Back to GetFilings.com
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended - October 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
--------------- ---------------
Commission file number 0-25312
STARTECH ENVIRONMENTAL CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1286576
------------------------------ -----------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
15 Old Danbury Road, Suite 203
Wilton, Connecticut 06897-2525
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(203) 762-2499
--------------------------------------------------
(Registrant's telephone number, including area code)
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 [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of January 22, 2002 9,287,675 shares of no par value common stock were
outstanding. The aggregate market value of shares held by non-affiliates as of
January 22, 2002 was $32,228,232 based on the closing bid price of the common
stock on that date.
Documents incorporated by reference and the Part of the Form 10-K into which the
document is incorporated are as follows: Items 10,11,12, and 13 of Part III of
this report are incorporated by reference to Registrant's definitive proxy
statement for its 2001 Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission on or before February 28, 2002.
PART I
Cautionary Note Regarding Forward Looking Statements
This Annual Report on Form 10K contains forward looking statements that are made
pursuant to the Safe Harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve risks, uncertainties and
assumptions as described from time to time in registration statements, annual
reports, and other periodic reports and filings of the Company filed with the
Securities and Exchange Commission. All statements, other than statements of
historical facts, which address the Company's expectations of sources of capital
or which express the Company's expectation for the future with respect to
financial performance or operating strategies can be identified as
forward-looking statements. As a result, there can be no assurance that the
Company's future results will not be materially different from those described
herein as "believed," "anticipated," "estimated" or "expected," which reflect
the current views of the Company with respect to future events. We caution
readers that these forward-looking statements speak only as of the date hereof.
The Company hereby expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any such statements to reflect any change
in the Company's expectations or any change in events, conditions or
circumstances on which such statement is based.
ITEM 1 - BUSINESS:
- -----------------
The Company's activities during the four fiscal years, November 1, 1992 to
October 31, 1995, when it was known as Kapalua Acquisitions, Inc., consisted
primarily of investigating possible business opportunities. On November 17,
1995, the Company completed the acquisition of all of the issued and outstanding
shares of the common stock of Startech Corporation, a Connecticut corporation,
and then changed its name to Startech Environmental Corp. Startech designs
machinery to recover, recycle, reduce and remediate hazardous and nonhazardous
waste materials.
On November 18, 1995, the Board of Directors of the Company unanimously approved
a change of business purpose of the Company from one seeking an acquisition
candidate to one engaged in the business of manufacturing equipment to recover,
recycle, reduce and remediate hazardous and nonhazardous waste materials. From
that time to the date of this filing, the Company has maintained only this
focus.
Background
Our core Plasma technology addresses these waste and resource issues by offering
remediation solutions that are integrated with a range of equipment solutions
and services. These products add value to our customers' business so they can
now realize revenue streams from tipping fees, as well as from the sale of
resulting commodity products and services. Alternatively, this will allow them
to generate the product they need while at the same time using a zero cost
basis, or revenue generating, source of raw material (waste).
Since 1995 we have been actively discussing the superiority of plasma over other
forms of waste remediation technologies. This ongoing education of the public
and government continues to this day. Like every new technology we have been met
with varying degrees of resistance. In 2000, recognizing the increasing
importance of alternative energy and power sources in general, and hydrogen in
particular, we expanded our product line to include a hydrogen separation
technology we named StarCell(TM). Working in conjunction with our core product,
the Plasma Converter(TM), StarCell provides a green and renewable source of
hydrogen to power forward the hydrogen economy. In 2002 this brings significant
change and, we believe, greater shareholder value. Due to many of the factors
mentioned above, as well as the rising comfort level with plasma based
technologies through our educational and informational efforts we are now being
greeted by a much more receptive marketplace. We have taken steps to transform
our business model from being solely a seller of equipment to a total solutions
provider, including facility ownership or management.
Our business model and its market development strategies arise from our mission,
which is to change the way the worldviews and employs discarded materials; what
many would now call waste. We hope to or expect to achieve this objective by
strategically marketing a series of products and services emanating from the
core Plasma Converter (TM) technology, resulting in saleable fossil fuel
alternatives while providing a safer and healthier environment. This shifting
2
strategy will be implemented through the use of our enhanced business model that
provides for build own operate/build own transfer (BOO/BOT) facilities, joint
development projects, engineering services and direct equipment sales with after
sales support and service.
Sales Strategy
Central to the Company's growth strategy is the implementation of a business
model that allows it to maximize market penetration and reduce the barriers of
entry while optimizing its revenue sources. To achieve that objective, we have
identified four key marketing strategies for the future that will make up the
overall model. They are:
1. Build Own Operate/Transfer Projects: We are pro-actively going to
develop opportunities to own and operate plasma facilities in various
markets. A Project Management Review Committee will seek out and
evaluate potential opportunities and present them for funding or
development to the management team. Such an arrangement is attractive
where long-term agreements with guaranteed waste streams and high
value tipping fees are contracted for long periods of time. BOO/BOT
will enhance our balance sheet, and significantly increase ongoing
revenue stream. The revenue generated by BOO/BOT projects has shown
better results than revenue realized from a straight equipment sale
over the life of the project, in addition to the concomitant increases
to the balance sheet.
2. Co-Venture Projects: The advantages of this type of project are
similar to the BOO/BOT. In a joint development project we will assume
an equity position in return for a reduced purchase price on our
equipment and associated engineering and management services. An
additional advantage is that we receive the certainty of revenue from
a direct sale along with the ability to realize future ongoing revenue
from the operations of the sole source joint development company.
3. Straight Equipment Sales: We will continue to be a direct seller of
our products to customers who prefer to purchase, lease, and operate
our equipment. We will simply sell or lease our Plasma Converter and
associated equipment to a customer with no equity position in the
project. However, we will offer Long Term Service Agreements to create
residual or ongoing revenue in this area.
4. Engineering Services: This area will include testing and application
engineering services for outside companies (not Plasma Converter
customers) as well as material testing, waste analysis, and
environmental processing solutions for Plasma Converter system
customers.
While each of the above sales strategies will receive equal attention by
Startech, each market will be closely managed by marketing to assure that its
development delivers the Company optimal sales/revenue growth and market
coverage.
Key to Startech's development of world markets is its sales network. The Company
sells systems through independent representatives and distributors, which helps
to keep sales costs variable and low. Representatives are paid a commission on
sales. Distributors purchase systems, mark them up, and re-sell them to
customers. As well, distributors are responsible for supplying after sales parts
and service.
Startech senior management may make direct sales to house account customers.
Such customers might include large corporations with activities in many states
or countries, or sovereign governments where the complexity of the bidding
process on projects requires a large degree of Company time and attention. House
account sales are not, however, limited to these types of sales.
We manufacture modular, skid-mounted systems that are easy to transport in
standard tri-modal containers for shipment to any market in the world. As sales
are on an FOB basis, all shipping and related costs are absorbed by the
customer. An exception to this arrangement is where Startech would be shipping
systems for a wholly owned Build Own Operate project.
The Company requires down payments and progress payments to be scheduled (for
direct sales and co-venture projects) so that cash flow in the manufacturing
process will be positive. Startech will obtain project financing against
guaranteed waste streams/ tipping fees for BOO projects to fund manufacturing,
3
shipping, and installation costs before facility startup. As well, the Company
will incorporate performance insurance for BOO projects to guarantee performance
on the specific waste stream to be processed as well as the obtaining of
necessary local permits to begin operation.
Primary Customer
For the fiscal year ended October 31, 2001 all of our revenue was derived from
one primary customer; Eiko Systems Corporation, while for the fiscal year ended
October 31, 2000, 87% of our revenues was derived from three primary customers.
Plasma Converter(TM) development and technology
We believe that the primary factors that create demand for our Plasma Converters
include the need for customers to:
o Reduce the costs for hazardous and toxic waste disposal; Eliminate
personal and organizational liability associated with hazardous and
toxic waste disposal;
o Comply with present and anticipated environmental regulations in a
cost-effective manner;
o Recover products for use or sale; and
o Destroy wastes completely, safely and irreversibly.
