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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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For the fiscal period ended Commission file Number
December 31, 2000 0-9180
THERMAL ENERGY STORAGE, INC.
(Exact name of registrant as specified in its charter.)
Colorado
(State of Incorporation)
95-3333931
(I.R.S. Employer Identification No.)
6362 Ferris Square, Suite C
San Diego, California 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (858) 453-1395
Securities registered pursuant to Section 12(g) of the Act:
Title of class: Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required 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 [] NO [X]
Indicate the number of shares outstanding of each of the issuer' classes of
common stock, as of December 31, 2000: Common Stock, $.001 Par Value -
59,131,289 shares
THERMAL ENERGY STORAGE, INC.
2000 Annual Report on Form 10-K
TABLE OF CONTENTS
PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 7a. Quantitative and Qualitative Disclosures about Market Risks 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 17
PART III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and Management 18
Item 13. Certain Relationships and Related Transactions 19
PART IV
Item 14. Exhibits Financial Statement Schedules and Reports on Form 8-K 19
PART I
Item 1. Business
General
Thermal Energy Storage, Inc. (TESI) is an innovator in the application of a
variety of thermal storage mechanisms, and in the application of one of these
mechanisms to the production of potable water from seawater. The Company has
designed, developed, and installed systems for reducing the peak load on air
conditioning systems. This is accomplished by 'cool storage' a term for
describing the creation of an ice-like media that can absorb peak air
conditioning loads. 'Cool storage' produces economies by reducing the size
and cost of the air conditioning equipment, and by shifting air conditioning
electrical loads from peak periods to off-peak periods when electricity is
cheaper. The company's systems make use of patented technology that induces
water to form ice-like crystals (a 'clathrate') by adding certain chemicals
to the water. A system using the foaming agent CCl2FCH3
monofluorodichloroethane or R141b)induced crystal formation at 47.5 degrees
F). The heat of fusion of the clathrate is close to that of water, and
provides the required heat sink mechanism. Recently the company has been
engaged in developing systems for the desalination of sea water using similar
technology and has designed built, and tested small capacity experimental
systems that have provided proof of concept for the desalting process. The
desalination systems take advantage of the phenomenon observed in ordinary
ice; that it excludes the salt when it freezes and the ice produced is nearly
pure water. Clathrate crystals are used in this process to produce crystals
at temperatures well above the normal ice freezing temperature in seawater.
Crystals may be produced from cold seawater available at ocean depths of
about 2000 feet without mechanical refrigeration, thus reducing the energy
required to obtain potable water.
Products Background
Thermal Energy Storage Systems
The Company has developed a unique system to create a heat sink for thermal
energy as a means of reducing the initial and operating cost of large central
air conditioning units. The system absorbs energy by melting 'clathrate'
crystals. The clathrates used by the company are formed of water mixed with
certain materials having a small molecular structure which, when combined,
promotes crystallization at higher freezing temperature than water alone.
In recent experiments the Company used the clathrate forming compound R141b,
or hydrochlorofluorocarbon (HCFC) 141b. The clathrate crystals and water
produce a slurry that is stored in a tank and pumped through a heat exchanger
to absorb heat when the air conditioning load increases above the nominal
capacity of the air conditioner.
The clathrate crystal slurry has several advantages over the more
conventional, ordinary water-ice systems in use for this purpose:
(i) the clathrate freezes at approximately 47.5 degrees (F) instead of 32
degrees (F) as with water-ice and thus permits retrofitting thermal energy
storage (TES)systems to existing compressors;
(ii) the clathrate requires much less energy to achieve storage at this
higher temperature as compared to ordinary ice; and
(iii)the clathrate does not expand as does ordinary ice, thereby simplifying
equipment design and minimizing the risk of damage that can occur with
ordinary ice.
The U.S. Environmental Protection Agency (EPA) has determined that R141b
depletes ozone in the upper atmosphere and that it has an Ozone Depletion
Potential (ODPof 0.11. This is substantially lower than a
chlorofluorocarbon used by the Company earlier, (trichloromono-
fluoromethane, also known as CFC 11 or R11). The production of R11 has been
banned by the EPA because it had an ODP of 1.0. Although the ODP of R141b is
almost a factor of ten lower, the EPA has ruled that the manufacture of R141b
must cease in the year 2003. This ruling, coupled with the uncertainty of
finding a suitable replacement, has effectively eliminated the Company's
ability to sell its product in its prime marketplace. Through work performed
in the development of a freeze desalination system the Company has identified
alternative clathrate formers that have freezing temperatures which may be
suitable for the thermal storage application. Although the freezing
temperature is important in this application other characteristics of the
crystals are also important in determining the feasibility of their use.
Nevertheless, the search for a suitable clathrate former for desalination may
also yield a substitute clathrate former, with zero ODP, for the purposes of
thermal energy storage.
Freeze Desalination Systems
For several years the Company has done research and development on the
application of clathrate technology to the desalination of seawater. This
work was funded by the Company's president through his solely owned
engineering consulting company, RAMCO, Inc., and support agreements with the
Department of Interior, Bureau of Reclamation (BuRec). In this process, the
clathrate former R141b is mixed with cold seawater from 2,000-foot depth,
forming a slurry of the clathrate-crystals. The slurry is pumped to a device
known as a wash column where the clathrate crystals are separated from and
washed of surface brine. The crystals are then melted producing fresh water
and the R141b is recovered for reinjection in a continuous cycle. The
initial studies and subsequent experiments show that, if certain problems can
be resolved, this process could compete economically with desalination
systems now in use. Since the manufacture of R141b will cease in the US in
2003, an effort is under way to find a suitable substitute clathrate-former
for desalination purposes. Forthis service a higher temperature clathrate
former is desirable because it would either make increased production
efficiency possible where water is available or would broaden the geographic
applicability of the process. A follow-on contract was received from the
Bureau of Reclamation in 1999 to identify possible replacement clathrate
formers suitable for desalination. During 1999 the work under this agreement
identified clathrate formers that have a zero ozone depletion potential, and
that form clathrate crystals at higher temperatures than R141b, at pressures
deemed feasible by the Company for the desalination process. Additionally,
some of the clathrate formers identified for the purpose of desalination may
be useful in certain thermal energy storage applications.
Customers
In 1988 the company installed a demonstration system at a field office of
Southern California Edison Company. The system, which used R11 as the
clathrate former, operated successfully for a period of two years. In 1989,
the EPA ruled that R11 could no longer be produced in the United States
leading the company to search for a Freon-replacement chemical. The
Company's research found a foam-blowing agent (R141b) that, although
relatively expensive, was otherwiseb superior to R11. In 1993 the EPA ruled
that R141b production would not be permitted after 2003. In each instance
where the EPA ordered production stopped, the long-term unavailability of the
clathrate formers precluded marketing the Company's systems, necessitating a
search for alternatives. Consequently, the company has no current customers
for its products, no backlog, and no in-house manufacturing capability. The
company's sales and marketing efforts at present are directed toward
obtaining additional support for research and development testing of
clathrate forming chemicals thus far identified.
Company Business Outlook
Since 1989 the Company's existence has been threatened by serious financial
difficulties as a result of circumstances that made the Company unable to
market its products. These circumstances have been noted in prior 10-K
reports and are briefly reviewed under History below. In fact, as early as
1989, the Company's Directors were required to consider terminating the
Company's business when it became unclear that the Company could meet its
obligations for operating funds. However, certain of the Directors,
including the President pledged personal funds to attempt to keep the Company
in operation, principally to explore the possibility of a merger or
acquisition with or by a stronger company, and more recently to help advance
the desalination technology. With this financial support the Company was
able to continue.
