Technology. All 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.
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. The Company leases
approximately 500 square feet of space on a month to month basis located at 3100
George Washington Way, Suite 153 in Richland, Washington from Sunna Corporation.
Alex Fassbender is an officer and shareholder of Sunna Corporation. The lease
arrangement is no more or less favorable than terms the Company could acquire
from an unaffiliated third party. In the event either of the Company's leases
are 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
On October 6, 1998, the Company filed an action in the United States
District Court, Eastern District of Arkansas, Western Division, Case No.
LR-C-98-657 against National Securities Corporation, a wholly owned subsidiary
of Olympic Cascade Financial Corporation and Steven A. Rothstein, individually
and as chairman of National Securities ("Defendants") in connection with
purported efforts on the part of the Defendants to underwrite a public offering
of securities for the Company. The Complaint alleges breach of contract,
promissory estoppel, breach of fiduciary duty and intentional or negligent
misrepresentation and seeks compensatory and punitive damages, jointly and
severally, against the Defendans.
ITEM 4. SUBMISSION OF MATERIALS TO A VOTE OF SECURITY
HOLDERS.
The Annual Meeting of the Shareholders of the Company's was held on
November 18, 1998. Louis J. Ortmann and J. Donald Philips were elected directors
of the Company. The shareholders also ratified the appointment of Kemp & Company
as independent public accountants for the fiscal year ending September 30, 1998.
<PAGE>
The results of the voting were as follows:
Abstain/
For Against Withheld
Election of Directors:
Louis J. Ortmann 2,175,571 2,753
J. Donald Philips 2,195,070 3,254
Appointment of Kemp
& Company 2,159,983 1,433 16,908
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, 1998, 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.
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
Selected financial data should be read in conjunction with and is qualified
in its entirety by reference to the consolidated financial statements and the
notes thereto set forth in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Cumulative During
Development Stage
Through 1998 1997 1996 1995 1994
September 30, 1998 ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net loss (1) $(7,534,536) $(797,099) $ 1,196,036 $ (551,621) $ (896,998) $ (767,427)
Total assets 673,068 349,911 173,333 125,215 49,541
Basic and
Diluted net
loss per
common share(2) (2.01) (.20) (.31) (.15) (.24) (.20)
</TABLE>
(1) To date, the Company has not derived any revenues from operations. See Note
9 of Notes to Financial Statements for management's consideration of going
concern matters.
(2) See Note 1 of Notes to Financial Statements for a discussion of Financial
Accounting Standards Board Statement No. 128, "Earnings per Share".
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
ThermoEnergy Corporation ("Company") is a development stage company
involved in the marketing and development of certain environmental technologies
primarily used for solving waste water problems. These technologies include
three chemical processes known as the Sludge-To-Oil Reactor System (STORS(TM))
and Nitrogen Removal (NitRem(TM)) and the Ammonia Recovery Process (ARP). The
fourth technology, a dual-shell pressure balance vessel, known as the Dual-Shell
Reactor(TM) ("DSR"), is the unique reactor equipment in which the STORS and
NitRem chemistries are conducted (STORS, NitRem, ARP and DSR are referred to
collectively as the "Technologies"). The Company's application of STORS and
NitRem through the use of a STORS-DSR, NitRem- DSR, or a combination of both
types of equipment, are designed to eliminate damaging organic and nitrogenous
contaminants, respectively, from municipal and industrial waste streams. The
Company's ARP process is designed to recover ammonia from fluid water streams
resulting in the manufacture of various by-products such as ammonium sulfate
fertilizer when sulfuric acid is added to the highly concentrated ammonia stream
that is recovered.
<PAGE>
The Company is the exclusive worldwide licensee for the Technologies
(except for STORS in Japan) which were developed by Battelle Memorial Institute
("Battelle"), an independent research and development organization. The Company
intends to sell equipment (i.e. STORS-DSR, NitRem- DSR or ARP) and services to
government and industrial users, sublicense the Technologies to industrial users
or third parties, or build, own and operate municipal and/or industrial waste
water treatment facilities. The Company's business strategy is based upon
entering into collaborative working relationships with established engineering
and environmental companies, or formal joint venture agreements relative to the
application of the technologies for specified industries or markets. On
September 9, 1998, the Company formed ThermoEnergy Environmental Corporation
("TENC") with Foster Wheeler Environmental Corporation ("FWENC") of Livingston,
New Jersey to pursue clean water projects worldwide. The new company combines
the Company's state-of-the-art clean water technologies with FWENC's engineering
expertise and global presence to pursue industrial and municipal
water/wastewater projects around the world and is the Company's first joint
venture. The Company owns 49.9% of TENC and has granted a worldwide sublicense
of the ARP technology to TENC for municipal and agricultural livestock
production facilities.
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
<PAGE>
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.
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
<PAGE>
water facility. For example, the Company believes that STORS and NitRem offer
POTWs a more cost-effective basis for tertiary water treatment, allowing the
recovery and reuse of water processed through the waste water treatment plant
with a minimal amount of processing. STORS removes nitrogen, heavy metals,
phosphorus, many toxic compounds and produces a high energy fuel. Industrial
wastewater often poses the same issues as does municipal wastewater. In
addition, there is a large volume of toxic slurries and solutions which pose an
even greater problem for their generators than exists for municipalities. A
review of the regulatory and technical situation for industrial discharges was
presented in the industry journal "Chemical Engineering" in June of 1992: Part 1
- - New Environmental Regulations Pose Challenges for Industry, and Part 2 - A
Guide to Industrial Pretreatment. The review demonstrates the diversity of
wastewater issues faced by industrial facilities, and it is clear that the best
solution will vary by industry and even by facility. However, management
believes that there are many situations where either a robust technology,
insensitive to pollutant concentrations and solids content, or a high
destruction efficiency will be required. These situations will often become
sales opportunities for the Company.
Although the Company has an exclusive License Agreement with Battelle
for the STORS technology, STORS is not a patentable technology. The Japanese
company which originally sponsored the Battelle STORS research has continued its
own research in STORS technology for the Japanese market.
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.
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.
Subsequently, the United States House and Senate approved, in PL 104-204,
September 26, 1996, a
<PAGE>
$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. In March,
1998, the SBVWD selected the City of Colton, California to host the STORS
demonstration project. The Company will not be required to make capital
contributions to this project and the Company will not receive any revenues or
earnings. The Company will be reimbursed for administrative and operating costs
for this project. The design plans for the STORS project have been completed .
The Company anticipates subcontracting with FWENC to fabricate, install and
operate the STORS demonstration unit. Once in operation, the Colton STORS
facility will have a larger processing capacity than 70% of the existing
municipal wastewater plants in the U.S. The demonstration project is scheduled
to begin in the second quarter of 1999.
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.
New York City Project
The second commercial scale nitrogen removal demonstration project is a
team effort between ThermoEnergy, Foster Wheeler Environmental Corporation and
the City of New York to test the Company's capability to cost-effectively
eliminate the concentrated ammonia discharge, or centrate, from eight of New
York City's fourteen waste water treatment facilities. The City of New York
currently produces over three million gallons of centrate daily, which the City
<PAGE>
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, to wit: ARP. The
Company has decided to demonstrate the capabilities of its newly acquired ARP
technology at New York City's Staten Island wastewater treatment facility. On
August 4, 1998, the Company signed an agreement FWEC to provide up to $500,000
funding necessary to demonstrate ARP and to design, fabricate and operate the
ARP pilot plant. (See Strategic Corporate Relationships).
On September 11, 1998, the Company formed ThermoEnergy Environmental
Corporation with Foster Wheeler Environmental Corporation of Livingston, New
Jersey to pursue clean water projects worldwide. The new company combines the
Company's state-of-the-art clean water technologies with FWENC's engineering
expertise and global presence to pursue industrial and municipal
water/wastewater projects around the world and is the Company's first joint
venture. The Company owns 49.9% of TENC and has granted a worldwide sublicense
of the ARP technology to TENC for municipal and agricultural livestock
production facilities. It is anticipated that any commercial business derived
from the successful demonstration of ARP will be engaged through TENC.
The Company also has joint marketing arrangements with Roy F. Weston, Inc.,
Dan Cowart, Inc., and Mitsui & Co. (U.S.A.), Inc. and plans to enter project
specific working arrangements when such projects are identified and funding is
obtained. The Company has not generated any operating revenues or any profits.
The Company has recently completed demonstration of its NitRem-DSR technology at
the TRIES, Radford Army Ammunition Plant project in Radford, Virginia. This
NitRem-DSR project took a wastewater stream containing dinitrotoluene (DNT) and
successfully reduced the concentration of DNT from 120,000 ppb to less than 5
ppb, acheiving a destruction efficiency of 99.996%, well below National
Pollution Discharge Elimination System (NPDES) discharge limits. Based on these
test results, the Company, individually and jointly with Foster Wheeler
Environmental Corporation, is actively marketing the NitRem-DSR units to
potential industrial clients and to various divisions within the DOD. The
Company has a project to demonstrate its ARP technology at New York City's
Staten Island wastewater treatment facility. The demonstration project is
scheduled to begin March of 1998 and will run for 150 consecutive days. In
addition, the Company is in the process of negotiating a STORS demonstration
facility for the San Bernardino Valley Municipal Water District. The Company
will not be required to make capital contributions to any such projects and the
Company will not receive any revenues or earnings from these demonstration
projects. The Company will be reimbursed for administrative and operating costs
from the two demonstration projects underway and is negotiating similar
arrangements for the third demonstration project.
Since its formation in 1988, the Company has devoted substantially all of
its resources to funding the payments due under license agreements, searching
for opportunities to employ its technologies in demonstration facilities and
seeking capital necessary to sustain the Company's efforts. After a
demonstration unit has been successfully operated and the Technologies have been
proven commercially viable, the Company may still require additional investment
capital and/or debt financing to continue its operations.