We believe our Plasma Converter meets customers' needs because our system:
o Reduces the cost and risk associated with hazardous waste generation
and disposal;
o Performs safer than prevailing environmental standards;
o Converts wastes into products for use or for sale;
o Destroys wastes safely and irreversibly; and
o Comes in small and large system capacities, in stationary and mobile
configurations.
4
Plasma Converter Development And Technology
A device generally referred to as a plasma torch, although there is no fire
involved in the device, produces the Plasma lightening-like arc in the Plasma
Converter vessel to produce a plume of radiant energy. The Plasma Converter
therefore is an electrically driven system that produces this intense field of
radiant energy within the Plasma vessel that causes the dissociation of the
molecular bonds of solid, liquid, and gaseous compounds or materials of both
hazardous and non-hazardous wastes. We refer to this destruction process as
"molecular dissociation."
Dissociation causes the molecules of the waste material to be separated into
their elemental components (atoms), and reformed by the Startech System into
special recoverable, commodity products. The process is not combustion or
burning process, and the system should not be confused with an incinerator or a
vitrification process. It is the intense energy field produced by the plasma
plume within the Plasma Converter vessel that drives the dissociation process.
The Plasma Converter vessel operates at normal atmospheric pressure quietly and
safely. While the interior temperature of the plume is about 30,000 degrees
Fahrenheit, the temperature of the refractory walls inside the vessel is
maintained at about 3,000 degrees Fahrenheit and is the lowest temperature
experienced within the vessel. On the average most waste material will be
dissociated or melted at temperatures exceeding 6,000 degrees Fahrenheit.
The Plasma Converter consists of many well-proven process components currently
used in the metallurgical and chemical industries. Solid wastes being fed to our
system are automatically fed to the system through an air-locked infeed port,
and the feeding is ordinarily on a continuous basis. Liquids, gases and sludges
can also be fed or pumped directly into the vessel through a pipe port. Bulk
solids, liquids, gases and sludge may be fed in and processed simultaneously.
The Plasma Converted Gas (PCG) (TM) synthesis gas recovered from our system,
after dissociation, is drawn out of the top of the vessel and put through our
gas-polishing unit. The molten silicates, inorganics and metals, if any, are
removed at the lower side of the Plasma Converter vessel through a melt
discharge port and recovery procedure.
Recovered products can be used or sold as commodities for use in various
manufacturing processes. It is expected that most of the Plasma Converted Gas
will be used as a fuel gas and to a lesser degree, as a chemical feed stock;
silicate materials recovered will be used in the ceramics, abrasives or the
construction industries; the metallic components can be used or be readily
available for sale with little or no additional processing. There is a newly
developing interest in PCG(TM) to produce hydrogen by use of our patented
StarCell(TM) system. The economic justification for the use of our systems in
hazardous waste applications does not depend on any revenues from the use or
sale of the recovered commodity products, but the emergence of StarCell Hydrogen
may modify that attitude.
Recovered Commodity Products
The Plasma Converter processes the wastes (matter) in such a way that the
elemental components of the feedstock can be recovered in from one to three
distinct phases:
(1) synthesis gas (PCG(TM), Plasma Converted Gas) that exits the top of
the chamber;
(2) inorganic, glass-like (obsidian-like) silicates which form a separate
layer above the liquid metal (if there is a sufficient quantity of
metal in the feed stock, with small quantities of metal encapsulated
in the silicate stone); and
(3) liquid metallic elements, if in sufficient quantities, which collect
and are automatically discharged at the base of the vessel.
5
Depending on the composition of the feedstock, any one phase may be produced,
any two phases may be produced, or all three may be produced. However, the
Company's experience indicates that the most likely commodity-product
recover-phase will be in two parts:
(1) the PCG(TM)GAS-PHASE; and
(2) the SOLID-PHASE in which the inorganic silicate, containing metals,
will be produced.
Energy Produced And Volume Reduced
Carbon is abundantly present in the products and the wastes of the industrial
world. Such materials are inherently rich in latent chemical energy such as one
would find in fuel. When carbonaceous waste feedstocks of many industrial
wastes, infectious hospital waste, municipal solid waste, shipboard waste, and
such are processed, the Startech system will consume 1 unit of electrical energy
while producing about 4 units of energy residing in the PCG(TM). With the
improved efficiencies of electrical generating units, the 4 units of energy
residing in the PCG(TM) can be used to create 2 units of electrical energy.
Materials such as scrap tires, for example, will produce recovered commodity
products in two phases: the PCG(TM) gas phase and the metal phase, if metal
exists. Because materials such as plastics, solvents, and tires are so rich in
energy, they will produce a relatively large amount of PCG(TM) with a
high-energy content that will result in approximately 6-8 units of recovered
PCG(TM) energy for each unit of electrical energy used in the process.
In some applications, the Plasma Converter will produce enough energy for its
own needs, and produce a surplus that can be sold to the local electrical grid,
or used in the customer's facility to reduce the need for purchased power or
purchased fuel. Not all wastes produce PCG(TM). For example, processing
contaminated soil will produce no appreciable amount of PCG(TM).
The volume reduction of these solid wastes, when processed in the Plasma
Converter, is approximately 300 to 1. Waste streams composed primarily of
hazardous or non-hazardous paper, cloth, plastic, food, pharmaceutical,
explosives, paints, solvents, PCBs, confiscated drugs, filters, oils, and so on
will result in so few solids as to produce volume reductions approaching
infinity. Materials such as this are also very rich in elements such as carbon,
oxygen, and hydrogen and the processing results almost entirely in the PCG(TM)
commodity synthesis gas. In addition to the volume reduction, none of the
remaining materials, if any, are hazardous in nature.
Waste feedstocks that have a relatively high metal content will produce a
separate liquid metal phase that can be recovered directly from the system for
resale or reuse in the metallurgical industry.
The recent entry of StarCell into the market is moving the interest of PCG(TM)
use for plant heating and cooling to a new interest in PCG(TM) use for the
production StarCell Hydrogen for fuel cells and for direct hydrogen powered
engines.
Our system can also achieve volume reductions on low-level radioactive surrogate
waste of approximately 300 to 1. Other present methods of volume reduction
include compaction and incineration that produce overall volume reductions of
about 8 to 1. Our system will not reduce the radioactivity of the low-level
radioactive waste nor do we believe that can be done by any other system, but
the volume of that waste may be significantly reduced. Industries that may
benefit from this process are utilities, research laboratories and hospitals
that store the reduced low-level radioactive waste material on-site until it can
be shipped off site to a special repository. The cost for that method can be
many thousands of dollars per ton. The continued availability of the few
repository sites that exist, are problematic and uncertain. We believe our
system can increase a site's storage capacity.
6
What is Plasma?
Plasma is simply a gas (air) that the Plasma Converter ionizes so it becomes an
effective electrical conductor and produces a lightning-like arc of electricity
that is the source of the intense energy transferred to the waste material as
radiant energy. The arc in the plasma plume within the vessel can be as high as
30,000 degrees Fahrenheit ... three times hotter than the surface of the Sun.
When waste materials are subjected to the intensity of the energy transfer
within the vessel, the excitation of the wastes' molecular bonds is so great
that the waste materials' molecules break apart into their elemental components
(atoms). It is the absorption of this energy by the waste material that forces
the waste destruction and elemental dissociation.
How The System Works
The basic Plasma Converter system consists of the following:
In-feed System
Plasma Vessel
Gas Polisher
Computer Control Station
Power Supply
Figure 1. Process Overview of PCS
-----------------------
[OBJECT OMITTED]
Feed System
The feed mechanism can simultaneously accommodate any proportion or combination
of solid, liquid and gaseous feedstocks. Solid wastes, depending upon their
composition, can be pumped, screw fed, or ram fed into the plasma vessel. A
shredder ahead of the feed system may be appropriate to achieve size reduction
or object separation prior to direct system feed.