After 1992, substantial contributions from the President were a major source
of funding, combined with supplementary support from other Directors. In
1994, dollar contributions from the other Directors ceased although these
Directors continue to provide services. Continued efforts from 1994 to
present have produced some positive results and the Company has received
funds from the Bureau of Reclamation for its desalination program. These
funds from the Bureau have also carried with them an obligation for the
Company to contribute on a participatory basis and this latter obligation was
met in major part by continued funding of the Company by RAMCO, Inc.
In the 1995 Annual Report, Form 10K, the company reported that there was one
outside company with whom there had been discussions concerning a possible
merger of the two organizations. However in 1996 those discussions were
terminated. There have been no other discussions since and none are expected
unless and until a new replacement clathrate former is found.
Competition
Because of the delay created by the elimination of R11 and R141b, the Company
still has not entered the thermal energy storage (TES) market, which
exacerbates the financial constraints under which the Company had been
operating. Management is aware of at least eight companies currently
competing in the off-peak storage air conditioning market. Seven of these
companies produce systems based on water-ice, or water, as the storage media.
Management believes its clathrate storage technology is unique and, as noted
earlier, offers technical advantages over systems presently marketed by
competitors. Management is not aware of any manufacturer currently producing
or developing a clathrate-based cool storage system; however, other firms
with greater resources than the Company are interested in the utilization of
phase-change materials for thermal energy storage. Some of these firms have
the technical capability of developing a thermal energy storage system along
the lines of the Company's product should they decide to do so, subject to
constraints imposed by our patent position.
Both the technology, and the utility perception as to the requirements for
energy storage and electric power load management, are experiencing many new
developments. There can be no assurance that the Company's products will not
be made uncompetitive or obsolete in the future. The clathrate former
(R141b) used in the Company's storage medium is currently being manufactured
by several major chemical companies in the U.S. at a price that permits the
company to compete in the market. However, the uncertainty surrounding the
Company's ability to find a suitable replacement has stalled the Company's
entrance into the market place. Should the price of a replacement
increase significantly over that of R141b the Company's system could be
rendered uncompetitive. An alternate clathrate former will have to be used
after 2003. The Company continues to seek R&D funds to meet this need.
The company is aware of other makers of thermal storage systems for air
conditioning applications. The primary market for the Company's systems is
for large central air conditioning systems such as those employed in office
buildings, shopping malls, and high-technology manufacturing facilities. The
Company believes that its systems have significant advantages, including
higher efficiency, over competing thermal storage systems. The company is
aware of another patent on clathrate desalination, but does not believe that
the clathrate desalination technology embodied in that patent offers the
advantages inherent in the company's technology. The Company anticipates
that competition from makers of distillation and reverse osmosis desalination
systems will be significant because of their current presence in the
marketplace.
Marketing
Analysis of a typical utility company's electrical load pattern over a 24-
hour period shows that daytime use by customers is much higher than
nighttime. A utility must have sufficient generating capacity to meet this
daytime, or 'peak' period, load. Such being the case, many utility
generators are left under-utilized during the nighttime, or 'off-peak'
period. In fact, the typical utility company has approximately twice the
installed generating capacity it would need if its load were level throughout
the day. Because of this disparity, to the extent that a utility can shift
electrical loads from peak to off-peak periods, the utility can avoid
building additional generating capacity. By virtue of such load shifting,
utilities would be able to operate more efficiently by utilizing their most
efficient generators at a higher capacity through the night. For this reason
electricity rates are generally much higher during peak periods than during
off-peak periods. The difference in rates is such that a thermal energy
storage system can produce substantial economies in energy costs. The
restructuring of the electrical industry that results in market-based prices
for electricity is expected to emphasize the need for off-peak energy
storage.
History
Thermal Energy Storage, Inc. (the Company) was incorporated under the laws of
Colorado on December 8, 1978. Initially the Company's business was the
manufacture and marketing of thermal energy storage systems to the solar
industry. In fact, the great majority of the Company's existing shareholders
trace their participation to the 1979-1983 period.
By the end of 1984 consumer demand for solar energy systems declined and the
Company directed its efforts into the growing commercial demand for off-peak
cool thermal storage in large central air conditioning systems. The TES
system first developed by the Company relied on the use of the refrigerant
labeled R11 (monofluorotrichloromethane), a chlorofluorocarbon (CFC) that was
subsequently (in 1989) identified with the depletion of the earth's ozone
layer. The U.S. government placed a heavy tax on the use of CFC R11 in 1990
and the U.S. Environmental Protection Agency (EPA) ordered the termination of
manufacture of all CFC products at the end of 1995.
Under a contract with Consolidated Edison of New York, the Company was
successful in identifying the R141b as a suitable replacement to R11.
However, the expenditures made by the Company to accomplish the development
of the 'SnoPeak' (a contraction of 'there's no peak') thermal energy storage
system depleted the Company's resources so that it was unable to sustain a
marketing effort. The Company then began to seek merger partners to promote
the product line.
In 1993 an effort was begun to pursue clathrate desalination technology.
This work led to a sharing contract with the Bureau of Reclamation (BuRec) to
design, build, and test a small-scale pilot plant at the Natural Energy
Laboratory of Hawaii, on the Big Island of Hawaii. As part of this endeavor
a search for a new clathrate former for use with the desalination technology
was made and that work is ongoing. In order to obtain this contract, RAMCO
met the financial sharing obligations required by BuRec.
In January, 1995 the Company's President filed for a patent on a clathrate
desalination system, which patent has subsequently been issued. All costs
incurred up to the time of issuance of the patent and thereafter, for
developing, obtaining and supporting the patent were paid by RAMCO. The
Company's Board of Directors has proposed, and the Company's president has
agreed, that RAMCO cross-license the technology, as embodied in the patent
application and developments through the completion of the aforementioned
BuRec contract, to the Company in perpetuity, on a world-wide, royalty-free
basis. Additionally, RAMCO has agreed to assign all its rights to the
desalination technology to the Company upon reimbursement of expenditures and
amounts owed RAMCO by the Company.
In 1995 the EPA dealt the company another blow when it ruled that the
manufacture of R141b must also be terminated and established the year 2003 as
the date after which no new material can be produced. This ruling by EPA
effectively removed the Company from both the thermal energy storage and
desalination markets. Over the long and difficult period from 1989 to
present, while the Company was developing its 'Snopeak' product line and
searching for a suitable replacement for its clathrate-forming chemical, many
fundamental and structural changes were occurring in the traditional electric
utility industry leading up to the current restructuring of the industry.
Having lost its ability to market its 'Snopeak' product line because of EPA
rulings, the Company sought to align with a financially strong company with
comparable business interests that would continue to fund the search for new
a clathrate-former as well as to develop the desalination technology.
However management judges that the best opportunity to find an appropriate
partner is to find a suitable replacement clathrate-former and also to
develop a working system for its desalination technology for a demonstration
plant. The NELH site is a prime candidate for a demonstration plant because
of the available supply of cold deep seawater (42 degrees (F) at 2,000 feet
pumped to the surface for use by the various tenants of NELH.
In an approach to revitalize itself, the Company was able to obtain two cost-
sharing desalination contracts from the Bureau of Reclamation amounting to
$553,000. In order for the Company to obtain these contracts it was
necessary for RAMCO to agree to fund in kind the major part of the cost-
haring amount of $241,000.