Plan of Operations
The Company had planned to use the net proceeds of the proposed public
offering to fund it day-to-day the operations until such time as the Company
either made substantial equipment sales or secured a long-term privatized
contract. All of the Company's demonstration projects have been funded by grants
or by its strategic corporate partners. As discussed in note 7, of the financial
statements, the managing underwriter of the proposed offering notified the
Company in October of 1997 that it would be unable to complete the offering. The
Company now plans to use the proceeds from the sale of $1,500,000 of convertible
debentures to satisfy the cash requirements of the for its basic operation for
the next year.
<PAGE>
The company raised $536,000 in interim financing from current shareholders
to fund the Company through the registration period. The notes were for original
terms of six months at 10%, renewable at the option of the holder. In July of
1998, a holder for $200,000 failed to renew his note for which the Company is
now in default with interest accruing at 18% per annum. All or part of the
remaining $336,000 six month notes may be in default if the holders fail or
refuse to renew their notes by December 31, 1998. Additionally, the company
previously issued $750,000 of 6.63%, 5 year notes, of which $179,365 is due in
1999, $217,535 is due in 2000. The balance of the notes was converted to stock
by the holder. Additional funds may be necessary in the event the company is
unable to pay the notes as they become due and as the Company takes on other
projects or makes an acquisition of another company to facilitate the
commercialization of its technologies. On September 11, 1998, the Company agreed
to form ThermoEnergy Environmental Corporation with Foster Wheeler Environmental
Corporation of Livingston, New Jersey to pursue clean water projects worldwide.
The new company combines the Company's state-of-the-art clean water technologies
with FWENC's engineering expertise and global presence to pursue industrial and
municipal water/wastewater projects around the world and is the Company's first
joint venture. The Company will own 49.9% of TENC. The main purpose of the joint
venture, among other things, is to develop, market and utilize the ARP
technology. Concurrently with forming TENC, the Company entered into a
Shareholders agreement by an among FWENC, the Company and TENC and a worldwide
sublicense of the ARP technology to TENC for municipal and agricultural
livestock production facilities. On August 4, 1998, the Company signed an
agreement FWEC to provide up to $500,000 funding necessary to demonstrate the
ARP technology and to design, fabricate and operate the ARP pilot plant. It is
thereafter anticipated that any commercial business derived from the successful
demonstration of ARP will be engaged through TENC. At the option of the Company,
projects utilizing NitRem, DSR and STORS may be engaged through TENC.
The overall goal of the Company has been to successfully complete a full
scale demonstration of its technologies and to form strategic corporate
alliances to market the technologies discussed above. The company has
successfully completed demonstration of the NtiRem; DSR and ARP technologies and
it scheduled to begin a STORS NitRem project in the second quarter of 1999.
Management plans to utilize these demonstration projects and the TENC joint
venture to expand the visibility of the Company in the municipal, industrial,
Department of Defense and Department of Energy markets. These successful
demonstration projects are the single most important business factors in
implementing the Company's plan of operations.
<PAGE>
Liquidity and Capital Resources
During the year ended September 30, 1998, the Company used $592,560 of cash
in operations compared to $753,287 in 1997 and $257,166 in 1996. During 1992,
the Company initiated a public offering of 125,000 shares of Series B Common
Stock at a price of $16.00 per share. The offering was conducted on a "best
efforts" basis, primarily by directors and officers of the Company. Effective
January 5, 1994, the offering was terminated. A total of 93,129 shares were sold
at a price of $16.00 per share and an additional 6,438 shares were issued at
$16.00 per share in satisfaction of notes payable and related accrued interest.
Currently, there is no public market for the Series B Common Stock. As
previously discussed, the Company's proposed 1997 public offering did not occur.
During 1998, 1997 and 1996, the Company met its liquidity needs primarily
from borrowings from related parties (see Note 4 of Notes to Financial
Statements). Management plans to meet the Company's liquidity needs during the
year ending September 30, 1999 with proceeds from the sale of convertible
debentures and public or private placement offerings of Common Stock. Management
plans to meet long-term liquidity needs primarily from revenues derived from
commercial contracts the Company hopes to obtain subsequent to successful
demonstrations of its Technologies, such as the Radford NitRem, New York City
NitRem and San Bernardino STORS demonstration projects.
Recent Pronouncements of the Financial Accounting Standards Board
During 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income", and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information". Statement No. 130, which is
effective during the year ending September 30, 1999, establishes new rules for
the reporting and display of comprehensive income and its components.
Application of Statement No. 130 will not impact amounts previously reported for
net income or affect the comparability of previously issued financial
statements. Statement No. 131, which is effective during the year ending
September 30, 1999, changes the requirements for reporting segment information
in annual and interim financial statements. The industry segment approach under
Statement No. 14 will be replaced with a management approach of reporting
financial and descriptive information about operating segments.
Net Operating Losses
The Company has net operating loss carry forwards as of September 30, 1998,
of approximately $5,500,000 which expire in various amounts during the years
2003 through 2018. The amount of net operating loss carried forward that can be
used in any one year will be limited by the applicable tax laws which are in
effect at the time such carry forward can be utilized. A valuation allowance of
approximately $2,095,000 has been established to offset any benefit from the net
operating loss carry forward as it cannot be determined when or if the Company
will be able to utilize the net operating losses. See Note 5 of Notes to
Financial Statements.
<PAGE>
Year 2000 Issues
Management has not completed its assessment of its Year 2000 issues.
Confirmation requests for Year 2000 readiness of the third parties with whom the
Company has significant relationships have been sent. Based on management's
discussions to date with such third parties and an analysis of its record
keeping functions, management does not believe that the Year 2000 issues will
have a material effect on Company's business, results of operations or financial
condition. The Company has also determined that its financial reporting system
could be maintained on a manual basis.
Impact of Inflation
Although inflation has slowed in recent years, it is still a factor in the
economy. Since the Company has no significant revenues, inflation primarily
affects the Company's travel costs and cost of outside services. It could also
affect the cost of constructing demonstration and full-scale facilities in the
future. The Company will consider the impact of inflation in its financing
plans.
<PAGE>
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
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 52 Chairman of the Board,
Chief Executive Officer,
Secretary and Director
Primo L. Montesi 63 President and Director
Alex G. Fassbender 42 Executive Vice President,
Senior Vice President
of Corporate Technology
Louis J. Ortmann, DDS 61 Director
J. Donald Phillips 64 Director
Andrew T. Melton 52 Director
Dr. Paul A. Loeffler 51 Director
Jerald H. Sklar 61 Director
(1) As of September 30, 1998.
<PAGE>
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.
Alex G. Fassbender has served as Executive Vice President, Senior Vice
President Corporate Technology since November 20, 1998. Mr. Fassbender serves
the Company on a half time basis and serves the remainder of his time as an
engineer at Battelle Memorial Institute and President of Sunna Systems Corp.
Prior to joining the Company, Mr. Fassbender was manager of Technology
Commercialization at Battelle Pacific Northwest Laboratories. He has held
various positions with Battelle since 1976. Mr. Fassbender received his B.S.
(Chemical Engineering) in 1976 from the University of California, Berkeley, his
MBA in 1980 and his M.S. (Chemical Engineering) in 1988. (See Employment
Agreements).
Dr. Louis J. Ortmann, D.D.S., age 62, is currently an associate of Louis J.
Ortmann Dental Clinic, Inc., and is active in the business management and
operation of the clinic. Dr. Ortmann is a graduate of the University of St.
Louis and had been engaged in the practice of dentistry for thirty years. Dr.
Ortmann had been a director of the Company since September, 1991.
J. Donald Phillips is an insurance executive in Little Rock, Arkansas, and
currently National Sales Manager for Citizen's Fidelity Insurance Corporation,
an Arkansas-based insurance company. Mr. Phillips has been employed by Citizen's
Fidelity Insurance Corporation since November 1989. Mr. Phillips has served as
Director of the Company since November 1990.
Andrew T. Melton, is 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. From 1995 to 1998, Mr. Melton was
Vice President with Merrill Capital Markets in 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
<PAGE>
& 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 November 18,
1998 and will serve three year terms until May 2001 or until their successors
are duly elected. Primo L. Montesi was elected May 1, 1996 and will serve a
three year term until May 1999 or until his successor is duly elected. Thomas
Randall Kemp was also elected as a director May 1, 1996 to serve a three year
term. Mr. Kemp resigned April 15, 1997 at the request of the Company to ensure
the continued independency of the Company's auditors. On September 5, 1997, the
Board of Directors elected Jerald H. Sklar to fill the vacancy created by Mr.
Kemp's resignation. Mr. Sklar will serve until May of 1999 or until his
successor is duly elected. Dennis Cossey was elected to a five year term on May
1, 1996 and will serve until May 2001 or until his successor is duly elected.
Andrew T. Melton and Dr. Paul A. Loeffler were elected on September 5, 1997 and
will serve three years until the 2000 Annual Meeting of Shareholders or until
their successors are duly elected.
Item 11
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Chief
Executive Officer and to the four most highly compensated executive officers of
the Company for the years ended September 30, 1998, 1997, and 1996. 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.
<PAGE>
SUMMARY COMPENSATION TABLE
Name and Annual Compensation
Principal Position Year Salary Bonus
Dennis Cossey,
Chief Executive Officer and 1998 $161,618(1)
Secretary 1997 $138,185(1) --
1996 $118,062(1) --
Primo L. Montesi, President 1998 $161,618(1)
1997 $138,185(1) --
1996 $118,062(1) --
Alex G. Fassbender (2)
(1) All of the reported amount was accrued and not paid and classified as
deferred compensation in accordance with the Company's employment
agreements with the individuals.