Liquid wastes, including sludges, can be pumped directly into the PCS through
the wall of the plasma vessel through a special infeed nozzle. The liquid feed
system is designed to also accommodate any entrained solids that may be present.
Similarly, gaseous feedstocks may also be introduced into the plasma vessel
through a specially designed nozzle.
Plasma Vessel
The plasma vessel is a cylindrical two-part container made of stainless steel
with an opening in the roof through which the plasma torch is inserted. The
vessel is lined with insulation and refractory to allow both maximum retention
of internal energy and to protect the stainless steel container from the intense
heat inside the vessel. The plasma vessel is equipped with inspection ports
(including a video camera so the operator can see real time images inside the
vessel to assist in PCS operation), openings for introduction of feedstocks, and
7
an exit port for removal of excess molten material. The smaller vessels are
designed to remove molten material periodically through an automated tipping
mechanism during which time the vessel may or may not remain in continuous
operation. A design enhancement incorporated into the most recently constructed
system is a continuous melt extraction feature which maintains the level of
molten material in the plasma vessel at or below a preset limit without
interrupting the operation of the system. This melt extraction system can be
deployed with all sizes of Plasma Converters.
The plasma vessel is specially designed to ensure that no feedstock material is
able to reach the exit port without first passing through the plasma energy
field and undergoing complete molecular dissociation. The method by which this
is accomplished forms a part of Startech's intellectual property. In addition,
the plasma vessel is maintained at a slight negative pressure to ensure that no
gases can escape to atmosphere.
The plasma torch system is a commercially available product that Startech can
purchase from any number of reputable vendors. Comparable plasma systems have
been used extensively in the metallurgical industry for decades. The most
maintenance-intensive aspect of the PCS is the need to periodically replace
electrodes, which occurs approximately every 300 to 500 hours of operation.
Electrode replacement can be accomplished in approximately 30 minutes thus
ensuring minimum downtime of the PCS.
The PCS is also equipped with a torch positioner system that allows the operator
to aim the torch at different points within the plasma vessel. This aspect of
the PCS allows the operator to quickly and efficiently treat feedstocks as they
enter the vessel and move around inside the vessel to avoid any build-up of
solidified melt that may occur on the vessel walls.
Gas Treatment System
The gas treatment system is comprised of six stages:
o High temperature cyclone separator to remove particulates
o Quench stage (with heat recovery, if desired)
o Cartridge dust collector to remove particulates
o Selective catalytic reduction to remove NOx
o Packed column scrubber to remove acids and volatized metals
o Final polishing
High Temperature Cyclone Separator
The initial step of the gas treating process is a pre-quench in which the PCG is
cooled from approximately 1000(degree)C down to 650(degree)C by direct water
injection with a conventional spray dryer arrangement. The PCG then flows
through a refractory lined pipe into a conventional, insulated cyclone
fabricated with high temperature alloy and designed to operate at high
temperatures. The purpose of the cyclone is to remove particulate matter, which
is then collected and batch-fed back into the plasma vessel.
Quench
PCG then flows to a spray dryer designed to rapidly reduce the gas temperature
from approximately 650(degree)C down to 120(degree)C. The importance of this
temperature reduction is to ensure that dioxins and furans, troublesome
by-products of incineration, do not form. In order for dioxins and furans to
form, the gas would need to remain in a specific temperature zone (e.g.,
190(degree)C to 330(degree)C) for some period of time - conditions which are
precluded by the quench.
8
Cartridge Dust Collector
PCG then flows to a commercial pulsejet cartridge dust collector with
high-temperature cartridges and heating elements to prevent condensation. This
unit is capable of automatically "blowing back" collected solids that are
collected and batch-fed back into the plasma vessel.
Selective Catalytic Reduction (SCR)
Upon exiting the dust collector, the PCG is reheated to approximately
310(degree)C for selective catalytic reduction of NOx in a standard unit
designed for this application where hydrogen present in the PCG reacts with NOx
to form atmospheric nitrogen and water. During periods where there is no
hydrogen in the PCG (e.g. during start-up, with processing materials that do not
contain carbon), urea is added to reduce the NOx.
Packed Column Scrubber
Upon exiting the SCR, PCG undergoes a final quench with direct water injection
to reduce the temperature below 50(degree)C. This prepares the PCG for acid gas
removal, which is accomplished in a standard horizontal packed column scrubber.
Other inorganic species dissolve into the scrubbing liquid as common ions
including chloride, fluoride, sulphate, phosphate, sodium and calcium. To manage
the build-up of salts, the scrubbing solution is removed and replenished with
fresh water. The wastewater typically requires no further treatment prior to
discharge to sewer, except in the event there is a high concentration of heavy
metals entering the system as feedstock. Approximately 75% of metals go into the
melt with the remainder being volatilized and entrained in the PCG where they
are captured in the scrubber and carbon filter. The wastewater also contains
particulates below one micron.
Final Polishing
Final polishing of the PCG is then accomplished by passing the gas through a
mesh mist eliminator, a standard HEPA filter and granular activated carbon
filter.
Finally, a standard variable speed fan at the exit of the gas treatment train
pulls PCG through the entire system and maintains a constant, slight negative
pressure within the plasma vessel.
The system has been designed so that it is comfortable, intuitive, and easy to
use. The skill level of the operator need not be any higher than one having a
reasonable technical aptitude.
As of February 2001 we completed work on our next generation Plasma Converter
that is being used for our demonstration and training unit in our Bristol,
Connecticut facility. The facility has been operational and has been a very
active marketing tool in showcasing our technology to potential customers,
investors, and governmental agencies. We have been proactive in utilizing this
facility for training such as Eiko Systems Corp. and also running some surrogate
testing for specific customers. We expect testing activity to increase in 2002
as more and more companies and governmental agencies look to validate our
technology for their specific applications.
9
StarCell(TM) development and technology
On March 7, 2001, we announced the unveiling of our StarCell(TM) system.
StarCell is the Company's patented hydrogen selective membrane device that
separates hydrogen from Plasma Converted Gas (PCG(TM)). PCG(TM) is a
synthesis-fuel gas mixture produced from processing material through the Plasma
Converter. The increasing importance of the need for alternative energy sources
and the emergence of the "Hydrogen Economy" drove our development of StarCell.
There are essentially two principal uses of energy:
o first, stationary energy for electrical power generation and heating;
o second, mobile energy such as that used for transportation propulsion
systems...the energy you can put in a fuel tank and take with you.
Any discussion on energy-related issues, such as air pollution, dependable
energy supplies, and global climate change, further illuminates the need for
alternative fuels. Hydrogen offers very large benefits by eliminating polluting
emissions and greenhouse gases, and, with the Plasma Converter-StarCell
technology, hydrogen can become a more readily and cheaply available alternate
primary energy fuel. Hydrogen, like electricity, is a premium-quality energy
carrier. It can be used with high efficiency, and with zero tailpipe and zero
stack emissions.
Besides producing the Plasma Converter, we are also developing equipment that
can recover hydrogen from a variety of feedstocks including coal and the wastes
of the world. This capability will help make it possible to have a large-scale
dependable energy system with essentially no pollutants and with no
climate-changing gases.
Hydrogen is clearly recognized as a very real alternative to our
always-depleting reservoir of fossil fuel. But more than that, hydrogen is the
pristine fuel. When used as a fuel, it produces only water vapor (fresh water)
as the by-product. Although energy production is not our main objective, the
ability to separate this highly sought after gas from an already valuable
synthesis gas will be another step forward in our mission to achieve broad
market acceptance of our primary product, the Plasma Converter.
StarCell is not a fuel cell; it is a ceramic membrane filtration system that
extracts hydrogen from PCG(TM). Because hydrogen is such a small molecule,
smaller than all the others in the PCG(TM) gas mixture, it can be pushed through
the filtering membrane to allow the hydrogen to be separated from the PCG(TM).
PCG(TM) is produced from wastes; it is a gas mixture containing a large quantity
of hydrogen. Hydrogen is a valuable commodity with many commercial uses. It also
is a pristine fuel that produces no carbon by-products. Pound-for-pound,
hydrogen contains more energy punch than all the other fuels; and, when used in
fuel cells or engines produces only clean water vapor.