The testing to date has shown that four of the five subsystems making up the
desalination system operate satisfactorily. The fifth subsystem did not work
as required for the overall system to be deemed successful. Follow on
funding was sought from BuRec to modify the design of this subsystem and to
perform further testing.
This funding was held back by BuRec because of an incident at NELH in
September, 1998 whereby certain parties accused, falsely as it turns out,
NELH and the Company of causing a fish kill through the release of R141b into
the outfall tidepool from the company's test facility. The company's
subsequent investigation determined that the most likely cause of the alleged
fish kill would have been thermal shock caused by the release of very cold
water into the warm water that collects in the outfall tidepool during
periods when the company's system is not operating. Further it was shown
that for R141b to be toxic to humans, fish or plant life it would have to be
in concentrations on the order of magnitude of 1 million times or 1000 times
greater, respectively than the amounts reportedly detected. It was concluded
that the most likely cause of there being R141b in the outfall was through
the efforts of one or more disgruntled defendants in a suit brought by NELH
to eject them from the land to which they claim ownership, which land is part
of NELH's facility.
The Company received the follow on contract from BuRec in March 1999.
Although the company had intended to continue experiments with the pilot
plant at NELH, extremely stringent requirements the Company deems arbitrary
were established by the Hawaii Department of Health that made further
experiments there financially infeasible. As a consequence, the Company
dismantled the pilot plant in 1999 and vacated the NELH facility. Instead of
experiments at the pilot plant, the Company contracted for the construction
of a small-scale test facility in San Diego near the company offices. A
small-scale system, designed to permit observation during operation, was
constructed and evaluated with the test facility.
The project was completed in June 2000 and successfully demonstrated the
ability of the process to produce water meeting EPA salinity standards. The
experiments with the scale model system reduced the salinity from 35,000
parts per million (ppm) in seawater to less than the 500 ppm salinity limit
on drinking water established by the EPA. Several alternative clathrate
formers that have zero ozone depletion potential were identified in the
second quarter. Experiments with those alternative clathrate are planned for
2001. The results to date have provided management with optimism that its
desalination efforts may lead to a marketable product in the foreseeable
future.
Research and Development
In October, 1993 the Company was awarded a $103,000 participatory contract
from the U.S. Department of Interior, Bureau of Reclamation (BuRec), to
perform a feasibility study to determine if clathrate technology is suitable
for the desalination of sea water. Known as 'Freeze Desalination' a
clathrate system, theoretically, has the potential to be a more efficient
desalination system than reverse osmosis systems currently in use. The study
was completed in April 1995 and verified the technical feasibility of the
clathrate desalination system and showed that there is potential for this
system to compete with other desalination systems now in commercial use.
In October 1995, the Company received a follow-on, $450,000, participatory
contract to build a small demonstration plant to be located at the Natural
Energy Laboratory of Hawaii. Certain costs associated with obtaining the
follow-on contract and funding needed for the $178,000 participatory share,
were paid by RAMCO, the Company not having sufficient funds to meet the
funding requirements.
In October 1996, the company was awarded a $250,000 contract by the Center of
Excellence for Research in Ocean Sciences (CEROS) to evaluate the effects of
greater pressures at ocean depths on crystal formation, and to design,
construct, and test a subsystem module for the removal and recovery of trace
quantities of the clathrate from the product water stream. This work was
completed in March 1999.
In March 1999, the company was awarded a $100,000 financial assistance
agreement by the Bureau of Reclamation. The agreement, which supported
participation by the company at a somewhat higher level, was for research
into higher temperature clathrate formers and experimentation with the wash
column. RAMCO provided funds on behalf of the Company in support of this
work.
During the first quarter, 2000 the Company accepted a proposal for
engineering services from Innovative Engineering Services, Inc. (IES) in
which IES proposed that the services be paid either in cash or in stock, at
the Company's option. The Board of Directors established a price of $0.03
per share as reasonable in light of the recent volatility in share price and
IES accepted that price as the basis for the contract. The work was
completed in February 2000 and the sale of 202,833 restricted common shares
to IES via a private placement was anticipated in the second quarter to fund
payment for the engineering services. After further discussions with IES,
the Company and IES agreed that a total of 200,000 shares would be issued for
the services provided by IES. The private placement to issue these
restricted common shares was completed in the third quarter.
In accordance with generally accepted accounting principles, all costs
associated with research and development incurred by the Company were
expensed.
The company has also received significant support in its research from the
Department of Interior, Bureau of Reclamation and from CEROS. The Company
has published three technical reports on the work supported by these
agencies, and a paper presented at the International Desalination
Association's 1999 World Congress. These technical reports, listed below,
are available from those agencies.
1. Richard A. McCormack and Richard K. Andersen, Thermal Energy Storage,
Inc., "Clathrate Desalination Plant Preliminary Research Study," Bureau of
Reclamation Contract Number 1425-3-CR-81-19520, Water Treatment Technology
Program Report Number 5, June 1995
2. Richard A. McCormack and Glenn A. Niblock, Thermal Energy Storage,
Inc., Build and Operate a Clathrate Desalination Pilot Plant, Final Technical
Report, Bureau of Reclamation Assistance Agreement Number 1425-5-FC-81-20690,
Water Treatment Technology Program Report Number 31, May 1998
3. Richard A. McCormack, Thermal Energy Storage, Inc., Development and
Testing of a Clathrate Desalination Research Facility, DARPA Grant Number MDA
972-94-1-0010, Final Technical Report, January 1999.
4. Richard A. McCormack, Thermal Energy Storage, Inc. and Glenn A.
Niblock, Vertex Associates Inc.; "Clathrate Freeze Desalination Progress,"
IDA Log No: SD99165 presented at the International Desalination Association
1999 World Congress, August 29-September 4, 1999.
Intellectual Property Rights
Patents
The Company has patented its clathrate phase-change technology based on the
concept of freezing the clathrate mix in a range of 42 degrees (F) to 48
degrees (F) while maintaining high thermal storage capacity. Clathrates,
also known as gas-hydrates, are produced by mixing certain compounds with
water using off-the-shelf mechanical and chemical components. At certain
temperatures and pressures, depending on the chemistry of the mixture,
molecules of the clathrate forming compound are completely enclosed with a
group of water molecules in a solid crystalline structure to form the
clathrate heat sink medium. The Company was issued U.S. Patent Number
4,696,338 on September 29, 1987 covering the formation of a clathrate under
specific physical and chemical conditions. This patent was for a warm
temperature (118 degrees ((F))) heat storage medium that the Company no
longer considers commercially valuable. The Company's second clathrate
patent, number 4,821,794 which was issued on April 18, 1989 covers different
methods and chemicals for forming its clathrate heat sink medium.
In January 1995, Richard McCormack, the Company's President filed for a
patent on a clathrate desalination system. U.S. Patent 5553456 was issued to
RAMCO as the originator of the basic patent applications on freeze
desalination that is used by the Company in its desalination development
work. All costs of obtaining the patent have been, and are being, paid by
RAMCO. The Company's Board of Directors has proposed, and the Company's
president has agreed, that RAMCO cross-license the technology, as embodied in
the patent application and developments through the completion of
aforementioned BuRec contract, to the Company in perpetuity, on a world-wide,
royalty-free basis. Additionally, RAMCO has agreed to assign all its rights
to the desalination technology to the Company upon reimbursement of
expenditures and amounts owed RAMCO by the Company.