(2) Mr. Fassbender did not join the Company until November 20, 1998. His
compensation is set forth below.
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. No incentive compensation expense was
earned during fiscal 1998, 1997 or 1996. Any amounts earned as salary and
incentive compensation but not paid by the Company are classified as deferred
compensation which accrues interest at the prime rate of a local bank.
Compensation expense aggregating $73,911, $49,708, and $30,078 was accrued
during the years ended September 30, 1998, 1997, and 1996, 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.
On November 20, 1998, the Company entered into a three year employment
agreement with Mr. Fassbender under which he shall devote substantially all of
his business and professional time to the Company in its business development.
Under such agreement, Mr. Fassbender will receive a base salary of $135,000 with
15% annual increases until his salary reaches $250,000. Due to the financial
condition of the Company at this time, the employment agreement with Mr.
Fassbender was amended November 20, 1998 to engage Mr. Fassbender for an interim
period, not to exceed twelve months from the execution of the employment
agreement where Mr. Fassbender will devote one-half of his business time and
attention to Company matters of minimum annual salary of $67,500.
In addition to the Company's last annual shareholders meeting on November
18, 1998, the directors conducted 4 regular and 3 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
<PAGE>
Stock Option Committee will review and administer the 1997 Stock Option Plan.
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
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.
<PAGE>
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
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 1998, 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.
<PAGE>
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table sets forth, as of December 22, 1998, 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.
NAME AND ADDRESS NUMBER OF SHARES % OF OUTSTANDING
BENEFICIAL OF COMMON STOCK(1) SHARES OF COMMON
STOCK (2)
P.L. Montesi
22 Greenway Drive
Little Rock, AR 72212 162,010(3) 4.67
Dennis Cossey
11706 Pleasant Ridge Drive
Little Rock, AR 72212 260,447(4) 7.65
Alexander G. Fassbender 625
3100 George Washington Way, Suite 153
Richland, WA 99352
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 -- --
<PAGE>
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) 538,985(7) 15.82
Centerpoint Power Corporation of
VA
8228 Smithfield Road
Springfield, VA 22152 701,875(8) 17.8
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 1,019,595(10) 25.12
* 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.
<PAGE>
(3) Does not include 2,188 shares of Series B Common Stock owned by Mr.
Montesi's wife distributed to her on February 9, 1993, pursuant to her
status as a shareholder of common stock of American Fuel and Power
Company ("AFP") in like amount. Pursuant to shareholder action of the
Company May 21, 1988, the Company agreed to issue to AFP stockholders
one share of the Company's common stock for each share of AFP common
stock outstanding as of April 15, 1988. Mr. Montesi's wife was one of
such shareholders of AFP entitling her to stock of the Company. Mr.
Montesi disclaims beneficial ownership of the shares of Series B
Common Stock owned by his wife. Includes 1,875 Series B Warrants
purchased February 20, 1996 for $150 exercisable at $2.00 per share
for restricted stock within forty-eight months from date of purchase
and assumes the exercise of all Series B Warrants. Includes 3,125
shares representing a one-half interest in 6,250 shares owned jointly
with Dennis Cossey. Does not include 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.
Includes 3,125 shares representing a one-half in 6,250 shares owned
jointly with P.L. Montesi.
(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.
<PAGE>
(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. 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. Includes 375,000
shares of Series B Common Stock represented by the purchase of
$750,000 of 15% Convertible Debentures due January 15, 2003, by Mr.
Trump, $250,000 purchased each on January 15, 1998; May 20, 1998; and
August 24 1998, respectively. The Debentures are convertible to Series
B Common Stock at a Conversion price of $2.00 per share, at the option
of the holder, up to the date of maturity or afterwards until the
entire principal and interest amount shall have been paid.
<PAGE>
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.
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.
<PAGE>
Relationship with Battelle
In August 1991, Battelle entered into a license agreement with the Company,
pursuant to which the Company was granted certain rights to make, use and sell
the STORS and NitRem processes ("License Agreement"). All prior agreements
licensing the STORS and NitRem technologies to the Company, including payments
thereunder, were superseded by this Agreement.
Under the License Agreement, Battelle granted the Company the following:
(1) An exclusive world-wide license, except in Japan, to practice the STORS
thermochemical process for converting municipal sludge and combinations of
municipal sludge and municipal solid waste to liquid fuels and the NitRem
process, as developed by Battelle including improvements designed by Battelle,
in addition to the right of first opportunity for any other applications (e.g.
non-municipal) of the STORS and NitRem processes, as they may have been
identified, upon payment of an additional fee and royalty at a rate to be
negotiated.
(2) A license to utilize technical information including any unpublished
research and development information, unpatented invention, know-how, trade
secrets, and technical data in the possession of Battelle prior to the effective
date of the License Agreement and which comes into the possession of Battelle
during the terms of the License Agreement which relates to the STORS and NitRem
processes. Battelle reserved the right to practice the technology for research
purposes.
The Company agreed to the following terms under the License Agreement:
(1) The Company paid Battelle a license fee of $129,000.
(2) The Company shall pay Battelle a royalty fee not greater than 4% of the
invoiced cost of processing sludge material or $6 for each ton of dry equivalent
weight material input to the STORS process, whichever is greater.
(3) The Company shall pay Battelle a royalty fee not greater than 5% of the
invoiced cost of processing each thousand gallons or $1 for each thousand
gallons of input to the NitRem process, whichever is greater.
(4) If both STORS and the NitRem technologies are used on a single waste
stream, then the combined royalty of (2) and (3) above shall not exceed the
greater of 5% of the invoiced cost of processing each dry ton equivalent weight
material input to the STORS process, or $7.50 for each dry ton equivalent weight
material processed.
<PAGE>
(5) If the Company enters into an agreement with a municipal government,
wherein the Company sublicenses the STORS and/or NitRem technologies for a sum
of money which does not contemplate royalty payments, then the Company shall pay
Battelle a lump sum of 10% of the consideration received from the municipality.
(6) Battelle may, by written notice to the Company, terminate the License
Agreement at any time on or after January 31, 1998, if construction and
continuous operation of at least one facility with a capacity of ten dry tons
equivalent or 1,000 gallons of liquid per day has not been achieved by that
date.
(7) The License Agreement makes explicit the right of any STORS and NitRem
facility owner to continue using the Technologies at that facility even after
the expiration of the License Agreement.
As new applications for the Technologies were developed by Battelle, the
Company entered into additional agreements with Battelle to expand the
applicable license fields for the Technologies. In October 1993, the Company and
Battelle entered into an option agreement for the Company to apply NitRem to
nitrogen bearing waste from explosives and propellent manufacturers. The Company
paid $25,000 for the option. This option was extended in 1994, and in July 1995,
the Company and Battelle entered into a license agreement for this license
field. This extension of the license field allows the Company to market NitRem
to the Department of Defense, and defense manufacturers ("defense license
field"). The Company paid Battelle a license fee of $25,000 cash and shares of
Series B Common Stock having a value of $80,000. Battelle may terminate this
license during April 1999, and during any subsequent April thereafter, if the
Company has not generated royalties to Battelle for the defense license field in
the amount of $5,000 for the preceding calendar year.
On July 7, 1995, the Company and Battelle entered into another license
agreement to apply NitRem to waste from industrial processes, excluding nitrogen
bearing waste from explosives and propellent manufacturers. This includes waste
from agriculture and food processing operations, petroleum refining, metal
working, chemical, pharmaceutical and materials manufacture, textile processing,
and similar waste from government operations ("industrial license field"). The
Company paid Battelle a license fee of Series B Common Stock having a value of
$75,000 to Battelle. This license also may be terminated by Battelle during
April 1999, and during any subsequent April thereafter, if the Company has not
generated royalties to Battelle for the industrial license field in the amount
of $5,000 for the preceding calendar year.
<PAGE>
On February 15, 1995, the final payment from the Company of $75,000 was due
and payable to Battelle under the License Agreement, as amended. Due to the
financial condition of the Company at that time, the Company was unable to pay
the fee. In addition, the Company also owed Battelle reimbursement of expenses
advanced by Battelle to cover travel, research, development and associated costs
for Alex Fassbender and other technical staff at Battelle engaged in the
marketing of the Technologies for the Company. Due to the financial condition of
the Company, Battelle agreed, in lieu of cash payment, to accept 18,750 shares
of restricted common stock of the Company representing a value of $150,000 based
on the Company's last net restricted stock sale at that point in time as full
and total payment of all license fees and expenses due from the Company. The
License Agreement, when combined with the additional two licenses for defense
and industrial license fields, grants the Company the exclusive worldwide rights
to STORS and NitRem for all fields of use (except STORS in Japan).
In December, 1998, Battelle entered into an additional license agreement
with the Company, pursuant to which the Company was granted certain rights to
make, use and sell the Ammonia Recovery Process (ARP).
Under the License Agreement, Battelle granted the Company the following:
(1) An exclusive world-wide license to practice the ARP
technology for the recovery of ammonia from fluid waste streams
for use at municipal and agricultural livestock production
facilities, as developed by Battelle including improvements
designed by Battelle.
(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 and that which may come into the
possession of Battelle during the term of the License Agreement
which relates to the ARP processes. Battelle reserved the right
to practice the technology for research, development, and
demonstration purposes and to license the technology in field and
territories no exclusively licensed herein.
The Company agreed to the following terms under the likes agreement:
(1) The Company paid Battelle a $25,000 license fee at the time
of the execution of the license and is obligated to pay an
additional $25,000 license fee on the first anniversary of the
effective date.
(2) The Company shall pay Battelle a continuing royalty fee of
(1) 5% of all revenues received from processing fluids or (2)
$1.00 for each 1,000 gallons of input to the ARP process,
whichever is greater.
