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
For the fiscal period ended
Commission file Number
December 31, 2001
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's
classes of common stock, as of December 31, 2001: Common Stock,
$.001 Par Value - 59,131,289 shares
THERMAL ENERGY STORAGE, INC.
2001 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 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 seawater 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 47.5F instead of 32F
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 (ODP) of 0.11. This is substantially
lower than a chlorofluorocarbon used by the Company earlier,
(trichloromono-fluoromethane, also known as CFC 11 or R11). The
EPA has banned the production of R11 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 that 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. For this service a higher temperature
clathrate former is desirable because it would either make increased
production efficiency possible where cold 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 otherwise 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 worldwide, 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 (42F
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-sharing 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 tide pool 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 tide pool 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 clathrates 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 seawater.
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 contrac
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
42F to 48F while maintaining high thermal storage capacity.
Mixing certain compounds with water using off-the-shelf mechanical
and chemical components produces clathrates, also known as
gas-hydrates. 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 (118F) heat storage
medium that the Company no longer considers commercially
valuable. The Company's second clathrate patent, number
4,821,794 that 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 worldwide, 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, 2001 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. A legal charge of $25,000 was incurred in defending
against this action during the latest reporting period.
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". The National Quotation Bureau does not currently quote
TESI Common Shares. 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 cash or
other dividends 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 2001. 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 2000 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, 1998 through Decembe
31, 2001 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,
2001 2000 1999 1998
Revenues $0 $16,080 $84,205 $140,714
Net income (loss) (22,953) (18,186)
(34,974) (4,013)
Per common share (0.000) (0.000) (0.001) (0.000)
Total assets 15,805 13,758 25,860 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% 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 that 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, the Directors
and the major stockholder repaid $15,625. In 1994, the
Directors and the major stockholder paid off the bank loan.
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 wastewater.
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, 2001
and December 31, 2000. As of December 31, 2001 the Company
had a cash balance of $12,700 as compared to $10,700 cash at
December 31, 2000.
The Company had a net loss of $23,000 in 2001 as compared with
a net loss of $18,200 in 2000. This loss was due to an excess
of expenses with no contract revenues.
A negative cash flow from operations was approximately $2000 per
month throughout 2001, as compared to a negative cash flow from
operations of approximately $2000 per month in 2000.
Current assets and total assets were $16,000 as of December 31,
2001 compared to current assets and total assets of $14,000 as
of December 31, 2000.
As of December 31, 2001 the Company had a working capital
deficiency of $679,000. As of December 31, 2000 the Company
had a working capital deficiency of $681,000. This deficiency
in working capital was due to operating losses.
As of December 31, 2001 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, 2001 the Company had accounts payable totaling
$24,000. As of December 31, 2000 the Company had accounts
payable totaling $24,000.
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 Company received the total of
$1,000,000 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-the-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 $0 in contract revenues for the year ended
December 31, 2001 and $16,080 in contract revenues in 2000.
As of December 31, 2001 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 $0 in internally funded research and development
expenses compared to $6,085 expenses in 2000 and $0 in 1999
and 1998.
There was no interest income or interest expense for 2001.
There were no selling, general and administrative expenses
in the year ended December 31, 2001 compared to $0 in 2000,
$35,000 in 1999, and $29,000 in 1998.
It is Management's opinion that inflation had no significant
effect on Company operations in 2001 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. Mr. Jankowski prepared
the 1998 10k and 10q reports. 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 that 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 that 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.
A terminating employee exercised options for 100,000 Common Shares
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.
A standing Compensation and Stock Option Committee of the Board
of Directors administer the Plan. 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
_____________________________
_________________________________________
Date
Richard A. McCormack
President and Principal Executive Officer
_____________________________
_________________________________________
Date
Sidney M. Stoller
Director
_____________________________
_________________________________________
Date
A. Philip Bray
Director
THERMAL ENERGY STORAGE, INC.