Work completed under the financial assistance agreement received in 1999, and
work funded by RAMCO may lead to additional patents. No evaluation of the
potential for patent protection has yet been done and there is no assurance
that additional patents will be granted.
Trademark
In 1981 the Company was granted a federal trademark for the name, Thermal
Energy Storage, Inc., as well as the acronym, 'TESI', and the Company's logo.
A state trademark registration has been granted by the State of California.
The Company believes its name is an asset as it reflects the name for thermal
energy storage (TES) commonly used in the literature and in the industry.
Material Customers
In 2000, as in 1999, 100 percent of the Company's revenues were derived from
research supported by contracts with the U.S. Department of Interior, Bureau
of Reclamation (BuRec). In 1998, and 1997, 100 percent of the Company's
revenues were derived from research supported by contracts with the BuRec and
the Centers of Excellence for Research in Ocean Sciences. The failure of the
Company to contract with additional new customers is having a material
adverse effect on the Company.
Manufacturing and Assembly
The Company's production of storage systems consists primarily of
engineering, procurement and final assembly of components produced by other
manufacturers to Company specifications, and charging the system with its
storage medium. Management believes that all major equipment components of
its system are, and will remain, readily obtainable from numerous suppliers
to the extent necessary to meet the Company's production needs. The Company
has not entered into any long-term contract for the supply of any component.
The Company does not intend to build any manufacturing facilities in the
foreseeable future.
Employees
As of December 31, 2000 the Company had no full time employees. Part time
employees, consultants and contractors are hired as needed in engineering,
marketing, manufacturing and administration.
ITEM 2. PROPERTIES
Office Facilities
The company neither owns nor leases real property. In March, 1998 the
Company moved to 6362 Ferris Square, Suite C, San Diego, California 92121,
where it shares 1,600 square feet of office space with RAMCO. RAMCO signed a
three year lease, commencing on March 1, 1998, and RAMCO is currently sharing
the office space with the Company. The lease was renewed in March 2001 for an
additional three year term. The company has leased or subcontracted for
laboratory space and facilities in the recent past but currently has no
leased facilities.
ITEM 3. LEGAL PROCEEDINGS
On September 26, 2000 the company was served with a complaint that was filed
in the Third Circuit Court of the State of Hawaii on September 12, 2000. The
lawsuit alleges that the several complainants were injured during
desalination experiments being conducted by the company at the Natural Energy
Laboratory of Hawaii Authority. The complaint alleges injuries caused by the
release into the ocean of a toxic chemical. As of the end of the reporting
period, the company's liability insurance carrier had not evaluated the
complaint. Subsequent to the end of the reporting period the Company's
insurance carrier advised that the Company was not covered under its
insurance policy. The company believes that the lawsuit is without merit.
The defense of this action may cause some disruption in the Company's
operations and may from time to time distract management from day-to-day
operations. The ultimate outcome of these actions cannot be presently
determined. Accordingly, no provision for any liability or loss that may
result from adjudication or settlement thereof has been made in the
accompanying financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Securities Market
The Common Shares of the Company are traded via an over-the-counter bulletin
board (OTCBB) and quoted under the symbol "THES". TESI Common Shares are not
currently quoted by the National Quotation Bureau. The Company acts as
Transfer Agent for the Common Shares. There are approximately 3,000
shareholders of record of Common Shares.
The Company has not, since inception, declared or paid a cash or other
dividend with respect to the Common Shares. Management does not contemplate
the payment of such dividend on the Common Shares in the foreseeable future.
On June 26, 1984, the Company was removed from the NASDAQ automated reporting
system as the Company was not in compliance with requirements of the NASD
Bylaws because it no longer met the financial net worth standards set by
NASDAQ.
Delinquent filings and effects in market for securities
The Company did not hold an annual meeting in 2000. The Company did not hold
its annual meeting in 1989 or 1990 until November of each year, and did not
hold an annual meeting in 1992, 1994, 1995, 1996, 1997, 1998 and 1999, and
did not timely file all of the quarterly form 10-Q reports required to be
filed under Section 13 or Section 15(d) of the Securities Exchange Act of
1934, therefore, the Company failed during these periods to qualify for the
use of Rule 144 under the Securities Act of 1933. By filing this 10-K the
company will be current in its reporting under the referenced provisions of
the 1934 act.
In 1998 the company failed to file the first of two required Y2K compliance
reports and in 1999 the Securities and Exchange Commission cited the Company
for violations of Section 17 (a)(3) and Section 17A (d) (1) of the Securities
Exchange Act of 1934 and Rule 17Ad-18. In 1999 the company submitted the
first and second of the required Y2K planning reports, and entered into a
settlement agreement with the Securities and Exchange Commission ordering the
firm to cease and desist from further such violations. The civil penalty was
waived by the SEC because of the financial condition of the Company.
Sales of restricted Common Shares under Rule 144 under the Securities Act of
1933 are available.
Item 6. Selected Financial Data
The following table summarizes certain financial data of the Company for the
years ended December 31, 1997 through December 31, 2000 and is qualified in
its entirety by the financial statements and notes thereto included in "ITEM
8. Financial Statements and Supplementary Data."
Year Ended December 31,
2000 1999 1998 1997
Revenues $16,080 $84,205 $140,714 $280,787
Net income (loss) (18,186) (34,974) (4,013) (21,578)
Per common share (0.000) (0.001) (0.000) (0.001)
Total assets 13,758 25,860 27,828 27,828
Long term obligations 0 0 0 0
Cash dividends per share 0 0 0 0
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and capital resources
In 1990 a new United States federal excise tax on the material R11 used in
the formation of the Company's storage media forced the Company to terminate
its U.S. marketing efforts until a suitable substitute material was
identified and successfully demonstrated.
Under contract from Consolidated Edison of New York and Empire State Electric
Energy Research Corp. (a group of New York State utilities) the Company
conducted successful research and identified a new clathrate forming
material, R141b, as a suitable replacement. This material is being
manufactured by several major chemical companies in the U.S. as a substitute
for R11 in the rigid foam insulation industry. Currently the EPA, through
the National Clean Air Act, has approved this material, which has an Ozone
Depletion Potential of approximately 11 percent of the former clathrate
former R11, for manufacture through 2003.
The Company's Board of Directors has directed management to seek an alignment
with a financially strong company with compatible business interests to
market its 'Snopeak' Storage System and to remain cognizant of any new
development with clathrate forming materials that have zero ODP, such as
certain hydrofluorocarbons (HFC's) that are not now being manufactured but
which are under study by several U.S. chemical companies. Without such an
alignment the company may be unable to market its products and may terminate
its business.
In 1988 the Company obtained a $50,000 bank loan, guaranteed by the Directors
and a major stockholder, and in January 1990 completed a Private Placement
which sustained the Company operations until receipt of the Consolidated
Edison/ESEERCO contract. In 1992, $25,000 of the Bank loan was repaid by the
Directors and the major stockholder (who became a member of the Board of
Directors in 1991). In 1993, $15,625 was repaid by the Directors and the
major stockholder. In 1994, the bank loan was paid off by the Directors and
the major stockholder. The Company is actively seeking additional operating
funds to sustain operations until such time as it generates a positive cash
flow from internal operations. A major effort is currently underway to
obtain private or public funding to construct a modular desalination pilot
capable of producing 250,000 gallons per day of fresh water from sea or waste
water. This modular concept creates attractive economies of scale applicable
to communities with a wide range of populations. The pilot advances the
concept from research to commercial application and will demonstrate the
economic viability of the this form of fresh water reclamation.