StarCell Hydrogen can feed fuel cells and hydrogen engines. StarCell Hydrogen is
a fuel that can produce clean electricity and clean propulsion systems. The
combination of the Plasma Converter with StarCell can produce hydrogen on a
large scale from the wastes of the world, and at a very low cost. Our customers
who use a Plasma Converter with a StarCell will get paid for processing the
incoming waste at the front end, and will be paid for the hydrogen at the back
end. People sometimes forget that waste, even hazardous waste, is an
ever-present, and much overlooked, valuable and renewable resource.
Hydrogen is a very valuable commercial gas that is produced by various
thermo-chemical industrial methods. Hydrogen gas is used in many industrial
processes to make products that we use every day. These products include cooking
oils, peanut butter, soap, insulation, metals, drugs, vitamins, adhesives,
cosmetics, ammonia, fuels, plastics and so on. Hydrogen is also used extensively
to propel spacecraft because it is very light and has a very high energy
content. Hydrogen is used as a fuel to produce pollution-free electricity in
fuel cells.
The paradox is, that while hydrogen is the most abundant material in the
universe, it is not readily accessible. Expensive and sophisticated
chemical-industry processes must extract it. Nearly all of the hydrogen produced
today is made from fossil fuels. These fuels consist primarily of molecules made
up of carbon and hydrogen. To produce hydrogen from these fossil fuel molecules,
they must be "reformed" with steam and/or oxygen in a complex thermo-chemical
process consisting of many steps. The products of reformation are hydrogen gas
and carbon-gas species. The traditional industrial process further purifies and
10
separates the hydrogen from the rest of the stream by various methods. This
expensive reformation process is exactly what our Plasma Converter does in the
process of destroying most feedstock. In other words, we get the reformation
process from the Plasma Converter for no additional costs.
Competition
We believe the following technologies may be the potential competition to
plasma-based technology:
We believe we are the industry leader in the use of plasma technology to rid the
world of its waste problem and/or create valuable alternative power sources and
industrial products. There are other plasma-based technologies in various stages
of development that claim to achieve some, but not all, of the benefits achieved
by our system. However, the fact that the commercial use of plasma for waste
destruction resulting in power and product creation is in its early stages makes
competitive comparisons difficult. We welcome the presence of other plasma
technologies. The market for plasma is huge and the existence of competing
technologies provides credibility to the industry. We are the only plasma
company whose shares are traded on a recognized stock exchange.
We believe we are positioned to take advantage of the recognition of plasma
technology as an alternative to conventional forms of waste disposal. We have
spent substantial money, time and effort educating the public and private
sectors on the benefits of our technology and believe we will reap the rewards
of that effort.
We believe the following are a few of our competitive advantages:
o Low total system cost that allows our customers to make money with our
system
o Operating performance far safer than prevailing environmental
standards
o The ability to process solids, liquids, and gases simultaneously
o Versatile feed systems and vessel openings that allow a wide variety
of feed streams
o Advanced stage of power producing peripheral equipment
o Unmatched advanced design and operating performance of our complete
system
o Management's experience with plasma and its commercial application
o Depth and breath of manufacturing knowledge and experience
o Greater access to capital markets as a public company over private
companies and
o Fully trained distributors and representatives
o Multiple modes of operations
We believe the following are our competitive disadvantages;
o Our cash position relative to other multi-national companies who may
enter this field as it grows
o Resistance to new technologies when dealing with the public health and
safety
11
We believe many potentially competitive technologies are limited to a narrow
number of waste feed-streams. In some of those technologies, if the system does
not receive exactly what it expects, even something as benign as water or
metals, the process may be ineffective and possibly dangerous. In the waste
industry, it is difficult to specify the exact composition of a waste stream in
a real world application. By their very nature, waste streams are sometimes made
up of unknown and unpredictable materials. For any processing system to be
commercially successful it must be able to safely and effectively process
unpredictable waste streams without system upsets. Our Plasma Converter can
handle great deviations in the waste stream content. We believe many of the
potentially competitive technologies have yet to demonstrate capabilities beyond
small laboratory or bench scale devices that use precisely controlled waste
streams under precisely controlled conditions. They may also produce undesirable
and hazardous by-products.
We believe the following companies are our most serious competitors in the
plasma industry:
Integrated Environmental Technologies (IET); and
MSE Technology Applications, Inc.
IET offers a very different system from our technology. IET uses a carbon rod
plasma arc system whereas we use a plasma torch based system. MSE, like
Startech, is a plasma torch based system.
There are difficulties present in comparing technologies in our industry that
are not present in established industries. The commercial nature of any
plasma-based system is based upon the performance data received and the
versatility of the material feedstock that can be processed. Further, in
addition to the performance data and versatility of feedstock, the commercial
uses for the system can be greatly enhanced by the number of peripheral devices
that can be added to the system to make use of the saleable gas, silicate and
metals that the system produces to create a total solution. Because this
industry is just beginning to develop, there is very little empirical evidence
in the public domain regarding the performance data of each competing
technology. Therefore, performance comparisons are not available. However, some
of our competitive advantages are not data related, but are the direct result of
the versatility in the feedstock variations we can accommodate and in the
advanced level of our system design. Additionally, we know of no competitor who
is offering the variety of uses for the gas and silicates that Startech can
offer.
Besides those companies mentioned specifically, there are a number of other
companies that advertise a capability using plasma technology. We have no way of
knowing the status of these companies or if they are even ongoing concerns.
Since many of them are small, private companies it is very difficult to know
what, if any, capabilities are ready for the commercial market. We are not aware
of any competitive company that has a commercial site up and operating other
than those we have named above.
In addition, we believe that other waste disposal methods may be considered as
competition. These methods are summarized as follows:
- - landfill dumping: the least expensive in the short term and one of the most
environmentally dangerous of all waste disposal methods.
- - incineration: even though the permitting of new incinerator installations is
being dramatically reduced, and the method has fallen into great disfavor both
in the U.S. and internationally, this rather primitive method of disposal is
still presently accepted by many although the emissions produced are regarded as
pollutants, and large quantities of toxic bottom ash and fly ash are produced
which are eventually deposited into landfills in the community.
Intellectual property
We have developed and acquired extensive proprietary technology. Our
technologies are comprised of a variety of overall coordinated system and
subsystem concepts, detailed mechanical engineering calculations, detailed
engineering design features, data compilations and analyses, complex chemical
engineering calculations, business methods and market information. Since our
formation, a substantial amount of intellectual property has been developed.
12
Although we have submitted four invention disclosures related to the overall
system design of our Plasma Converter and StarCell technologies for the
submission to the U.S. Patent and Trademark Office, an extensive amount of
proprietary intellectual property that has been developed will be protected as
trade secrets. We may, in the future, file foreign applications for these
patents. We plan to continue our development and protection of our intellectual
property. We have not authorized or licensed the use of our proprietary
information to any third parties and have no plans to do so. We retain the
exclusive worldwide rights for development and commercialization of our
technologies.
We have licensed three patents. The inventions and related know how could
enhance the commercial capability of our core plasma system for certain
applications. The first is a Hydrogen-Selective Ceramic Membrane that was
developed by Media and Process Technology, Inc., and its predecessor, ALCOA
Corporation. This technology provides for the high temperature dehydrogenation
of our Plasma Converted Gas. The second and third are Catalytic Conversion of
Water and Carbon Dioxide to Low Cost Energy, Hydrogen, Carbon Monoxide, Oxygen
and Hydrocarbons developed by Dr. Rollin C. Swanson. This novel process produces
low cost energy by reacting carbon dioxide and water over a catalyst complex.
This technology could also enhance the commercial nature of our Plasma Converted
Gas. These systems can enhance the Plasma Converter(TM) capability for
environmentally attractive energy and electrical power generation.