(3) In the event the Company, it's sublicensee wherein the
customer will design, and/or build, and/or own, and/or operate a
licensed facility, the Company agrees to pay Battelle 5% of the
installed cost of the facility using ARP or $40,000, whichever is
greater. The installed cost of a facility shall be calculated as
<PAGE>
equal to 2.72 times the total delivered cost to the major
purchased equipment. It does no include land, building yard
improvements, services, taxes, contingency fees or working
capital.
(4) The Company shall pay Battelle minimum royalty of $10,000 of
1998, $20,000 for 1999, $30,000 for 2000 and $40,000 for each
year thereafter.
(5) In the event the Company has not contracted to build a
commercial facility to practice ARP within three years of the
effective date in Territory 1, the United States; Territory 2,
the Americas outside of the United States; and Territory 3,
Europe; Battelle may, in its sole discretion, elect to terminate
the Company's rights for that particular territory. In the event
the Company has not contracted to build a commercial facility to
practice ARP within five years of the effective date in Territory
4, Battelle may, in its sole discretion, elect to terminate the
Companies rights for Territory 4. Otherwise, the License
Agreement terminates upon the expiration of the last to expire of
the patent(s) included therein.
On or about July 6, 1998, Battelle and the Company have amended all of the
aforementioned licenses from Battelle to the Company to allow Battelle the right
to directly license the technologies to TENC in the event that access to the
technologies is impeded due to a voluntary or involuntary bankruptcy of the
Company.
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 or ARP demonstration facility, for the
conducting of laboratory analysis and characterization of various waste streams
to be processed through a STORS, NitRem or ARP unit, to collect and analyze
process equipment and performance data generated during a STORS , NitRem and/or
ARP demonstration test, and for on-going research and development of the STORS,
ARP and NitRem processes. While, at this time, the Company must rely on
Battelle's engineers to work with the Company's strategic partners to supervise
the design and implementation of the demonstration projects, management believes
that upon completion of this Offering, it will be able to reduce its dependence
on Battelle's supervision over the design and implementation of the STORS, ARP
and NitRem demonstration facilities through the employment of Mr. Fassbender,
and the ability of the Company to hire and contract with its own engineers and
technicians. Although Battelle has no contractual obligation to support the
Company's efforts to commercialize the Technologies, as the Licensor of the
Technologies, it has been Battelle's practice to support the Company, as its
Licensee, in such efforts. Battelle has provided services including legal
services to maintain Technology patents, laboratory services, engineering and
marketing personnel, materials and research and development to support the
Company's efforts to commercialize the Technologies and pursue demonstration
projects. The Company has reimbursed Battelle an aggregate of $64,000 over the
last three years in connection with such support services.
<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).
TENC and FOSTER WHEELER ENVIRONMENTAL CORPORATION
On September 11, 1998, the Company agreed to form ThermoEnergy
Environmental Corporation with Foster Wheeler Environmental Corporation of
Livingston, New Jersey to pursue clean water projects worldwide. The new company
combines TEC's state-of-the-art clean water technologies with FWENC's
engineering expertise and global presence to pursue industrial and municipal
water/wastewater projects around the world and is TEC's first joint venture. TEC
will own 49.9% of TENC. Dennis Cossey, CEO of the Company serves as Vice
President of TENC.
Concurrently with forming TENC, the Company entered into a Shareholders
Agreement by and among FWENC, TEC and TENC and a sublicense agreement between
the Company and TENC.
Under the sublicense agreement, the Company grant TENC the following:
(1) The exclusive worldwide sublicense of the ARP technology to
TENC for municipal and agricultural livestock production
facilities . The sublicense also grants to TENC non-exclusive use
of NitRem/DSR for industrial and U.S. government applications and
a non-exclusive grant of STORS (except for Japan) for municipal
applications. (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 the Company and Battelle and that which may
<PAGE>
come into the possession of the Company and Battelle during the
term of the Sublicense Agreement which relates to the ARP
processes. The Company and Battelle reserved the right to
practice the technology for research, development, and
demonstration purposes and to license the technology in field and
territories no exclusively licensed herein.
The TENC agreed to the following terms under the likes agreement:
(1) The TENC paid the Company a $1.00 and other good and valuable
consideration, to wit: to provide any and all funding, not to
exceed $500,000, necessary for the demonstration of the ARP
technology pursuant to the Company's NO-COST-TEST- AGREEMENT with
the City of New York as set forth in a separate agreement with
FWENC.
(2) TENC shall pay the Company a continuing royalty fee of (1) 7%
of all revenues received from processing fluids or (2) $1.40 for
each 1,000 gallons of input to the ARP process, whichever is
greater.
(3) In the event TENC executes and agreement with a customer or
other end user for the purchase of a NitRem of ARP system, then
TENC agrees to pay the Company 7% of the invoiced cost of either
the NitRem/DSR or ARP system. When using STORS for treating
solids laden streams (sludge) and when using NitRem for treating
nitrogen laden aqueous streams associated with wastewater
treatment plant operations wither prior to of after the STORS
operation where the measurement is in gallons ( in thousands ),
TENC agrees to pay the Company 140% of the royalties as set forth
in paragraph 5 of LICENSE AGREEMENT 9120-C between the Company
and Battelle.
(4) In the event the TENC has not contracted to build a
commercial facility or the construction of a privatized
commercial facility within three years of the effective date of
the sublicense the Company may, in its sole discretion, elect to
terminate TENC's rights thereunder for that particular
technology. Other wise the sublicense agreement shall end upon
the expiration of the last toe expire of the patents described
therein.
On or about July 6, 1998, Battelle and the Company have amended all of the
aforementioned licenses to allow Battelle the right to directly license the
technologies to TENC in the event that access to the technologies is impeded due
to a voluntary or involuntary bankruptcy of the Company.
On August 4, 1998, the Company signed an agreement FWEC to provide up to
$500,000 funding necessary to demonstrate ARP and to design, fabricate and
operate the ARP pilot plant in connection with the Company's
No-Cost-Test-Agreement with the City of New York. It is thereafter anticipated
that any commercial business derived from the successful demonstration of ARP
will be engaged through TENC.
<PAGE>
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 the Company's NitRem 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 agreement to develop the nitrogen removal be executed either a
NitRem demonstration agreement or NitRem purchase agreement be executed with the
City of New York. According to the Agreement, MFI would be entitled to receive
9,375 shares of Common Stock Company signing a NitRem demonstration agreement
with New York for a City sponsored pilot demonstration project. In May 1993, the
Board of Directors authorized the issuance of 9,375 share of Series B Common
Stock to MFI pursuant to the terms of the March, 1992 agreement in connection
with MFI procuring an agreement with New York City to host a full scale NitRem
demonstration. MFI was also in a position to receive additional compensation
based on a percentage of the overall capital cost of the NitRem demonstration
facility and an option to purchase additional stock upon the sale of one or more
full scale NitRem facility as part or all of New York City's nitrogen disposal
processes if MFI procured funding for such projects.
Due to the Company's lack of capital at the time, and the Company's lack of
a strategic partner to fund the project, demonstration of the NitRem technology
never occurred. Subsequently, the City of New York declined to sponsor a NitRem
demonstration. Pursuant to the terms of the March 1992, agreement with MFI, the
MFI service agreement terminated at such time as the City of New York declined
to sponsor a NitRem demonstration facility. The Company, therefore, has
terminated the service agreement with MFI.
Nutrecycle Ventures
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 Company's
technologies capable of removing nitrogen from the City's wastewater centrate
discharge. The Company decided to demonstrate the capabilities of its newly
acquired ARP technology at New York City's Staten Island wastewater treatment
facility. On August 4, 1998, the Company signed an agreement with FWEC to
provide up to $500,000 funding necessary to demonstrate ARP and to design,
fabricate and operate the ARP pilot plant.
Additional efforts by some of the former principles of MFI who are now
principles in the Consulting Group contributed to the Company obtaining such
no-cost-test-agreement with the City of New York. Pursuant to the terms of a
November 1998 agreement with the Consulting Group, CG will assist the Company in
getting ARP selected as the technology of choice by the City of New York to
solve all or part of its nitrogen disposal and discharge problems. CG will be
paid a maximum of $2,500.00 per month, plus expenses for consulting services.
Additionally, CG is in a position to receive additional compensation based upon
a percentage of the overall capital cost of the ARP demonstration facility ,
plus an option to by additional stock in the Company in the event the Company
enters into an agreement to sell one or more ARP units to the City or the
Company processes wastewater for the City under a privatized agreement.
<PAGE>
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.
<PAGE>
ITEM 14.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND
REPORTS ON FORM 8-K
(a)
(1) and (2) Financial Statements and Financial Statement
Schedules.
1. Balance Sheets
September 30, 1998 and 1997.
2. Statements of Operations -- years ended September 30, 1998,
1997 and 1996 and cumulative during development stage through
September 30, 1998.
3. Statements of changes in stockholders'
equity (deficit) -- periods ended
September 30, 1988 through
September 30, 1998.
4. Statements of cash flows -- years ended September 30, 1998,
1997 and 1996 and cumulative during development stage through
September 30, 1998.
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.