The Company had no accounts receivable as of December 31, 2000 and December
31, 1999. As of December 31, 2000 the Company had a cash balance of
$10,70023 as compared to $23,000 cash at December 31, 1999.
The Company had a net loss of $23,000 in 2000 as compared with a net loss of
$35,000 in 1999. This loss was due to an excess of expenses over contract
revenues
A negative cash flow from operations was approximately $2000 per month
throughout 2000, as compared to a negative cash flow from operations of
approximately $1800 per month in 1999.
Current assets and total assets were $14,000 as of December 31,2000 compared
to current assets and total assets of $26,000 as of December 31,1999.
As of December 31, 2000 the Company had a working capital deficiency of
$681,000. As of December 31, 1999 the Company had a working capital
deficiency of $700,000. This deficiency in working capital was due to
operating losses.
As of December 31, 2000 the Company had no bank loans outstanding. A bank
loan to the company was paid off as of December 31, 1994.
As of December 31, 2000 the Company had accounts payable totaling $24,000.
As of December 31, 1999 the Company had accounts payable totaling $26,000.
Effective July 20, 1987, the Company entered into an agreement with Renewable
Resource Systems, Inc. (RRSI) of Menlo Park, California whereby RRSI
purchased 3,000,000 Common Shares for $150,000 cash or $.05 per share, and an
additional 6,375,000 Common Shares at $.133 per share for a total of
$850,000. As of December 31, 1987 the total of $1,000,000 was received by
the Company and 9,375,000 Common Shares were issued to RRSI.
In October, 1989 RRSI informed the Company that they were terminating their
business in the U.S. and intended to use their Company holdings to satisfy
their contractual agreements with certain key employees. As a result of
negotiations between RRSI, the Company and Mr. A. Philip Bray, (former CEO of
RRSI, and who, in 1992, became a Company Board Member) and in return for a
release of obligations and liabilities among the Company, RRSI and two (then
current) Company Board Members employed by RRSI, it was agreed that the
Company would issue to RRSI a warrant to purchase up to 2,280,427 Common
Shares at a price of $.13 1/3 per share, exercisable for a period of 5 years
commencing October 15, 1989 and RRSI would return 3,000,000 of its shares to
be canceled by the Company. These canceled shares formed the basis of a non-
dilutive Private Placement completed by the Company in February 1990. Mr.
Bray received the remainder of the Common Shares held by RRSI and RRSI's
warrant to purchase 2,280,427 Common Shares at $.13 1/3 per share. Mr. Bray
also assumed RRSI's 40 percent guarantee obligation on the $50,000 bank loan.
In 1990 Mr. Bray lent the Company $15,000 in working capital.
During the period 1989 through 1996 there were periods when there were lapses
in the Company's liability insurance coverage. The Company may have
financial exposure for claims arising during the periods in which no coverage
existed. No such claims against the Company had been made as of December 31,
1999 and the Company knows of no incidents that would lead to any such
claims.
In 1990 the Company settled a lawsuit with Alternate Energy Development
Corporation by paying $2,500.
The Company needs to raise additional funding to sustain operations until the
Company becomes self sustaining through the sale of its thermal energy
storage (TES) systems or funding of its freeze desalination development. The
Company is currently seeking to align itself or merge with a financially
strong company with compatible business interests. Since 1994 the Company
has discussed possible mergers, acquisitions and affiliations with several
companies but currently there are no ongoing negotiations.
Management believes that the company can pursue a strategic alliance with
another firm only after it has been able to complete its desalination testing
successfully and has found a substitute clathrate former for both the
desalination technology and the thermal storage technology. The most recent
experiments are encouraging but further work is required to have high
confidence in the technical and commercial feasibility of the TESI processes.
Results of Operations
In 1988, a field demonstration of a 250 ton-hour storage system was placed in
trial operation. At approximately the same time a 24 ton-hour system also
was placed in a field operation. Both systems immediately developed similar
and unexpected operating problems relating to equipment sizing and scale-up
from the Company's test stand system.
These scale up and sizing problems led to the decision by the Board of
Directors to suspend marketing activities and to initiate the subsequent
extensive testing program. These decisions further led to substantial cost
increases during 1988 and 1989.
To solve these technical operating problems management commenced an around-
e-clock test program on the Company's test stand and, at the same time,
halted field testing of the field units. The test ran for over five months
and was completed in December 1988. Subsequently, all data was reduced and
analyzed. On the basis of this analysis certain modifications were made to
the design of the Company's system such that operation of the system at the
100% storage capacity rating for each of the Company's field demonstration
units was successfully demonstrated.
The Company had $16,080 in contract revenues for the year ended December 31,
2000 and $84,000 in contract revenues in 1999.
As of December 31, 2000 the Company had no backlog of business The BuRec
contract awarded in 1999 was completed and no other new contracts were in
place.
There were $6,085 in 2000 in internally funded research and development
expenses compared to $0 expenses in 1999 and 1998.
There was no interest income or interest expense for 2000.
There were no selling, general and administrative expenses in the year ended
December 31, 2000 compared to $35,000 in 1999, and $29,000 in 1998.
It is Management's opinion that inflation had no significant effect on
Company operations in 2000 and no significant effect is forecast for 2001.
Item 7a. Quantitative and Qualitative Disclosures about Market Risks
The company has not prepared quantitative evaluations of market risks for its
systems. In the recent past regulatory actions have made the use of the
company's clathrate formers impracticable, precluding the sale of the
company's systems, both for thermal energy storage and for desalination. The
research completed to date into alternative clathrate formers to find a
suitable chemical that is safe, non-toxic, and commercially available at
prices that result in competitive desalination systems has been encouraging.
There is no assurance, however, that the Company will be able to find a
suitable clathrate former for desalination or thermal storage systems, nor is
there assurance that future regulatory actions will not have a similar
adverse effect on the ability of the Company to market its systems.
The Company's product and proposed products are subject to, or are affected
directly and indirectly by various aspects of federal, state and local
governmental regulations and tax laws. The federal excise tax imposed on
R11, which made the Company's use of R11 impractical, is an example. After
2003 the clathrate former R141b will also be prohibited by EPA regulations.
Residential and commercial use of the Company's thermal energy storage
systems is also affected by various state and local building codes. Such
regulations, while not directed specifically to thermal energy storage
devices, can impact the use of systems in which the Company's energy storage
units are used.
There is growing interest and activity at all levels relating to government
and industry regulation of alternate energy sources. Governmental entities
could impose regulations applicable to the Company and its products, which
might require the Company to submit its products to various testing,
certification and labeling programs. Management also expects that private
industry associations will become more active in this area. In the future
the Company may also be required to submit its products for testing and
certification to independent organizations. Compliance with future
regulatory or private industry standards could involve substantial costs and
have a material impact on Company operations.
Item 8. Financial Statements and Supplementary Data
The information required by this item is Included in Part IV, Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
In December 1992, the Company's management, citing severe financial
restrictions, instituted a change to the Company's use of independent
auditors, approving instead the change from Peterson & Co., a La Jolla based
accounting firm, to use financial results as prepared by the Company's
independent bookkeeper since 1988, Mr. William Jankowski. Management had no
disagreements with Peterson & Co. during the 1990 and 1991 fiscal year audits
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure. All financial results presented
herein are in accord with all previous practices used by the Company and past
auditors and are considered accurate. The sole reason for making this change
is to conserve operating funds.