Our success depends, in part, on our ability to maintain trade secrecy for our
proprietary information that is not patented, obtain patents for new inventions
and operate without infringing on the proprietary rights of third parties. There
can be no assurance that the patents of others will not have an adverse effect
on our ability to conduct business or that we will develop additional
proprietary technology which is patent able or that any patents issued to us
will provide competitive advantages or will not be challenged by third parties.
Since our inception we have never been notified by any third-party that we
infringe on any protected information. We also protect our trade secrets and
proprietary know-how and technology by non-disclosure agreements and non-compete
agreements with our collaborators, employees and consultants. However, there can
be no assurance that these agreements will not be breached, that we would have
adequate remedies for any breach, and that our trade secrets and proprietary
know-how will not otherwise become known or be independently discovered by
others.
Government regulation
Our customers are required to comply with a number of federal, state and local
laws and regulations in the areas of safety, health and environmental controls,
including without limitation, the Resource Conservation and Recovery Act, as
amended and the Occupational Safety and Health Act of 1970, which may require
us, our prospective working partners or its customers to obtain permits or
approvals to utilize the Plasma Converter and related equipment on job sites. In
addition, because we are marketing the Plasma Converter internationally and
expect those sales to represent a significant portion of our revenues, our
customers will be required to comply with laws and regulations and, when
applicable, obtain permits or approvals in those other countries. There is no
assurance that these required permits and approvals would be obtained.
Furthermore, particularly in the environmental remediation market, we may be
required to conduct performance and operating studies to assure government
agencies that the Plasma Converter and its by-products do not prove to be
environmental risks. There is no assurance that these studies, if successful,
will not be more costly or time-consuming than anticipated. Further, if new
environmental legislation or regulations are enacted or existing legislation or
regulations are amended or are interpreted or enforced differently, our
prospective working partners and/or its customers may be required to meet
stricter standards of operation and/or obtain additional operating permits or
approvals. There can be no assurance that our system's performance will satisfy
all of the applicable regulatory requirements.
13
Environmental matters
Our customers operations are subject to numerous federal, states and local
regulations relating to the storage, handling and transportation of regulated
materials. Although our role is generally limited to the sale or leasing of its
specialized technical equipment for use by our customers, there is always the
risk that equipment failures could result in significant claims against us. Any
claims against us could materially adversely affect our business, financial
condition and results of operations as well as the price of our common stock.
Manufacturing operations
Third party vendors who build specific component parts to our specifications are
presently manufacturing our products and systems. Some of the manufacturing
components are constructed at our 30,000 square foot manufacturing facility
located in Bristol, CT. We also assemble, ship and test our systems there.
Research and development
While the principal research and development to produce commercial Plasma
Converters has been completed, we will continue to perform research and
development activities with respect to product improvement and new product
development, utilizing internal technical staff as well as independent
consultants. These activities have to date been entirely paid for and sponsored
by the company. No further research and development is required for Plasma
Converters currently being marketed and sold. We will continue to develop and
design operational improvements that will be primarily in the area of the use of
the Plasma Converted Gas produced by the Plasma Converter. Expenditures for
research and development will be geared to achieving lower costs designs and
higher efficiencies consistent with our business model of offering complete
systems solutions. In the twelve months ending October 31, 2001 we expensed
$151,167 for research and development. As we expand our research and development
focus in fiscal year 2002 our efforts are expected to be devoted to the
development of paten table proprietary inventions in the field of high
temperature thermo-chemistry and the production of low cost hydrogen. In
addition we will continue conducting ongoing tests, demonstrations and
enhancements of the Plasma Converter for potential customers and governmental
agencies.
Employees
As of October 31, 2001, we had sixteen full-time employees, including seven with
engineering degrees. From time to time, we hire contract engineers for
particular projects and for a limited time. We believe that we have been
successful in attracting experienced and capable personnel. All officers and
directors have entered into agreements requiring them not to disclose any
proprietary information, assigning all rights to inventions made during their
employment, and prohibiting them from competing with us. Our employees are not
represented by any labor union, and we believe that our relations with our
employees are satisfactory. We expect to hire several marketing and
technical/engineering marketing personnel in 2002 to assist in proposal
preparation, request for quotes, and technical support for in-house management
as well as our network of representatives and distributors.
14
ITEM 2 - PROPERTIES:
- -------------------
Our corporate headquarters is located at 15 Old Danbury Road, Suite 203, Wilton,
Connecticut 06897-2525 where we lease 5,800 square feet of office space from CD
Station, LLC as landlord. The lease provides for monthly payments of $14,017,
increasing annually from December 2002 to December 2004, when the lease expires.
There is an option for us to extend the lease for a five (5) year term with the
Landlord having the right to cancel the lease after two (2) years of the
extended term if the buildings main tenant, The Common Fund, requires the
additional space for their corporate offices.
Our Product Showroom is located at 190 Century Drive, Bristol, Connecticut,
06010, where we lease 5,400 square feet of office space from Tunxis Management
as landlord. The lease provides for monthly payments of $2,363 increasing
annually to September 2005, when the lease expires.
Our Manufacturing facility is located at 545 Broad Street, Bristol, Connecticut,
06010, where we lease 30,000 square feet of manufacturing space from Gaski
Leasing as landlord. The lease provides for monthly payments of $1,875
increasing to $3,750 on February 1, 2002 and then increasing to $5,625 per month
on August 1, 2002. The Lease will expire on July 1, 2004.
The following table listed below is the annual rent expense for the corporate
headquarters at Wilton, Connecticut, and the Product showroom in Bristol,
Connecticut, and the Manufacturing facility in Bristol, Connecticut:
Year Annual Rent
2002 $254,180
2003 281,946
2004 270,046
2005 45,408
ITEM 3 - LEGAL PROCEEDINGS:
- --------------------------
As of the date of this report there are no outstanding legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth (4th)
quarter of the year covered by this report.
15
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
- --------------------------------------------------------------------------------
MATTERS:
- -------
(a) Market Information
------------------
From November 1995 through November 1, 2000 our common stock was traded on the
OTC Bulletin Board under the symbol STHK. On November 2, 2000 our common stock
began trading on the Nasdaq Small Cap Market under the symbol STHK. The table
below shows the high and low bid of our Common Stock during the last quarters
indicated.
Bid
---
Quarter Ended High Low
January 31, 2002 (through January 22, 2002) $ 3.67 $ 1.95
October 31, 2001 $ 4.83 $ 2.05
July 31, 2001 $ 5.15 $ 3.95
April 30, 2001 $ 7.44 $ 3.82
January 31, 2001 $ 9.88 $ 5.38
October 31, 2000 $ 10.82 $ 7.52
July 31, 2000 $ 14.00 $ 7.00
April 30, 2000 $ 18.75 $ 8.88
January 31, 2000 $ 8.12 $ 5.12
(b) Stockholders
------------
As of January 22, 2002, there were 664 holders of the Company's Common Stock.
This number does not include those beneficial owners whose securities are held
in street name.
(c) Dividends
---------
The Company has never paid a cash dividend on its Common Stock and has no
present intention to declare or pay cash dividends on the Common Stock in the
foreseeable future. The Company intends to retain any earnings, which it may
realize in the future to finance its operations. During the fiscal year 2001 the
Company paid $257,504 in preferred dividends payable in additional shares of
Series A Convertible Preferred Stock. On October 31, 2001 the Company had an
accrued preferred dividend of $3,170 on its Series A Convertible Preferred
Stock.
16
ITEM 6 - SELECTED FINANCIAL DATA:
- --------------------------------
The selected financial data set forth below for the five years ended October 31,
2001 is derived from the Company's audited financial statements. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7
and "Financial Statements And Supplementary Data" included in Item 8 which are
incorporated herein by reference. The acquisition of Startech Corporation by the
Registrant occurred on November 17, 1995. The financial information reflects the
operations of both companies combined for all the periods presented.