<PAGE>
Report of Independent Auditors
Board of Directors
ThermoEnergy Corporation
Little Rock, Arkansas
We have audited the accompanying balance sheets of ThermoEnergy Corporation (A
Development Stage Company) as of September 30, 1998 and 1997, the related
statements of operations and cash flows for each of the three years in the
period ended September 30, 1998 and for the period cumulative during development
stage through September 30, 1998, and the related statements of changes in
stockholders' equity (deficit) for each of the seven years in the period ended
September 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the balance sheets of
the Company as of September 30, 1991 and 1990, and the related statements of
operations, changes in stockholders' equity (deficit) and cash flows for each of
the three years in the period ended September 30, 1991 and cumulative since
inception through September 30, 1991. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts cumulative during development stage through September 30,
1991 included in the statements of operations and cash flows cumulative during
development stage through September 30, 1998, is based solely on the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of ThermoEnergy Corporation (A Development Stage Company)
as of September 30, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 1998
and for the period cumulative during development stage through September 30,
1998, in conformity with generally accepte accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 9, the Company is in the
development stage with no significant revenues from operations, has incurred net
losses since inception, is in default on a note payable to a stockholder and
will likely require substantial capital to continue commercialization of the
Company's technologies. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 9. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Little Rock, Arkansas
December 17, 1998
<PAGE>
Independent Accountants' Report
Board of Directors
Innotek Corporation
Little Rock, Arkansas
We have audited the accompanying statements of changes in stockholders'
equity of INNOTEK CORPORATION (A Development Stage Company) for the years ended
September 30, 1991, 1990, and 1989 and the period from inception to September
30, 1988 and the statements of operations and cash flows for the cumulative
period from inception to September 30, 1991 (not presented herein). The
Company's financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the changes in stockholders' equity for each of the
years and period from inception to September 30, 1991, and the results of
operations and cash flows from inception to September 30, 1991, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company is in the development
stage with no significant revenues from operations, and will likely require
substantial capital to construct and operate a demonstration facility to
commercialize the technologies. These conditions raise substantial doubt about
its ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Baird, Kurtz & Dobson
Little Rock, Arkansas
December 11, 1991
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash - Total Current Assets (Note 13) $ 242,486 $ 65,046
Advances to officers (Note 6) 381,015 258,365
Accrued interest receivable - officers (Note 6) 49,567 23,669
Property and equipment, at cost:
Equipment 14,818 14,818
Furniture and fixtures 4,991 4,991
Less accumulated depreciation (19,809) (16,978)
------------ -------------
- 2,831
------------ -------------
$ 673,068 $ 349,911
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 590,903 $ 733,660
Accrued interest payable - related parties (Note 4) 246,671 92,893
Deferred compensation (Note 6) 1,192,779 869,544
Notes payable to stockholders (Note 4) 932,900 1,052,900
------------ ------------
Total Current Liabilities 2,963,253 2,748,997
Convertible Debentures (Note 4) 906,000
------------ ------------
Total Liabilities 3,869,253 2,748,997
Commitments and contingencies (Notes 2, 3, 4, 7, 10, 11 and 12)
Stockholders' equity (deficit) (Notes 7 and 12):
Preferred stock, non-voting, $1 par value:
Authorized - 10,000,000 shares; none issued
Common Stock, $.001 par value:
Series A Common Stock; Authorized - 10,000,000
shares; no shares issued and outstanding
Series B Common Stock; Authorized - 65,000,000
shares; issued: 3,486,797 shares; outstanding
3,402,968 shares 3,487 3,487
Additional paid-in capital 4,334,864 4,334,864
Deficit accumulated during the development stage (7,534,536) (6,737,437)
----------- -----------
(3,196,185) (2,399,086)
----------- -----------
$ 673,068 $ 349,911
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
During
Development
Stage Through Year Ended September 30,
September 30, 1998 1998 1997 1996
<S> <C> <C> <C> <C>
Operating expenses:
General and administrative $ 5,570,941 $ 556,243 $ 930,866 $ 423,959
Payments under licenses (Note 3) 677,266 25,000 25,000
Travel and entertainment 1,009,079 90,472 167,937 96,405
----------- --------- ------------ ---------
7,257,286 671,715 1,123,803 520,364
----------- --------- ----------- ---------
Loss From Operations (7,257,286) (671,715) (1,123,803) (520,364)
----------- --------- ----------- ---------
Other income (expense):
Interest income (Note 6) 105,028 28,394 15,849 6,942
Interest expense (Note 4) (382,278) (153,778) (88,082) (38,199)
----------- --------- ------------ ---------
(277,250) (125,384) (72,233) (31,257)
----------- --------- ------------ ----------
Net Loss $(7,534,536) $(797,099) $(1,196,036) $(551,621)
=========== ========== =========== =========
Basic and Diluted per Common Share
(Notes 1, 4, 7 and 12):
Loss From Operations $ (1.94) $ (.17) $ (.29) $ (.14)
Net Loss $ (2.01) $ (.20) $ (.31) $ (.15)
</TABLE>
See notes to financial statements.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Periods Ended September 30, 1988 Through September 30, 1998
<TABLE>
<CAPTION>
Deficit
Series Accumulated
B Additional During the
Common Paid-in Development
Stock Capital Stage Total
<S> <C> <C> <C> <C>
Issuance of stock, January 1988,
(2,205,762 shares at $.08
per share) $ 2,206 $ 178,094 $ $ 180,300
Net loss (290,483) (290,483)
-------- ----------- --------- ---------
Balance (deficit),
September 30, 1988 2,206 178,094 (290,483) (110,183)
Conversion of $412,000 of
debentures and accrued
interest, September 1989
(306,335 shares) 306 456,695 457,001
Net loss (338,985) (338,985)
-------- ---------- ---------- ---------
Balance (deficit),
September 30, 1989 2,512 634,789 (629,468) 7,833
Net loss (255,036) (255,036)
-------- ---------- ---------- ---------
Balance (deficit),
September 30, 1990 2,512 634,789 (884,504) (247,203)
Conversion of $63,000 of
unsecured debentures and
accrued interest at 10%,
March 1991, (44,286 shares) 44 70,813 70,857
Issuance of stock, May - June
1991, (387,880 shares:
366,630 at $1.60 per share;
21,250 shares at $.80 per
share) 388 603,219 603,607
Issuance of stock for interest,
June 1991, (1,375 shares at
$1.60 per share) 1 2,199 2,200
</TABLE>
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through September 30, 1998
<TABLE>
<CAPTION>
Deficit
Series Accumulated
B Additional During the
Common Paid-in Development
Stock Capital Stage Total
<S> <C> <C> <C> <C>
Issuance of stock for
expenses incurred by
stockholders, July 1991
(5,081 shares at $1.60 per share) $ 5 $ 8,124 $ $ 8,129
Net loss (670,179) (670,179)
---------- ----------- ----------- ---------
Balance (deficit), September 30,
1991 2,950 1,319,144 (1,554,683) (232,589)
Issuance of stock, October -
December 1991 (150,925
shares at $1.60 per share) 151 241,329 241,480
Shares purchased in rescission
offer (10,562 shares) (11) (16,888) (16,899)
Issuance of stock, public
offering, August - September
1992 (344 shares at $16.00 per
share) 1 5,499 5,500
Net loss (562,751) (562,751)
--------- ----------- ----------- ---------
Balance (deficit), September 30,
1992 3,091 1,549,084 (2,117,434) (565,259)
Issuance of stock, public offering
October 1992 - September 1993
(92,785 shares at $16.00 per
share) 93 1,484,457 1,484,550
Issuance of stock for exercise
of stock options, May 1993
(2,500 shares at $1.60 per share) 3 3,997 4,000
</TABLE>
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through September 30, 1998
<TABLE>
<CAPTION>
Deficit
Series Accumulated
B Additional During the
Common Paid-in Development
Stock Capital Stage Total
<S> <C> <C> <C> <C>
Issuance of warrants to
stockholder $ $ 6,333 $ $ 6,333
Conversion of $103,000 of
notes payable to stockholders
and accrued interest, December
1992 (6,438 shares) 6 102,994 103,000
Issuance of stock for
consulting services, June
1993 (9,375 shares at
$16.00 per share) 9 149,991 150,000
Net loss (1,207,921) (1,207,921)
-------- ------------ ----------- ----------
Balance (deficit), September 30,
1993 3,202 3,296,856 (3,325,355) (25,297)
Issuance of warrants to
stockholders 226,000 226,000
Issuance of stock for exercise
of stock options, March 1994
(3,750 shares at $1.60 per share) 4 5,996 6,000
Issuance of stock for exercise
of warrants by stockholder,
August 1994 (3,677 shares at
$13.60 per share) 4 49,997 50,001
Net loss (767,427) (767,427)
-------- ------------ ------------ -----------
Balance (deficit), September 30,
1994 3,210 3,578,849 (4,092,782) (510,723)
</TABLE>
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through September 30, 1998
<TABLE>
Deficit
Series Accumulated
B Additional During the
Common Paid-in Development
Stock Capital Stage Total
<S> <C> <C> <C> <C>
Issuance of warrants to stockholders $ $ 9,760 $ $ 9,760
Issuance of stock, May 1995
(6,250 shares at $8.00 per share) 6 49,994 50,000
Issuance of stock for
exercise of warrants by
stockholder, June 1995
(6,250 shares at $8.00 per share) 6 49,994 50,000
Issuance of stock for expenses,
July 1995 (18,750 shares
at $8.00 per share) 19 149,981 150,000
Net loss (896,998) (896,998)
--------- ------------ ------------ --------------
Balance (deficit), September 30, 1995 3,241 3,838,578 (4,989,780) (1,147,961)
Issuance of warrants to stockholders 5,340 5,340
Net loss (551,621) (551,621)
--------- ------------ ------------ --------------
Balance (deficit), September 30, 1996 3,241 3,843,918 (5,541,401) (1,694,242)
Issuance of stock, July 1997
(50,000 shares at $2.00 per share) 50 99,950 100,000
Conversion of $338,100 of notes
payable to stockholders and accrued
interest, July 1997 (195,596 shares) 196 390,996 391,192
Net loss (1,196,036) (1,196,036)
--------- ------------ ------------ --------------
Balance (deficit), September 30, 1997 3,487 4,334,864 (6,737,437) (2,399,086)
Net loss (797,099) (797,099)
--------- ------------ ------------ --------------
Balance (deficit), September 30, 1998 $ 3,487 $4,334,864 $(7,534,536) $(3,196,185)
======== ========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
During
Development
Stage Through Year ended September 30,
September 30, 1998 1998 1997 1996
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Operating activities:
Net loss $(7,534,536) $(797,099) $(1,196,036) $(551,621)
Items not requiring
(providing) cash:
Depreciation 19,809 2,831 2,831 2,633
Expenses funded by Common
Stock issuance 596,279 53,092
Other 3,341 16,000
Changes in:
Advances to officers (579,998) (122,650) (162,165) (34,000)
Other receivables (49,567) (25,898) (14,531) (6,942)
Accounts payable 590,903 (142,757) 238,762 73,417
Accrued expenses 246,671 153,778 34,990 24,799
Deferred compensation 1,391,761 323,235 289,770 234,548
---------- --------- ----------- ----------
Net cash used in
operating activities (5,315,337) (592,560) (753,287) (257,166)
---------- --------- ----------- ----------
Investing activities:
Purchases of fixed assets (19,808)
Other (3,341)
Net cash used in
investing activities (23,149)
Financing activities:
Proceeds from issuance of
Common Stock and warrants 2,720,562 100,000 5,340
Proceeds from notes payable 1,665,609 20,000 656,000 261,635
Proceeds from convertible debentures 1,241,000 750,000
Payments on notes payable (154,609)
Other 108,410
Net cash provided by
financing activities 5,580,972 770,000 756,000 266,975
---------- --------- ---------- ----------
Increase in cash 242,486 177,440 2,713 9,809
Cash, beginning of period 0 65,046 62,333 52,524
---------- --------- ----------- -----------
Cash, end of period $ 242,486 $ 242,486 $ 65,046 $ 62,333
=========== ========== ========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 1: Organization and summary of significant accounting policies
Nature of business
ThermoEnergy Corporation ("the Company") was incorporated in January 1988,
for the purpose of marketing and developing certain environmental technologies.