In 1998 the Company hired William G. McKee, Inc.,CPA, to prepare the
financial statements without audit or review and continued this relationship
in 1999. The 1998 10k and 10q reports were prepared by Mr. Jankowski. The
1999 10-K and 10-Q reports were prepared by a consultant, Glenn A. Niblock of
Vertex Associates, Inc., using the financial reports prepared by William G.
McKee, Inc., and an accrual of compensation due for services in 1999 in order
to reflect the effect of amounts due for those services on the financial
state of the company.
PART III
Item 10. Directors and Executive Officers of the Registrant
The company has a single Executive Officer who holds all of the executive
positions. Mr. Richard A. McCormack is President, Secretary, and Treasurer.
Mr. McCormack is also Chairman of the Board of Directors.
Item 11. Executive Compensation
Compensation of Management
No executive officers have been paid compensation since December 31, 1993.
Compensation due to the President for management services provided through
RAMCO, Inc. has been accrued as a loan from RAMCO to the company. No
compensation was accrued for any executive officer during the years ended
December 31, 1997, and 1998 or 2000. In 1999, unpaid compensation due of
$30,000 was accrued. Previously, unpaid compensation of $30,000 was accrued
in 1996 and $90,000 was accrued in 1995.
The Company adopted a Stock Option Plan (the "Plan") on March 18, 1981 which
was approved by the shareholders on May 28, 1981 and further amended on
October 30, 1987, and approved by the shareholders in June 1988. The purpose
of the Plan is to advance the interest of the Company and shareholders by
affording to employees an opportunity to acquire or increase their
proprietary interest in the Company by the grant to such employees of
options.
Options granted pursuant to the Plan shall be options to purchase shares of
the Company's Common Stock, $.001 par value. Subject to adjustments
described in the Plan the aggregate number of Common Shares which may be
issued upon the exercise of options granted cannot exceed 7,500,000 Common
Shares.
There were no Common Shares acquired through the exercise of options granted
by the Company to its executive officers during the fiscal years ended
December 31, 1998, 1997 and 1996 and to all executive officers as a group.
Options for 100,000 Common Shares were exercised by a terminating employee in
1988. No stock options were exercised during the years ended December 31,
1991, 1990, 1989, 1987 and 1986. In February 1985, the Board of Directors
accelerated the vesting period to make all options granted prior to December
31, 1984 fully exercisable.
The Plan is administered by a standing Compensation and Stock Option
Committee of the Board of Directors. The Compensation and Stock Option
Committee met in 1994 and issued stock options listed in Note 7.
Prior to 1999, the members of the Compensation and Stock Option Committee
were Messrs. Lawrence O'Donnell and Sidney Stoller. Mr. O'Donnell died in
1999 and has not been replaced on this Committee.
Management believes that the terms of the transactions described were as
favorable to the Company as could have been arranged with unaffiliated
parties.
Compensation of Directors
Directors of the Company who are employees receive no special compensation
for serving as Directors or for their attendance at Board or Committee
meetings. Company policy is to pay non-employee Directors a fee of $480, or
stock equivalents, per day for Board and Committee meetings, except that if a
committee meeting is held in conjunction with a Board meeting there is no
compensation for the committee meeting. Since December 31, 1992 no Directors
fees were accrued or paid.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of December 31, 1999 certain information
with respect to all stockholders known by the Company to be beneficial owners
of more than five percent of its outstanding Common Stock, and all officers
and directors of the Company as a group.
Name and Address of Shares Owned Percent of
Beneficial Owner Beneficially Class
Richard A. McCormack 10,067,503 17.1% (1)
8155 Paseo del Ocaso
La Jolla, CA 92037
A. Philip Bray 6,719,573 11.4%
1912 Piper Ridge Court
Walnut Creek, CA 94596
All Officers and 19,328,944 32.8%
Directors as a Group
(1) Includes 857,000 shares held of record by RAMCO, In. a corporation
wholly-owned by Richard A. McCormack.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14. Exhibits Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
(1) Financial Statements
The financial statements of Thermal Energy Storage, Inc. are included in a
separate section of this report beginning on Page F-1.
(b) Reports on Form 8-K
No reports have been filed on Form 8-K during the year ended December 31,
1999.
(c) Exhibits
3a Articles of Incorporation of the Company incorporated by reference to
Exhibit 2.1 to the Company's Registration Statement on Form S-18, dated
September 21, 1979, Registration No. 2-65548, (hereinafter "1979 Form s-18").
3b By Laws of the Company incorporated by reference to Exhibit 2.2 of the
Company's 1979 Form S-18.
3c Form of Common Share Purchase Warrant, issued by the Company to certain
Underwriters for 600,000 Common Shares incorporated by reference to 1979 Form
S-18.
10a Cross License Agreement, dated March 2, 1979 by and between Kay
Laboratories, Inc. and the Company incorporated by reference to Exhibit 11.1
d) of the Company's 1979 Form S-18.
10b Contract to Supply Equipment and Services dated August 28, 1986 by and
between Pacific Gas and Electric and the Company incorporated by reference to
Exhibit 10(b) to the Company's Annual Report on Form 10-K dated December 31,
1987 (hereinafter "1987 10-K").
10c Contract to Supply Equipment and Services, dated April 28, 1987 by and
between Southern California Edison and the Company incorporated by reference
to Exhibit 10(c) to the Company's 1987 10-K.
10d Stock Purchase Agreement effective July 20, 1987 by and Renewable
resource Systems, Inc. and the Company, incorporated by reference to Exhibit
10.6 to the Company's Form 8-K dated September 17, 1987.
10e Consulting Agreement between the Company and Sidney Stoller, Director,
incorporated by reference to Exhibit 10(c) to the Company's 1987 10-K.
10f Settlement Agreement between Company and RRSI and Philip Bray
incorporated by reference to Exhibit 10(f) to the Company's 1989 10-K.
28a U.S. Patent No. 4,696,338, incorporated by reference to Exhibit 28(a)
to the Company's 1987 10-K.
28b U.S. Patent Application Serial No. 07/176,934 incorporated by reference
to Exhibit 28(b) to the Company's 1987 10-K.
THERMAL ENERGY STORAGE, INC.
SIGNATURES
Pursuant to the requirement 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.
THERMAL ENERGY STORAGE, INC.
Registrant
Richard A. McCormack, President
May 19, 2001 //s// Richard A. McCormack
Date Richard A. McCormack
President and Principal Executive Officer
May 19, 2001 //s// Sidney M. Stoller
Date Sidney M. Stoller
Director
May 19, 2001 //s// A. Phillip Bray
Date A. Philip Bray
Director
THERMAL ENERGY STORAGE, INC.
STATEMENTS OF LOSS AND ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999, 1997 AND 1996
(Unaudited)
(Amount in thousands, except per share data)
2000 1999 1998
REVENUES
Contract services $16 $84 $135
COST OF REVENUES
Contract services 31 87 116
Gross profit (loss) 15 (3) (19)
OPERATING EXPENSES
Research and development 6 0 0
Selling, general and administrative 1 35 29
Total operating expenses 7 35 29
Income (Loss) from operations (22) (38) (10)
Other Income 4 3 6
NET LOSS (18) (35) (4)
Accumulated deficit-beginning of period (4,799) (4764) (4760)
Accumulated deficit-end of period ((4,822) (4799) (4764)
LOSS PER COMMON SHARE ($0.000) ($0.001) ($0.000)
See Accompanying Notes to Financial Statements
THERMAL ENERGY STORAGE, INC.