Year Ended October 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net sales $2,400,000 $1,069,441 $2,268,964 $1,088,782 $10,000
Loss from operations 2,437,759 2,731,336 1,346,399 473,733 897,855
Other income (expense) 167,067 319,093 68,071 14,664 20,497
Net loss $2,298,480 $2,430,576 $1,289,192 $ 463,051 $ 877,908
========== ========== ========== ========== ==========
Earnings per share of weighted
average shares of common
stock outstanding (0.30) (0.63) (0.19) (0.07) (0.12)
Weighted-average number of
shares of common stock
outstanding 8,359,111 7,430,838 6,875,999 6,887,736 6,695,316
Total assets $4,663,005 $7,077,881 $6,374,818 $1,824,448 $1,201,870
Total liabilities 740,957 1,196,596 359,458 1,163,774 188,063
Long-term obligations 43,299 13,225 7,718 0 0
Cash dividends per share
for common stock 0 0 0 0 0
17
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS:
- ---------------------
Results of Operations
Comparison of Years Ended 2001 and 2000
Revenues. Our total revenues were $ 2,400,000 for the year ended October 31,
2001, as compared to $ 1,069,441 for the same period in 2000, an increase of $
1,330,559 or 124.4%. The increase is due to the shipment of a 10,000
pound-per-day Plasma Converter to Eiko Systems Corporation located in Japan.
This Eiko contract represented all of the revenues for the year ended October
31, 2001.
Gross profit. Our gross profit was $937,404 for the fiscal year ended October
31, 2001 an increase of $670,590 or 251.3% from the same period in 2000. Our
gross margins on revenue were 39.1% for the year ended October 31, 2001 versus
25.0% for the year ended October 31, 2000. The margins improved as a result of
increased efficiencies in identifying subcontractors and procuring materials.
General and administrative expenses. Our general and administrative expenses for
the year ended October 31, 2001 were $2,370,882 an increase of $302,646, or
14.6%, from the same period in 2000. This increase resulted from higher
depreciation expenses, office rental expenses, bad debt expense, insurance
expenses, and higher salary costs related to hiring additional personnel.
Research and development expenses. Our research and development expenses for the
year ended October 31, 2001 were $151,167 up 102.8%, from the same period in
2000. The increase is related to costs associated with our engineering and
design advances of the Plasma Converter sub-systems. Further, additional costs
were for the research, development and design of Starcell (TM). Starcell(TM) is
our latest product development that will improve the marketability and
versatility of our Plasma Converter system, as well as Starcell's ability to
operate as a stand-alone system for the production of hydrogen.
Selling expenses. Our selling expenses for the year ended October 31, 2001 were
$853,114 a decrease of $2,266 or less than 1%, for the similar period in 2000.
The costs related to selling expenses comprised mainly of demonstrations at our
Bristol showroom facility, as well as travel and consulting arrangements
associated with marketing activities.
Interest income. Our interest income for the year ended October 31, 2001 was
$182,193, as compared to $324,221 in the similar period 2000 a decrease of
43.8%. The decrease is due to lower cash balances and lower interest rates
earned on our investments resulting from the Federal Reserve lowering short-term
interest rates.
Income taxes. Income taxes for the year ended October 31, 2001 were $27,788 as
compared with $18,333 in the similar period 2000. We have minimal tax
obligations due to the fact that we have not had meaningful profitability to
this point. We have loss carry forwards of $7.8 million to offset against future
profits.
18
Comparison of Years Ended 2000 and 1999
Revenues. Our total revenues were $ 1,069,441 for the year ended October 31,
2000, as compared to $ 2,268,964 for the same period in 1999, a decrease of $
1,199,523 or 52.9%. Our decrease in revenue was due to the fact that in the 1999
period we were working on the Army sub-contract, whereas for the year ended
October 31, 2000, we were receiving no additional revenue from the Army
sub-contract as we had completed the Assembled Chemical Weapons Assessment Army
(ACWA) Project. In addition to the above, revenues were lower than expected due
to delays in progress payment for the three systems we had contracted to build
during that period for Taiwan, South Africa and Japan. While initial deposits of
varying amounts have been received for these systems, and preliminary design
work was completed, their manufacture has been delayed at the request of the
purchasers for reasons unrelated to our ability to manufacture and ship as
contracted.
Gross profit. Our gross profit was $266,814 for the fiscal year ended October
31, 2000 an increase of $136,109 or 104.0% from the same period in 1999. Our
gross margins on revenue were 24.9% for the year ended October 31, 2000. The
improved gross profit margins for the year ended October 31, 2000 were
attributable to revenues earned from the final payment fee from the US Army for
the Assembled Chemical Weapons Assessment Army (ACWA) Project, improved profit
margins associated with our strategic agreement with UXB International, and
lower associated costs related to our distributors. For the year ended October
31, 1999 lower gross profit margins resulted mainly from the higher than
expected initial costs relating to the Assembled Chemical Weapons Assessment
Army (ACWA) project.
General and administrative expenses. Our general and administrative expenses for
the year ended October 31, 2000 were $2,068,236 an increase of $591,133, or
40.1%, from the same period in 1999. The significant acceleration in expenses is
due to substantial increases in the following areas: hiring additional
professional and administrative personnel to support our operations,
international and domestic travel, printing expenses related to required SEC
filings, office rental expenses, professional services fees and insurance
expenses.
Research and development expenses. Our research and development expenses for the
year ended October 31, 2000 were $74,534 up 100.0%, from the same period in 1999
during which no research and development expenses were reported. The increase is
due to costs related to improved design and engineering of our Plasma Converter,
and the development of StarCell.
Selling expenses. Our selling expenses for the year ended October 31, 2000 were
$855,380, an increase of $788,522, or 1,179%, from the similar period 1999. The
increase is due to salaries for existing personnel, higher marketing and
demonstration cost.
Interest income. Our interest income for the year ended October 31, 2000 was
$324,221, as compared to $101,520 in the similar period 1999 and increase of
219.0%. The increase is due to higher cash balances as a result of the completed
preferred private placement dated October 20, 1999, and warrants that were
exercised during the year 2000.
Income taxes. Income taxes for the year ended October 31, 2000 were $18,333 as
compared with $10,864 in the similar period 1999. We have minimal tax
obligations due to the fact that we have not had meaningful profitability to
this point. We have loss carry forwards of $5.6 million to offset against future
profits.
19
Comparison of Years Ended 1999 and 1998
Revenues. Our total revenues for the year ended October 31, 1999 were $2.3
million, an increase of $1.2 million, or 108%, from the year ended October 31,
1998. Our increase in revenue was due to the award of the ACWA Army sub
contract, which we demonstrated at the Aberdeen Proving Grounds. This Army sub
contract represented 98% of revenues for both years ended October 31, 1999 and
1998.
Gross profit. Our gross profit was $131,000 for the year ended October 31, 1999
a decrease of $511,000, or 80% from the year ended October 31, 1998. Our gross
margins on revenue was 5% for the year ended October 31, 1999 compared to gross
margins on revenue of 59% for the year ended October 31, 1998. The 1999 decrease
in gross profit margin resulted mainly from the completion of the demonstrations
for the Army ACWA program at Aberdeen Proving Grounds.
General and administrative expenses. Our general and administrative expenses for
the year ended October 31, 1999 were $1.2 million, an increase of $491,000, or
74%, from the year ended October 31, 1998. The increase is due to a higher level
of salaries as a result of the hiring additional personnel to support our
growth, professional fees, insurance, and stockholder relations.
Selling expenses. Our selling expenses for the year ended October 31, 1999 were
$321,000, an decrease of $130,000, or 29%, from $451,000 for the year ended
October 31, 1998. The decrease is due to lower customer demonstration activity
at Aberdeen Proving Grounds.
Interest expense. Our interest expense for the year ended October 31, 1999 was
$33,000, an increase of $24,000, or 266%, from $9,000 for the year ended October
31, 1998. The increase is due to interest expenses relating to a note payable to
Connecticut Development Authority.
Interest income. Our interest income for the year ended October 31, 1999 was
$101,000, an increase of $78,000, or 339%, from $23,000 for the year ended
October 31, 1998. The increase is due to higher cash balances as a result of a
private placement completed on October 20, 1999.