These technologies include three chemical processes known as Sludge-to-Oil
Reactor System, or STORS, and Nitrogen Removal, or NitRem, and Ammonia Recovery
Process, or ARP, which were developed through research projects at Battelle
Memorial Institute (Battelle). A fourth technology, a dual-shell pressure
balance vessel, known as the Dual Shell Reactor "DSR"), is the unique reactor
equipment in which the STORS and NitRem chemistries are conducted. STORS,
NitRem, ARP and DSR are referred to collectively as the "Technologies".
The Company was formed for the transfer of technology from American Fuel and
Power Corporation ("AFP") in 1988 to continue development of the STORS
technology under assignment of the license from AFP, the original licensee.
Management of the AFP division developing the STORS technology became management
of the Company concurrent with the terms of the transfer. The license was
assigned to the Company under an agreement requiring that 70 percent of the
Company's initial outstanding Common Stock, approximately 1,543,750 shares (as
restated for the two reverse stock splits discussed in Note 7), be issued to AFP
for distribution to AFP stockholders.
The Company is totally dependent upon the engineering, laboratory, research and
development skills and expertise of Battelle to supervise the design and
implementation of a STORS, NitRem or ARP demonstration facility, for the
conducting of laboratory analysis and characterization of various waste streams
to be processed through a STORS, NitRem or ARP unit, to collect and analyze
performance data generated during a demonstration test, and for on-going
research and development of the Technologies. The Company owns the worldwide
licensing rights to the Technologies, except for STORS in Japan, pursuant to
exclusive license agreements with Battelle. The Technologies are currently in
the demonstration phase. No commercial contracts have been awarded to the
Company.
Property and equipment
Property and equipment are depreciated over the estimated useful life of each
asset. Depreciation is computed primarily using the straight-line method.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 1: Organization and summary of significant accounting policies (continued)
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Loss per common share
During the year ended September 30, 1998, the Company adopted the provisions of
Financial Accounting Standards Board Statement No. 128, "Earnings per Share".
Since the Company must use the computational guidance contained in SAB 83 Topic
4D, adoption of this Statement had no effect on prior period loss per share
data. Loss per common share is computed by dividing the net loss for the period
by the weighted average number of shares outstanding during the period after
giving effect to the reverse stock splits described in Note 7. Stock options and
warrants issued within twelve months of the initial public offering filing date
(February 27, 1992,) have been treated as outstanding for all periods presented
in accordance with SAB 83 Topic 4D.
The adjusted weighted average number of common shares used in the basic and
diluted loss per share computations were 4,045,557, 3,844,636, 3,799,555, and
3,744,876 shares for the years ended September 30, 1998, 1997 and 1996 and
cumulative since inception through September 30, 1998, respectively.
Warrants to purchase approximately 736,000 shares of Series B Common Stock, and
stock options under the 1997 Stock Option Plan, which provides for the issuance
of up to 750,000 shares of Series B Common Stock, were not included in the
computation of diluted loss per share since the effect would be antidilutive.
See Note 4 for information regarding convertible debentures issued during 1998.
Future application of accounting standards
During 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information". Statement No. 130, which is
effective during the year ending September 30, 1999, establishes new rules for
the reporting and display of comprehensive
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 1: Organization and summary of significant accounting policies (continued)
income and its components. Application of Statement No. 130 will not impact
amounts previously reported for net income or affect the comparability of
previously issued financial statements. Statement No. 131, which is effective
during the year ending September 30, 1999, changes the requirements for
reporting segment information in annual and interim financial statements. The
industry segment approach under Statement No. 14 will be replaced with a
management approach of reporting financial and descriptive information about
operating segments.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the reporting format used for the 1998 financial statements.
Note 2: Joint venture corporation agreement
In September 1998, the Company and Foster Wheeler Environmental Corporation
("FWEC") agreed to form ThermoEnergy Environmental Corporation ("TENC") to act
as a joint venture for purposes of, among other things, developing, marketing
and utilizing the ARP technology. The shareholders' agreement executed in
connection therewith obligates the Company to sub-license the ARP technology to
TENC (see Note 3) and FWEC to provide funding, not to exceed $500,000, for the
demonstration project with the City of New York, which is more fully discussed
in Note 10. The Company's ownership percentage will be 49.9% (requiring a cash
capital contribution of $499) and FWEC's ownership percentage will be 50.1% of
the outstanding stock of TENC. As of September 30, 1998, TENC had not been
capitalized and had no transactions.
Note 3: License and marketing agreements
The license agreements with Battelle permit the Company to commercialize the
Technologies with respect to municipal, industrial and Department of Defense
hazardous and non-hazardous water/wastewater/sludge processing. Payments under
the terms of the license agreements have been charged to operations.
The license agreements provide for payment of royalties to Battelle from
revenues generated using the Technologies. The Company has not been required to
make royalty payments to Battelle under the agreements since no revenues have
been generated from the use of the Technologies.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 3: License and marketing agreements (continued)
In connection with the agreement to form of TENC (see Note 2), the Company
sub-licensed the ARP technology to TENC. The sub-license agreement provides for
the payment of royalties to the Company when revenues are generated from the use
of the Technologies by TENC.
The Company entered into a memorandum of understanding with Foster Wheeler
and Mitsui & Co. (U.S.A.) Inc. in September 1996 to pursue various water and
waste water projects in Brazil, Mexico and Peru. In April 1996, the Company
entered into a teaming agreement with Roy F. Weston, Inc. to jointly pursue both
municipal and governmental projects using the Technologies. In March 1996, the
Company executed a marketing agreement with a Georgia corporation for the
purpose of marketing the Technologies in Georgia and Florida (see Note 7). The
Company entered into a ten-year worldwide marketing agreement with Foster
Wheeler USA Corporation in September 1994, for the purpose of marketing,
developing and commercializing the Technologies. The agreement provides for
three-year extensions after the initial period and conditions for changing or
terminating the arrangement.
The Company entered into the agreements referred to above and in Notes 2 and 10
as part of its business strategy of creating collaborative working relationships
with established engineering and environmental companies. Management believes
that such relationships will limit the Company's participation in future
projects to providing the Technologies and technical support relevant to the
design of STORS, NitRem, ARP and/or the DSR portion of such projects. The
Company may be required to bear a portion of the operational costs of such
collaborative efforts. Accordingly, the profitability of future projects and the
Company's financial success may be largely dependent upon the abilities and
financial resources of the parties collaborating with the Company.
Note 4: Borrowings from related parties
Notes payable to stockholders consisted of the following at September 30:
1998 1997
-------- ---------
6.63% unsecured notes $396,900 $396,900
10% unsecured notes 536,000 656,000
--------- -----------
$932,900 $1,052,900
========= ===========
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 4: Borrowings from related parties (continued)
The 6.63% notes mature four years from the date of issuance ($179,365 during the
year ending September 30, 1999 and $217,535 during the year ending September 30,
2000). The notes provide that the principal balances and accrued interest will
become immediately due and payable at the closing of the next public offering of
securities of the Company should that event occur prior to the stated maturity
dates. In addition, if the Company obtains financing from a third party on terms
more favorable to the third party than the terms of the notes to the
stockholders, the Company and the stockholders may agree to modify the notes to
the stockholders to reflect the more favorable terms. The notes payable have
been classified as current liabilities since management anticipates that they
will be paid off within one year. During 1997, the Company converted $338,100 of
the 6.63% notes and related accrued interest of $53,092 to 195,596 shares of
Series B Common Stock (see Note 7).