STATEMENTS OF LOSS AND ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Unaudited)
(Amount in thousands, except per share data)
2001
2000
1999
REVENUES
Contract services
$0
$16
$84
COST OF REVENUES
Contract services
0
31
87
Gross profit (loss)
0
(15)
(3)
OPERATING EXPENSES
Research and development
0
6
0
Selling, general and administrative
26
1
35
Total operating expenses
26
7
35
Income (Loss) from operations
(26)
(22)
(38)
Other Income
3
4
3
NET LOSS
(23)
(18)
(35)
Accumulated deficit-beginning of period
(4,822)
(4,799)
(4,764)
Accumulated deficit-end of period
(4,786)
(4,822)
(4,799)
LOSS PER COMMON SHARE
($0.001)
($0.000)
($0.001)
See Accompanying Notes to Financial Statements
THERMAL ENERGY STORAGE, INC.
BALANCE SHEET
AT DECEMBER 31, 2001, 2000 AND 1999
(Unaudited)
(Amount in thousands)
2001
2000
1999
ASSETS
CURRENT ASSETS
Cash
$ 13
$ 11
$ 23
Accounts receivable
0
0
0
Inventories
1
1
1
Prepaid expenses and deposits
2
2
2
Total current assets
16
14
26
PROPERTY AND EQUIPMENT, at cost
109
109
109
Less - Accumulated depreciation
(109)
(109)
(109)
TOTAL ASSETS
$ 16
$ 14
$ 26
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable
$ 24
$ 24
$ 26
Accrued payroll
101
101
101
Payable to officers and affiliates
569
569
568
Total current liabilities
695
695
725
SHAREHOLDERS' DEFICIT
Preferred stock, par value $.10 per share;
30,000,000 shares authorized; none issued
0
0
0
Common stock, par value $.001 per share;110,000,000 shares
authorized; 59,131,289 shares issued and outstanding at 2001
59
59
59
Additional paid-in capital
4,046
4,052
4,040
Accumulated deficit
(4,786)
(4798)
(4799)
Total shareholders' deficit
(704)
(710)
(700)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
$ 16
$ 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, 2001, 2000 AND 1999
(Unaudited)
(Amounts in thousands)
2001
2000
1999
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from Operations
$ (23)
$ (18)
$ (35)
Adjustments to reconcile net loss to net cash
Provided (used) by operating activities
Depreciation
0
0
0
DECREASE (INCREASE) FROM CHANGES
Accounts receivable
0
0
25
Prepaid expenses and deposits
0
(1)
0
INCREASE (DECREASE) FROM CHANGES
Accounts payable
0
1
2
Payable to officers and affiliates
00
00
30
Net cash provided (used) by operating activities
(23)
(18)
(22)
CASH FLOW FROM INVESTING ACTIVITIES
0
0
0
CASH FLOW FROM FINANCING ACTIVITIES
0
6
0
NET INCREASE (DECREASE) IN CASH
(23)
(12)
22
Cash and cash equivalents at beginning of year
11
23
1
Cash and cash equivalents at end of year
$ 12
$ 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 US Department of Interior, Bureau of
Reclamation (BuRec), to perform a feasibility study to
determine if the technology was suitable for the desalination
of seawater. 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 2000.
In September of 2001, the company entered into an agreement energy
related company to evaluate the applicability of using the
companies clathrate-based desalination system in conjunction
with a cryogenic application. As of the end of the reporting
period the evaluation had not yet been completed.
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 [JCS1]consists of accrued compensation
due to the Company's President as of December 31, 2001.
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 2001. 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 2001 and 2000.
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 that 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 worldwide, 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 was derived from
a limited number of customers. In 2001, there were no revenues.
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 is a lawsuit against the company that is currently being
defended against that is discussed in the sections above.
Note 11. Going Concern
As shown in the accompanying financial statements, as of December
31, 2001 the Company's current liabilities exceeded its current
assets by $679,000. 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
May 20, 2002
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.
______________________________________
Richard A. McCormack, President
[JCS1]Under Executive Compensation it looks like Dick has
accrued $150K
5
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