Income taxes. Income taxes for the year ended October 31, 1999 were $11,000 as
compared with $4,000 in the similar period 1998.
Liquidity and Capital Resources
The Company had working capital of $2,096,033 as of October 31, 2001 and had
cash and cash equivalents of $2,207,328 as of October 31, 2001.
Working capital was provided primarily revenues earned Eiko Systems Corporation
and exercising of warrants. We have and will continue to be dependent upon the
revenues from the sale of equipment and public or private sale of securities. It
is anticipated that our capital requirements for future periods will increase
and future needs are anticipated from the above sources, demonstration and
testing programs, joint development programs, build own and operate facilities,
and from cash generated from the operations of our business.
In the period November 1, 2000 thru October 31, 2001 we received proceeds of
$210,000 from 30,000 warrants that were exercised at $7.00 per share.
We believe that cash generated from our current operations, and our current cash
balances, will be sufficient to satisfy our projected working capital and
planned capital expenditures for at least 9 months. In addition we are currently
undertaking a private placement of our securities and we anticipate raising up
to $5 million dollars from this offering. Assuming the total offering is
completed and additional revenue generating activities are realized this will
satisfy our projected working capital needs for at least 36 months.
20
Our investing activities have consisted primarily of short-term high quality
liquid investments, with maturities of three months or less when purchased,
which are considered cash equivalents. The primary investments are high quality
commercial paper, U.S. Treasury notes and U.S. Treasury bills.
For the year ended October 31, 2001 we declared four quarterly dividends on our
Series A Convertible Preferred stock in the aggregate amount of $257,504, which
was paid by the issuance of 22,441 shares of Series A Convertible Preferred
stock.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
- ----------------------------------------------------
Financial Statements and Supplementary data and the Independent Auditors Report
thereon are listed and included Part IV, Item 14 of this Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE:
- --------------------
None
21
PART III
Directors and Executive Officers of the Registrant
Note: The information pursuant to Items 10, 11, 12 and 13 is omitted from this
report (in accordance with Instruction G for Form 10-K) since the Company is
filing with the Commission (by no later than February 28, 2002), a definitive
proxy statement pursuant to Regulation 14A, which involves the election of
Directors at the annual shareholders' meeting of the Company, expected to be
held on or about March 5, 2002.
22
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Financial Statements
October 31, 2001, 2000 and 1999
23
STARTECH ENVIRONMENTAL CORPORATION
Table of Contents
For The Years Ended October 31, 2001, 2000 and 1999
Independent Auditors' Report..................................................25
Consolidated Balance Sheets...................................................26
Consolidated Statements of Operations.........................................27
Consolidated Statements of Changes in Stockholders' Equity....................28
Consolidated Statements of Cash Flows.........................................29
Notes to the Consolidated Financial Statements................................30
24
Pond View Corporate Center
76 Batterson Park Road
Farmington, CT 06032
[GRAPHIC OMITTED]
[GRAPHIC OMITTED] Farmington - New London Main Line: (860)678-6000
Toll Free: (800)286-KRCO
Business Advisors and Certified Public Accountants Fax: (860)678-6110
Web: www.kostin.com
To the Board of Directors
Startech Environmental Corporation
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Startech
Environmental Corporation as of October 31, 2001 and 2000, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended October 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Startech
Environmental Corporation as of October 31, 2001 and 2000, and the results of
its operations, changes in stockholders' equity and its cash flows for each of
the three years in the period ended October 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
Farmington, Connecticut
December 6, 2001
25
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Balance Sheets
October 31, 2001 and 2000
2001 2000
Assets
Current assets:
Cash $ 2,207,328 $ 5,221,154
Accounts receivable 300,000 338,000
Inventory 279,502 273,706
Prepaid expenses 5,000 --
Other current assets 1,861 13,876
------------ ------------
Total current assets 2,793,691 5,846,736
Equipment, at cost, net of accumulated depreciation 1,791,863 1,157,950
Other Assets 77,451 73,195
------------ ------------
Total Assets $ 4,663,005 $ 7,077,881
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 115,489 $ 449,216
Capital lease - short-term 38,920 23,907
Other accrued expenses 543,249 710,248
------------ ------------
Total current liabilities 697,658 1,183,371
Long-term liability:
Capital lease payable, net of current portion 43,299 13,225
------------ ------------
Total liabilities 740,957 1,196,596
------------ ------------
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized; 47,511, and 502,220 issued
and outstanding at October 31, 2001 and 2000 respectively (aggregate liquidation
preference of $ 475,110 and $5,022,220 at October 31, 2001 and 2000, respectively) 475,110 4,641,483
Common stock; no par value; 800,000,000 shares authorized, shares issued 12,265,072 7,532,267
and outstanding: 9,282,880 at October 31, 2001 and 8,085,660 at
October 31, 2000
Additional paid-in-capital 1,742,745 1,742,745
Deficit (10,560,879) (8,035,210)
------------ ------------
Total stockholders' equity 3,922,048 5,881,285
------------ ------------
$ 4,663,005 $ 7,077,881
The accompanying notes are an integral part of the financial statements.
26
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Statements of Operations
For The Years Ended October 31, 2001, 2000 and 1999
Year Ended October 31,
----------------------
2001 2000 1999
Revenue $ 2,400,000 $ 1,069,441 $ 2,268,964
Cost of goods sold 1,462,596 802,627 2,138,259
----------- ----------- -----------
Gross profit 937,404 266,814 130,705
Selling, general and administrative
Expenses 3,375,163 2,998,150 1,477,104
----------- ----------- -----------
Loss from operations (2,437,759) (2,731,336) (1,346,399)
----------- ----------- -----------
Other income (expense):
Interest income 182,193 324,221 101,521
Interest expense (15,126) (5,128) (33,450)
----------- ----------- -----------
Total other income 167,067 319,093 68,071
----------- ----------- -----------
Income tax expense 27,788 18,333 10,864
----------- ----------- -----------
Net loss ($2,298,480) ($2,430,576) ($1,289,192)
=========== =========== ===========
Net loss ($2,298,480) ($2,430,576) ($1,289,192)
Less: preferred dividends 257,504 2,251,276 16,016
----------- ----------- -----------
Loss attributable to common stockholders ($2,555,984) ($4,681,852) ($1,273,176)
=========== =========== ===========
Net loss per share ($ 0.30) ($ 0.63) ($ 0.19)
=========== =========== ===========
Weighted average common shares outstanding 8,359,111 7,430,838 6,875,999
=========== =========== ===========
The accompanying notes are an integral part of the financial statements
27
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
For The Years Ended October 31, 2001, 2000 and 1999
Common Preferred
Shares Amount Shares
Balance, October 31, 1998 6,845,965 $ 2,708,524 --
Shares issued during the year
for services rendered 45,792 226,445 --
Shares issued for cash 13,500 49,250 696,978
Net loss during the year
ended October 31, 1999 -- -- --
Dividends -- -- --
------------ ------------ ------------
Balance, October 31, 1999 6,905,257 2,984,219 696,978
Preferred shares converted to common shares 430,765 2,234,032 (243,890)
Shares issued during the year
for services rendered 14,918 136,338 --
Shares issued for cash 561,496 2,154,165 --
Shares issued for 401(k) plan 2,106 23,513 --
Shares issued in lawsuit settlement 171,118 -- --
Net loss during the year
ended October 31, 2000 -- -- --
Accretion of dividend on preferred shares -- -- --
Dividends -- -- 49,132
------------ ------------ ------------
Balance, October 31, 2000 8,085,660 $ 7,532,267 502,220
Preferred shares converted to common shares 1,178,720 4,423,877 (477,150)
Shares issued during the year
for services rendered 8,050 29,987 --
Shares issued for cash 30,000 210,000 --
Shares issued for 401(k) plan 15,450 68,941 --
Shares retired (35,000) -- --
Net loss during the year
ended October 31, 2001 -- -- --
Dividends -- -- 22,441
------------ ------------ ------------
Balance, October 31, 2001 9,282,880 $ 12,265,072 47,511
============ ============ ============
The accompanying notes are an integral part of the financial statements
28
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
For The Years Ended October 31, 2001, 2000 and 1999
(Continued)
Additional
Paid-In
Amount Capital Deficit
Balance, October 31, 1998 $ -- $ 300 $ (2,048,150)
Shares issued during the year
for services rendered -- -- --
Shares issued for cash 6,384,199 -- --
Net loss during the year
ended October 31, 1999 -- -- (1,289,192)
Dividends -- -- (16,016)
------------ ------------ ------------
Balance, October 31, 1999 6,384,199 300 (3,353,358)
Preferred shares converted to common shares (2,234,032) -- --
Shares issued during the year
for services rendered -- -- --
Shares issued for cash -- -- --
Shares issued for 401(k) plan -- -- --
Shares issued in lawsuit settlement -- -- --
Net loss during the year
ended October 31, 2000 -- -- (2,430,576)
Accretion of dividend on preferred shares -- 1,742,445 (1,742,445)
Dividends 491,316 -- (508,831)
------------ ------------ ------------
Balance, October 31, 2000 $ 4,641,483 1,742,745 $ (8,035,210)
Preferred shares converted to common shares (4,423,877) -- --
Shares issued during the year
for services rendered -- -- --
Shares issued for cash -- -- --
Shares issued for 401(k) plan -- -- --
Shares retired -- -- --
Net loss during the year
ended October 31, 2001 -- -- (2,298,480)
Dividends 257,504 -- (227,189)
------------ ------------ ------------
Balance, October 31, 2001 $ 475,110 1,742,445 $(10,560,879)
============ ============ ============
The accompanying notes are an integral part of the financial statements.