During the year ended September 30, 1997, the Board of Directors authorized the
Company to borrow from stockholders up to $700,000 to fund operations through
the completion of a proposed public offering (see Note 7). The terms of the 10%
notes provided for maturities six months from the date of execution or the
closing of the proposed public offering, whichever was sooner. The notes also
provide for the issuance of shares of Series B Common Stock to holders of the
notes in the ratio of one share for eac $10 loaned to the Company within six
months from the date of execution of the notes or extensions thereof or the
closing of the proposed public offering, whichever is sooner (see Note 7). Since
the public offering did not occur, the maturity dates of $336,000 of the
outstanding notes payable at September 30, 1998 have been extended to various
dates during 1999. A holder of a $200,000 note did not agreed to extend the note
past the last maturity date and, therefore, the Company is in default on the
note. As provided in the note agreement, interest on the amount owed to the
stockholder is accrued at an annual rate of 18% from the date of default. In
February 1998, the Company issued convertible debentures (described below) in
exchange for $140,000 of the 10% notes and related accrued interest.
During January 1998, the Company's Board of Directors approved the issuance of
up to $1,000,000 of Series 98, 15% Convertible Debentures, due January 15, 2003
(see Note 12). Debentures with an aggregate principal balance of $750,000 were
sold for cash to related parties during 1998. Debentures with an aggregate
principal balance of $156,000 were issued to stockholders during February 1998
in exchange for the 10% notes and related accrued interest due to them by the
Company. The holders of the Debentures can convert the principal amount and
accrued interest into shares of Series B Common Stock at the conversion price of
$2.00 per share at any time prior to the maturity date.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 4: Borrowings from related parties (continued)
Interest expense on borrowings from related parties amounted to $153,778,
$88,082 and $38,199 for the years ended September 30, 1998, 1997 and 1996,
respectively. No interest was paid during that three-year period.
Based on the borrowing rates currently available to the Company for borrowings
with similar terms, the fair value of borrowings from related parties
approximated the book value of such borrowings at September 30, 1998.
Note 5: Income taxes
The Company uses the liability method of accounting for income taxes as required
by Statement of Financial Accounting Standards No. 109. The Statement provides
that the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes are reflected in deferred taxes. A valuation allowance
equal to the total of the Company's deferred tax assets has been recognized for
financial reporting purposes. The net changes in the valuation allowance during
the years ended September 30, 1998 and 1997 were increases of approximately
$302,000 and $447,000, respectively. The Company's deferred tax liabilities are
not significant.
Significant components of the Company's deferred tax assets as of September 30,
1998 and 1997 are as follows:
1998 1997
------ -------
Net operating loss carryforwards $ 2,095,000 $ 1,916,000
Deferred compensation 453,000 330,000
Capitalized costs for income tax purposes 78,000 78,000
Other 36,000 36,000
------------- -------------
2,662,000 2,360,000
Valuation allowance for deferred tax assets (2,662,000) (2,360,000)
----------- -----------
$ 0 $ 0
============ ============
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 5: Income taxes (continued)
A reconciliation of income tax expense (credit) at the statutory rate to income
tax expense at the Company's effective rate is shown below:
1998 1997 1996
---- ---- ----
Computed at the statutory
rate (34%) $(271,014) $(406,652) $(187,551)
Increase in taxes resulting from
net operating loss benefit
not recognized 271,014 406,652 187,551
--------- --------- ---------
Provision for income taxes $ 0 $ 0 $ 0
========= ========= =========
The Company has net operating loss carryforwards at September 30, 1998 of
approximately $5,500,000 which expire in various amounts during 2003 through
2018.
Note 6: Related party transactions
During the years ended September 30, 1998, 1997 and 1996 the Company advanced an
aggregate of $122,650, $162,165 and $34,000, respectively, to its officers. The
advances outstanding are due on demand with interest at the average prime rate
of a local bank. Interest income on the advances amounted to $25,899, $14,531
and $6,942 for the years ended September 30, 1998, 1997 and 1996, respectively.
See Notes 4 and 7 for information concerning notes payable and other
transactions with stockholders.
During the years ended September 30, 1998, 1997 and 1996, the Company incurred
expenses for support services by Battelle of approximately $52,000, $72,000 and
$5,000, respectively. See Note 7 for information concerning the issuance of the
Company's Common Stock to Battelle during 1995.
During 1991, the Board of Directors adopted a resolution specifying amounts of
deferred compensation for the two officers of the Company for services rendered
prior to September 30, 1991. The Board of Directors also approved employment
agreements with the officers effective January 1, 1992 specifying minimum levels
of compensation and terms of employment. The agreements provide a minimum annual
salary of $72,000 to each of the individuals with 10%
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 6: Related party transactions (continued)
annual increases until the salary for each individual reaches $175,000. The
agreements provide for incentive compensation in addition to the above described
salary, not to exceed 50% of such salary determined in accordance with a formula
to be established annually in good faith by a committee of the Board of
Directors. Any amounts earned as salary and incentive compensation but not paid
by the Company are classified as deferred compensation and accrue interest based
on the prime rate of a local bank until payment. Deferred incentive compensation
aggregating $50,000 has been approved by the Board of Directors. No incentive
compensation was earned during the years ended September 30, 1998, 1997 and
1996. Compensation expense aggregating $73,911, $49,708 and $30,078 was accrued
during the years ended September 30, 1998, 1997 and 1996, respectively, pursuant
to the interest provisions of the compensation arrangements. The Board
resolution provides that amounts due from officers may be offset against accrued
deferred compensation. Management anticipates that the outstanding balance of
advances to officers will be offset against accrued deferred compensation upon
completion of a private placement or public offering of securities as more fully
described in Note 9.
In addition to the compensation described above, the agreements specify that the
Company will provide $250,000 of life insurance, financial planning and tax
preparation, annual medical examinations and membership dues in a social or
business club. Also, should the individuals' employment terminate within one
year of a change in control, the agreements require a payment of 2.99 times
annual salary.
Note 7: Common Stock
During 1994 and 1996, the Company's stockholders approved four-to-one reverse
stock splits of the Company's Common Stock. These reverse stock splits were
implemented during 1997. All numbers of Common Stock shares and per share data
have been restated to reflect the reverse stock splits.
During October 1996, the Board of Directors of the Company approved the
execution of a nonbinding letter of intent with a NASD member broker-dealer to
act as managing underwriter in connection with a proposed public offering. In
order to comply with the pre-conditions set forth in the letter of intent, the
Board of Directors approved a resolution for a four-to-one reverse stock split
of the Company's Common Stock in addition to the four-to-one reverse stock split
approved in 1994. The Board of Directors also approved amendments to the
Company's Articles of Incorporation as follows: (1) To authorize the designation
of 10,000,000 shares as Series A
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 7: Common Stock (continued)
Common Stock and 65,000,000 shares as Series B Common Stock, which are
convertible to Series A Common Stock commencing 12 months after the effective
date of a registration statement for the proposed offering subject to certain
conditions, from the 75,000,000 shares of $0.001 par value Common Stock
authorized originally under the Company's Articles of Incorporation; (2) To
authorize the designation of and reclassification of all shares of Common Stock
issued prior to the adoption of the proposed amendments to the Articles of
Incorporation to Series B Common Stock; and (3) To change the name of the
Company from Innotek Corporation to ThermoEnergy Corporation. Stockholders'
approval of these matters was obtained during a special stockholders' meeting in
December 1996.
During October 1997, the broker-dealer informed the Company that it would be
unable to complete the proposed public offering. The Company terminated its
relationship with the broker-dealer and filed a complaint with NASD against the
firm (see Note 12). Deferred public offering expenses of approximately $282,000
were expensed as of September 30, 1997 as a result of the failure of the public
offering.
During May 1995, a stockholder purchased 6,250 shares of Common Stock at $8.00
per share and warrants for 6,250 shares of Common Stock (exercise price of $8.00
per share) at a price equal to the par value of the Company's Common Stock. The
stockholder exercised these warrants during June 1995.
During the year ended September 30, 1995, the Board of Directors approved the
issuance of 18,750 shares of the Company's Common Stock, at $8.00 per share
(based on the price for the May 1995 sale of the Company's Common Stock), to
Battelle in lieu of a cash payment for $75,000 of license fees and $75,000 of
expenses.
During the year ended September 30, 1994, the Company issued Common Stock
warrants, at prices ranging from $.40 to $3.20 per warrant, to stockholders for
289,375 shares of the Company's Common Stock. The Company issued Common Stock
warrants, at a price equal to par value of the Company's Common Stock, to a
stockholder for 395,845 shares during the year ended September 30, 1993. The
related Warrant Agreements provide for an exercise period of 10 years from the
date of issuance at prices ranging from $12.80 to $14.40 per share, subject to
adjustment in the event that the Company issues shares of Common Stock at a
price per share which is less than the warrant price or the current market value
of such shares. The exercise prices for the warrants were adjusted to prices
ranging from $2.00 to $8.00 during the year ended September 30, 1995 due to the
sale of Common Stock in May 1995 for $8.00 per
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 7: Common Stock (continued)
share. During the year ended September 30, 1997, a stockholder cancelled
warrants for 195,596 shares of Common Stock at an exercise price of $8.00 per
share in connection with the conversion of notes payable to Common Stock
described below. During the year ended September 30, 1994, a stockholder
exercised warrants for 3,677 shares at $13.60 per share.
In connection with the issuance of 6.63% notes payable to stockholders described
in Note 4, the Company sold warrants to stockholders for 187,500 shares of the
Company's Common Stock. The related Warrant Agreements provide for an exercise
period of 4 years from the date of issuance at a price of $2.00 per share, as
adjusted per the terms of the Warrant Agreements.
During the fourth quarter of fiscal 1997, the Company and a stockholder agreed
to convert $338,100 of 6.63% notes payable and related accrued interest of
$53,092 to 195,596 shares of Series B Common Stock. The stockholder also
purchased 50,000 shares of Series B Common Stock at $2.00 per share.