BALANCE SHEET
AT DECEMBER 31, 1999 AND 1998
(Unaudited)
(Amount in thousands)
2000 1999
ASSETS
CURRENT ASSETS
Cash $ 11 $ 23
Accounts receivable 0 0
Inventories 1 1
Prepaid expenses and deposits 2 2
Total current assets 14 26
PROPERTY AND EQUIPMENT, at cost 109 109
Less - Accumulated depreciation (109) (109)
TOTAL ASSETS $ 14 $ 26
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $24 $26
Accrued payroll 101 131
Payable to officers and affiliates 569 568
Total current liabilities 695
SHAREHOLDERS' DEFICIT
Preferred stock, par value $.10 per share;
30,000,000 shares authorized; none issued 0 0
Common stock, par value $.001 per share;
110,000,000 shares authorized;
59,131,289 shares issued and outstanding
at 2000 59 59
Additional paid-in capital 4,052 4,040
Accumulated deficit (4798) (4,799)
Total shareholders' deficit (710) (700)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 14
$ 26
Note: Totals reflect effects of rounding
See Accompanying Notes to Financial Statements
THERMAL ENERGY STORAGE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
(Amounts in thousands)
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from Operations $ (18) $ (35)
Adjustments to reconcile net loss to net cash
Provided (used) by operating activities
Depreciation 0 0
DECREASE (INCREASE) FROM CHANGES
Accounts receivable 0 25
Prepaid expenses and deposits (1) 0
INCREASE (DECREASE) FROM CHANGES
Accounts payable 1 2
Payable to officers and affiliates 00 30
Net cash provided (used) by operating activities (18) (22)
CASH FLOW FROM INVESTING ACTIVITIES 0 0
CASH FLOW FROM FINANCING ACTIVITIES 6 0
NET INCREASE (DECREASE) IN CASH (12) 22
Cash and cash equivalents at beginning of year 23 1
Cash and cash equivalents at end of year $11 $ 23
See Accompanying Notes to Financial Statements
Notes to Financial Statements
Note 1. Organization and Nature of Operations
Thermal Energy Storage, Inc needs to raise additional funding to sustain
operations until the Company becomes self-sustaining through the sale of its
thermal energy storage (TES) systems or funding of its freeze desalination
development. The Company has sought to align itself or merge with a
financially strong company with compatible business interests. Since 1994
the Company has discussed possible mergers, acquisitions, and affiliations
with several suitable companies. Management believes that the company can
pursue a strategic alliance with another firm only after it has been able to
complete its desalination testing successfully and has found a substitute
clathrate former for both the desalination technology and the thermal storage
technology.
Without additional funding, or merger with a financially strong company, the
Company may be unable to market its products and may terminate its business.
For the last four years, the Company has been funded in part by RAMCO, a
company wholly owned by the Company's president, who for three of those years
has served without compensation. RAMCO has notified the Company that it does
not intend to continue such support of the Company's activities beyond 2000.
It is therefore likely that the Company will cease operations if a new
funding source is not found.
In October, 1993 the Company was awarded a $103,000 participatory contract
from the U.S. Department of Interior, Bureau of Reclamation (BuRec), to
perform a feasibility study to determine if the technology was suitable for
the desalination of sea water. Known as "freeze desalination", a clathrate
system has the potential to be a more efficient desalination system than
reverse osmosis systems currently in use. The study, completed in April
1995, theoretically verified the technical feasibility of the clathrate
desalination process and showed that this system has the potential to compete
with other desalination systems now in commercial use.
In October 1995 the Company received a follow-on participatory contract for
$450,000 to build a small clathrate desalination demonstration plant to be
located at the Natural Energy Laboratory of Hawaii. Certain costs associated
with obtaining the follow-on contract and funding for the $178,000
participatory share, were paid by RAMCO since the Company does not have
sufficient in kind funds to meet the funding requirements. This contract was
completed in September 1998. The company has sought, and expects to receive,
follow on funding from BuRec as discussed under "Marketing".
In March 1999, the company received a support agreement from BuRec for
additional research into clathrate formers and for development testing of a
key subsystem of the desalination system. This work is largely completed and
completion of the work and final report is expected in the first half of
2001.
Note 2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern; they do not include adjustments relating to
the recoverability of recorded asset amounts and classification of assets and
liabilities that would be necessary should the Company be unable to continue
as a going concern. The going concern basis might not be appropriate since
the Company has required additional funds in the form of loans from the
President's solely owned consulting company to sustain operations. As of
December 31, 1999 its current liabilities exceeded its current assets and
total liabilities exceeded its total assets.
Inventories
Inventories, which are stated at the lower of cost (first-in, first-out) or
market, are entirely composed of purchased parts as of December 31, 2000.
Property and equipment
Depreciation is provided using the straight line method over the estimated
useful lives of the related property, as follows:
Machinery and equipment 3-7 years
Furniture and fixtures 5-10 years
Accrued payroll and related taxes
Accrued payroll of $131,000 consists of accrued compensation due to the
Company's President as of December 31, 2000.
Revenue and cost recognition for contract services
Revenues from fixed-price contracts are recognized as they are earned,
measured by the costs incurred are recognized on the basis of costs incurred
during the period plus the fee earned. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies,
tools and repairs. Selling, general and administrative costs are charged to
expense as incurred.
Note 3. Loss Per Share
Computation of loss per share was based on the 59,131,289 Common shares
outstanding in 2000. Common share equivalents (stock purchase warrants and
stock options) have not been included in the calculation of net loss per
common share because the effect would be insignificant for 2000 and 1999.
Note 4. Related Party Transactions
The Company's President is the President and sole shareholder of RAMCO, which
is a holder of the Company's equity securities. At various times RAMCO has
advanced the Company both cash and services that have been accrued as loans
by the Company.
In 1998 RAMCO advanced the Company $40,000 with a balance due of $503,554 as
of December 31, 1998. In 1997 RAMCO advanced the Company $38,161 with a
balance due of $463,554 as of December 31, 1997. In 1996 RAMCO charged the
company $30,000 for services and advanced the company $58,942, with a balance
due of $425,393 as of December 31, 1996. In 1995 RAMCO charged the Company,
but was not paid, $90,000 for services and advanced the Company $14,950 with
a balance due of $336,450 as of December 31, 1995. In 1994 RAMCO did not
charge the Company for services and advanced the Company $22,302 with a
balance due of $231,500 as of December 31, 1994. In 1993 RAMCO did not
charge the Company for services and was repaid $9,174 with a balance of
$209,198 as of December 31, 1993. In 1992 RAMCO charged the Company, but was
not paid, $90,000 for services, and advanced the Company $24,632 with a
balance due as of December 31, 1992 of $218,372. In 1991 RAMCO charged the
Company $90,000 for services and was paid $21,737 with a balance due as of
December 31, 1991 of $103,740. In 1990 RAMCO charged the Company $90,000 for
management services and was paid $72,924 with a balance due as of December
31, 1990 and 1989 of $35,477 and $18,401, respectively. In 1990, 1991, 1992
and 1995, the Company's President provided his service to the Company through
the RAMCO affiliate, an arrangement approved by the Company's Board of
Directors in 1990. RAMCO charged the Company $5,237 and $5,765 during 1986
and 1987 respectively, for travel, secretarial and engineering services of
which $5,539 was outstanding at December 31, 1988. It was anticipated that
the balance owed RAMCO of $43,598 would be paid at the rate of $7,500 per
month commencing January 1, 1989 in lieu of equivalent salary which will be
accrued and paid from Company profits in accord with an agreement requested
by the Company's President and approved by the Company's Board of Directors.