An agreement with Centerpoint Power Corporation (CPC) specifies compensation at
an hourly rate plus expenses for services rendered and grants CPC stock warrants
for 701,875 shares of Common Stock (which were registered in connection with the
Company's public offering), exercisable at $.16 cent per share, if CPC obtains
public funding for a demonstration facility or obtains capital financing from an
investor entity. The agreement expires in April 2001. No payments have been made
to CPC under the terms of the agreement and CPC has not obtained funding which
obligates the Company to compensate CPC under the agreement.
The marketing agreement with a Georgia corporation discussed in Note 3 provides
for the issuance to the corporation of 62,500 warrants for 62,500 shares of the
Company's Common Stock exercisable within 10 years from the date of granting the
warrants at a price of $2.00 per share within 90 days upon the signing of an
agreement with a customer to purchase or utilize the Technologies.
In connection with the assignment of the license for the STORS technology from
AFP, 1,543,750 shares of the Company's Common Stock were issued to AFP. The
shares were placed in a Voting Trust and distributed to the AFP stockholders.
The Company owns 83,829 shares of its Common Stock previously included in the
Voting Trust pursuant to a settlement agreement with a former AFP stockholder.
These treasury shares have a zero cost basis.
During September 1997, the stockholders approved the 1997 Stock Option Plan (the
"Plan") which provides for incentive and non-incentive stock options for an
aggregate of 750,000 shares of Series B Common Stock for key employees and
non-employee Directors of the Company. The
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 7: Common Stock (continued)
Plan, which terminates in May 2007 or sooner if all of the options granted under
the Plan have been exercised, provides that the exercise price of each option
must be at least equal to 100% of the fair market value of the Common Stock on
the date of grant. The Plan contains automatic grant provisions for non-employee
Directors of the Company. At September 30, 1998, the Company was committed to
issue options under the automatic grant provisions for 10,000 shares of Series B
Common Stock.
At September 30, 1998, approximately 2,724,000 shares of Series B Common Stock
were reserved for future issuance under warrant agreements, the 1997 Stock
Option Plan and the terms of the 10% notes payable to stockholders (see Note
12).
Note 8: Employee stock ownership plan
The Company has adopted an Employee Stock Ownership Plan. However, as of
September 30, 1998, the Plan had not been funded nor submitted to the Internal
Revenue Service for approval.
Note 9: Management's consideration of going concern matters
The Company has incurred net losses since inception and, as more fully described
in Note 4, is in default on a $200,000 note payable to a stockholder and has
$179,365 of the 6.63% notes payable to stockholders maturing during the year
ending September 30, 1999. Additionally, substantial capital will likely be
required to continue commercialization of the Technologies. The financial
statements have been prepared assuming the Company will continue as a going
concern, realizing assets and liquidating liabilities in the ordinary course of
business and do not reflect any adjustments that might result from the outcome
of the aforementioned uncertainties. Management is considering several
alternatives for mitigating these conditions during the next year. As more fully
described in Note 12, the Company is authorized to issue an additional $594,000
of Series 98 Convertible Debentures. The sale of stock pursuant to private
placement or public offerings and fees from projects involving the Technologies
are other alternatives management is pursuing. Additional funds may be necessary
in the event the Company takes on other projects, is unable to obtain extensions
on the 10% notes to stockholders which are not in default at September 30, 1998,
or makes an acquisition of another company to facilitate the Company's
commercial demonstration of the Technologies. If the Company is unable to enter
into commercially attractive collaborative working arrangements for one or more
commercial or industrial projects, the Company may sub-license the Technologies
to third parties.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 9: Management's consideration of going concern matters (continued)
The overall goal of the Company is to successfully complete a demonstration
project for STORS, NitRem and/or ARP. Management plans to utilize any
demonstration facilities to expand the visibility of the Company in municipal,
industrial, Department of Defense and Department of Energy markets. A successful
demonstration project is the single most important business factor in
implementation of the Company's plan of operations.
Management has determined that the financial success of the Company may be
largely dependent upon the ability and financial resources of established third
parties collaborating with the Company with respect to projects involving the
Technologies. As described more fully in Notes 2 and 3, the Company has entered
into agreements with third parties in order to pursue this business strategy.
Note 10: Commitments
On July 26, 1996, the Company signed an agreement with the City of New York
which allows the Company to demonstrate certain services and equipment. The
Company agreed to provide the test equipment at no cost to the City of New York
for a period of not less than 150 consecutive calendar days nor more than 200
consecutive calendar days from the start-up of the demonstration. As more fully
described in Note 2, the Company and Foster Wheeler Environmental Corporation
agreed to form a corporation in Septembe 1998 to conduct the demonstration
project.
Note 11: Executive Bonus Plan
On January 3, 1997, the Company's Board of Directors established a five-year
Executive Bonus Plan (the "Bonus Plan") to reward executive officers and other
key employees based upon the Company achieving certain performance levels. Under
the Bonus Plan, commencing with the Company's 1997 fiscal year and for each of
the four fiscal years thereafter, the Company will have discretion to award
bonuses in an aggregate amount in each fiscal year equal to 1% of the Company's
net sales revenues for each fiscal year, provided and on condition that the
Company achieves a net profit before taxes of not less that 5% of net sales but
less that 15% of net sales.
The Board of Directors approved bonus payment percentages for certain
individuals for fiscal 1997. In the future, the Compensation Committee of the
Board of Directors of the Company will determine the allocable amounts or
percentages of the bonus pool which may be paid annually to participants. No
persons were entitled to receive bonus payments since the inception of the plan.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Note 12: Subsequent events
During October 1998, the Company filed a lawsuit seeking compensatory and
punitive damages from the broker-dealer involved in the failed public offering
more fully described in Note 7.
During November 1998, the Company entered into a consulting agreement with a
third party in connection with the City of New York demonstration project more
fully described in Note 10. The agreement specifies compensation at an hourly
rate plus expenses for services rendered. In the event the Company sells an ARP
unit to or operates an ARP unit for the City of New York under a privatized
agreement, the agreement provides for additional cash compensation based upon a
percentage of the overall capital cost of the ARP demonstration facility and for
the issuance of warrants to purchase 62,500 shares of Series B Common Stock of
the Company at an exercise price of $4.00 per share, exercisable within two
years from the date of issuance of the warrants.
During November 1998, the Company's Board of Directors approved the issuance of
up to $1,500,000 (an increase of $500,000 from the amount previously authorized)
of the Series 98, 15% Convertible Debentures, due January 15, 2003.
During November 1998, the Company entered into an employment agreement with an
individual to serve as the Company's Executive Vice President and Senior Vice
President of Corporate Technology. In order to assist the Company in conserving
cash, an amendment to the agreement was executed which provides the executive
with a half-time position for a period not to exceed twelve months. The
employment agreement provides for, among other things, basic, incentive and
other compensation.
Note 13: Concentration of credit risk
At September 30, 1998, the Company had cash in a financial institution that
exceeded the limit insured by the Federal Deposit Insurance Corporation.
Note 14: Change in fiscal year end
On September 21, 1998, the Board of Directors approved a change in the Company's
fiscal year end from September 30 to December 31. The Company will file a
transition report on Form 10-Q with the Securities and Exchange Commission for
the period from October 1, 1998 through December 31, 1998.
<PAGE>
(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.
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.
<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
10.24 Amendment Number 1 to License Agreement between the Company
and Battelle Memorial Institute dated June, 1998.
10.25 Amendment Number 1 to License Agreement between the Company
and Battelle Memorial Institute dated June, 1998.
10.26 Amendment Number 1 to License Agreement between the Company
and Battelle Development Corporation dated June, 1998.
10.27 Amendment Number 2 to License Agreement between the Company
and Battelle Memorial Institute dated June, 1998.
10.28 Sublicense Agreement between the Company and Thermoenergy
Environmental Corporation.
10.29 Shareholder Agreement by and among Foster Wheeler
Environmental Corporation, the Company and Thermoenergy
Environmental Corporation dated September 9, 1998.
10.30 Agreement between the Foster Wheeler Environmental Corporation
and the Company dated August 4, 1998.
10.31 Consulting Agreement between the Company and Nutrecycle
Ventures dated November 22, 1998.
10.32 License Agreement between the Company and Battelle Memorial
Institute effective December 30, 1997.
10.33 Form of Convertible Debenture dated August 24, 1998, with
Robert S. Trump.
10.34 Amendment Number 1 to License Agreement between the Company
and Battelle Memorial Institute effective December 30, 1997.
10.35(1) EmploymentAgreement between Alex G. Vasbender and the Company
dated November 18, 1998.
<PAGE>
21.1 Subsidiaries of the Company.
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.
<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:
Dated: December 29, 1998
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, 1998
- --------------------
Dennis C. Cossey Officer, Secretary and Director
(Principal Executive Officer)
/s/Primo L. Montesi President and Director December 29, 1998
- -------------------------- (Principal Financial Officer)
Primo L. Montesi
/s/ J. Donald Phillips Director December 29, 1998
- --------------------------
J. Donald Phillips
Director December 29, 1998
- --------------------------
Dr. Louis J. Ortmann
/s/ Andrew T. Melton Director December 29, 1998
- --------------------------
Andrew T. Melton
<PAGE>
Director December 29, 1998
- ---------------------------
Dr. Paul A. Loeffler
Director December 29, 1998
- ---------------------------
Jerald H. Sklar
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains smmary financial information extracted from the balance
sheets and statements of operations for Thermoenergy Corporation for the year
ended September 30, 1998, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000884504
<NAME> THERMOENERGY CORPORATION
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 242,486
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 242,486
<PP&E> 19,809
<DEPRECIATION> (19,809)
<TOTAL-ASSETS> 673,068
<CURRENT-LIABILITIES> 2,963,253
<BONDS> 0
0
0
<COMMON> 3,486,797
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 349,911
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 671,715
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153,778
<INCOME-PRETAX> (797,099)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (797,099)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
Item 21.1
Entity State
- ------- -----
ThermoEnergy Environmental Corporation Delaware