No such payments were made in 1989 nor did the President receive any cash for
salary in 1989. RAMCO lent the Company funds at various times throughout
1989. From 1983 to 1985, RAMCO loaned the Company a total of $123,517 on an
interest free basis of which $7,500 was repaid in 1983, $9,022 in 1985,
$5,000 in 1987, and $63,936 in 1988.
In order for the Company to qualify to receive a BuRec contract, in 1995
RAMCO agreed to fund up to $178,000 of the participatory BuRec contract until
another funding source can be obtained. RAMCO is the holder of a patent
application for a clathrate-based desalination system and has agreed to
cross-license the technology, as embodied in the patent application and any
developments through completion of the BuRec contract, to TESI on a world-
wide, royalty-free basis, in perpetuity. Additionally, RAMCO has agreed to
assign all its rights to the desalination technology to the Company upon
reimbursement of expenditures and amounts owed RAMCO by the Company.
Note 5. Revenues
A substantial portion of the Company's revenues were derived from a limited
number of customers. In 2000 and 1999 one customer accounted for 100 percent
of revenues. In 1998 and 1997 two customers accounted for 100 percent of
revenues. In 1996, 1995 and 1993 one customer accounted for 100 percent of
revenues. There were no revenues in 1994.
Note 6. Common Shares and Warrants
On September 17, 1987, the Company entered into a common stock purchase
agreement (the "Agreement") with Renewable Resource Systems, Inc. (RRSI) of
Menlo Park, California. On July 20, 1987 the Company sold 3,000,000 Common
Shares at a price of $.05 per share for $150,000 cash and during September
through December 1987 sold an additional 6,375,000 Common Shares at $.13 1/3
per share for $850,000 cash.
In October 1989 RRSI informed the Company that they were terminating their
business in the U.S. and intended to use their holdings in the Company to
satisfy their contractual agreements with certain key employees. As a result
of a negotiation between RRSI, the Company and Mr. A. Philip Bray (former CEO
of RRSI and subsequent to the year ending December 31, 1991 a Company Board
Member), and in return for a release of obligations and liabilities among the
Company RRSI and two (then current) Company Board Members employed by RRSI,
it was agreed that the Company would issue a warrant to purchase up to
2,280,427 Common Shares at a price of $.13 1/3 per share, exercisable for a
period of 5 years commencing October 15, 1989 and RRSI would return 3,000,000
of its shares to be canceled by the Company. The canceled shares formed the
basis of a non-dilutive Private Placement completed by the Company in
February 1990. Mr. Bray received the remainder of the Common Shares held by
RRSI and the RRSI warrant to purchase up to 2,280,427 Common Shares at $.13
1/3 per share. Mr. Bray also assumed RRSI's 40 percent guarantee obligation
on the $50,000 bank loan. In 1990 Mr. Bray lent the Company $15,000 in
working capital.
In connection with the sale of Common Shares to RRSI and in consideration of
other services rendered, in 1987 the Company issued to a consultant 500,000
Common Shares valued at $.03 per share. The consultant, Sidney M. Stoller,
also become a member of the Board of Directors. On December 14, 1987, the
Company entered into an agreement with Mr. Stoller under which he could
acquire warrants for the purchase of up to 300,000 shares of the Company's
Common Shares at an exercise price of $.1333 per share, and as of December
31, 1988 Mr. Stoller had acquired warrants to purchase 300,000 Common Shares.
The warrants were issued in exchange for consulting services to be provided
through December 1988 and expire two years from completion of such services.
The consulting contract was extended through December 31, 1992. During 1990
Mr. Stoller acquired warrants to purchase an additional 300,000 Common
Shares. The Board of Directors directed that the exercise price be
established at $.03 per share.
Common Shares reserved for issuance on the exercise of warrants and options
as of December 31, 1998 are as follows (excluding subsequently expired
warrants):
Description Shares Reserved
Warrants 4,830,047
Non-qualified stock options 350,000
Incentive stock options (Note 7) 7,400,000
12,580,047
Note 7. Stock Options
Pursuant to a stock plan approved by the Company's stockholders in June 1988,
the Company reserved 7,500,000 Common Shares (100,000 Shares were purchased
in 1988 pursuant to this plan leaving 7,400,000 Shares reserved). The plan
provides for the granting of both incentive stock options and non-qualified
stock options to purchase Common Shares at prices not less than the fair
market value at the date of grant as determined by the Compensation and Stock
Option Committee of the Board of Directors. The period for the exercise of
each option granted is five years from the date of grant of an incentive
stock option and ten years from the date of the grant of a non-qualified
stock option. Options to purchase 1,000,000 and 150,000 Common Shares were
forfeited in 1992 and 1989.
In 1990 the Company granted an option to purchase 100,000 Common Shares at
$.065 per share to an employee who subsequently terminated employment, in
exchange for future services to be rendered relating to technology transfer
In 1994 and 1995, the Company granted an option to purchase shares at $.03
per share, in exchange for assistance relating to financial, administrative,
stockholder and marketing services as follows:
Mr. Lawrence O'Donnell 200,000 shares
Mr. William Jankowski 200,000 shares
Mrs. Virginia Paul 200,000 shares
Mrs. Bernice King 100,000 shares
Mrs. Debbie Smith 100,000 shares
Mr. Richard Andersen 200,000 shares
In 1995 the Board of Directors reestablished the option price to $0.005 for
the 1,000,000 shares outlined.
Note 8. Income Taxes and Net Operating Losses
The Company has unexpired net operating loss carry-forwards of approximately
$1,737,000 as of December 31, 1999, available to reduce future federal
taxable income. The carry-forwards are shown in the following tabulation:
Loss carry-forward amount Year of expiration
$23,000 2001
$403,000 2002
$463,000 2003
$226,000 2004
$105,000 2006
$114,000 2007
$18,000 2009
$69,000 2010
$84,000 2011
$22,000 2012
$4,000 2013
In December 1987, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 96, "Accounting for Income
Taxes". Because the Company has significant net operating loss carry
forwards and no material differences between book income and taxable income,
implementation of SFAS No. 96 is not expected to have a material effect on
the Company's reported financial position and results of operations.
Note 9. Commitments and Contingencies
The Company has no other undisclosed commitments or contingencies.
Note 10. Equipment Warranties and Claims
There are no pending or threatened lawsuits against the Company.
Note 11. Going Concern
As shown in the accompanying financial statements, as of December 31, 2000
the Company's current liabilities exceeded its current assets by $681,000.
Those factors create an uncertainty about the Company's ability to continue
as a going concern. The ability of the Company to continue as a going
concern is dependent on its success in obtaining working capital and
increasing revenues. The Company plans on obtaining working capital through
performance on contracts and potential merger with a company with
complementary products. The financial statements do not include any
adjustment that might be necessary if the Company is unable to continue as a
going concern.
THERMAL ENERGY STORAGE, INC.
6362 Ferris Square, Suite C
San Diego, CA 92121
June 21, 2001
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of 1934, we are
transmitting herewith the attached Form 10-K.
Sincerely,
THERMAL ENERGY STORAGE, INC.
//s// Richard A. McCormack
Richard A. McCormack, President