28(Con't)
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Statements of Cash Flows
For The Years Ended October 31, 2001, 2000 and 1999
Year Ended October 31,
----------------------
2001 2000 1999
Cash flows from operating activities:
Net loss $(2,298,480) $(2,430,576) $(1,289,192)
Adjustments to reconcile net loss to net
cash used in operating activities:
Expenses paid for through the
issuance of common stock 29,987 136,338 226,445
401(k) match through issuance
of common shares 68,941 23,513 --
Depreciation 141,640 51,849 16,847
Preferred stock accrual 30,315 -- --
(Increase) decrease in:
Accounts receivable 38,000 174,066 380,407
Prepaid expense (5,000) -- --
Inventory (5,796) (273,706) 552,454
Other current assets 12,015 (4,973) (7,537)
Other assets (4,256) 148,991 ( 120,072)
Increase (decrease) in:
Accounts payable (333,727) 203,642 ( 446,556)
Accrued expenses (166,999) 594,670 ( 289,551)
----------- ----------- -----------
Net cash used in operating activities (2,493,360) (1,376,186) ( 976,755)
----------- ----------- -----------
Cash flows used in investing activities:
Purchase of equipment (685,345) (1,033,298) ( 15,655)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from preferred stock issuance -- -- 6,284,199
Proceeds from common stock issuance 210,000 2,154,165 49,250
Proceeds from notes payable -- -- 750,000
Repayment of notes payable -- -- ( 750,000)
Repayment of capital lease payable (45,121) ( 19,761) ( 1,227)
Dividends on preferred shares -- ( 46) --
----------- ----------- -----------
Net cash provided by financing activities 164,879 2,134,358 6,332,222
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (3,013,826) ( 275,126) 5,339,812
Cash and cash equivalents, beginning 5,221,154 5,496,280 156,468
----------- ----------- -----------
Cash and cash equivalents, ending $ 2,207,328 $ 5,221,154 $ 5,496,280
=========== =========== ===========
The accompanying notes are an integral part of the financial statements
29
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2001, 2000 and 1999
Note 1 - Summary of Significant Accounting Policies:
- ---------------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements of Startech Environmental Corporation
include the accounts of Startech Corporation, its wholly owned subsidiary. All
intercompany transactions have been eliminated in consolidation.
Company's Activities
- --------------------
The Company is an environmental technology corporation dedicated to the
development, production and marketing of low cost waste minimization, resource
recovery, and pollution prevention systems that convert waste into valuable
commodities. The Company is no longer considered to be in the development stage
as revenues from shipments and services performed have begun to be recognized in
calendar year 1999.
Basis of Presentation
- ---------------------
On November 17, 1995, Startech Environmental Corporation, formerly Kapalua
Acquisitions, Inc., was acquired in a reverse acquisition, in which all the then
issued and outstanding shares of common stock of Startech Corporation were
exchanged for 4,000,000 shares of Kapalua Acquisitions, Inc.'s common stock.
After the acquisition and exchange of stock, the former shareholders of Startech
Corporation owned 80.5% of the common stock of Kapalua Acquisitions, Inc.
Subsequent to November 17, 1995, Kapalua Acquisitions, Inc. filed registration
statements with the Securities and Exchange Commission to register certain
securities.
On January 2, 1996, Kapalua Acquisitions, Inc. changed its name to Startech
Environmental Corporation. The financial statements of Startech Environmental
Corporation include all of the accounts of Startech Corporation. This
acquisition has been accounted for under the purchases method in the
accompanying financial statements.
Revenue Recognition
- -------------------
The Company recognizes revenue on the sale of its manufactured products at the
date of delivery. Revenues earned from consulting and design services are
recognized when the services are complete.
Management Estimates
- --------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at October 31, 2001, 2000 and 1999, and revenues and expenses during
the years then ended. The actual outcome of the estimates could differ from the
estimates made in the preparation of the financial statements.
30
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2001, 2000 and 1999
Note 1 - Summary of Significant Accounting Policies: (Continued)
- ---------------------------------------------------
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments, with a maturity of three
months or less when purchased, to be cash equivalents. The primary investments
will be high quality commercial paper, U.S. Treasury Notes, and T-Bills.
Regarding supplementary cash flows information, income taxes paid were $27,788
for the year ended October 31, 2001, $26,620 for the year ended October 31, 2000
and $2,577 for the year ended October 31, 1999. Interest paid in 2001 was
$15,126, 2000 was $5,128, and $33,450 in 1999. The Company also had the
following non-cash transactions:
2001
----
Shares Amount
Common shares issued for services rendered in 2001 8,050 $ 29,987
Common shares issued for 401(k) match 15,450 68,941
Series A convertible preferred shares converted to common shares 477,150 4,423,877
Equipment acquired through capital lease -- 90,208
Accrued dividends on the preferred stock -- 3,170
Shares returned and cancelled in 2001 (35,000) --
2000
----
Shares Amount
Common shares issued for services rendered in 2000 14,918 $ 136,338
Common shares issued for 401(k) match 2,106 23,513
Series A convertible preferred shares converted to common shares 243,890 2,234,032
Accretion of dividends associated with the issuance of the convertible
preferred shares -- 1,742,445
Equipment acquired through capital lease -- 41,118
Accrued dividends on the preferred stock -- 33,485
1999
----
Shares Amount
Common shares issued for services rendered in 1999 45,792 $ 226,445
Preferred stock issued to repay notes payable 10,000 100,000
Demonstration equipment transferred from inventory to equipment -- 100,000
Equipment acquired through capital lease -- 17,002
Accrued dividends on the preferred stock -- 16,016
31
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2001, 2000 and 1999
Note 1 - Summary of Significant Accounting Policies: (Continued)
- ---------------------------------------------------
Inventory
- ---------
Inventory consists of raw materials and work in process, and is stated at lower
of cost or market. Cost is determined by the first-in, first-out method.
Equipment
- ---------
Depreciation of equipment is provided using the straight-line method over the
estimated useful lives of the assets. Expenditures for major renewals and
betterments, which extend the useful lives of the equipment, are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred.
Other Assets
- ------------
Other assets consist of security deposits on office leases and utility deposits
in 2001 and 2000. Other assets consist of deposits on the purchase of office
furniture, inventory and the deposit on the office lease in 1999.
Income Taxes
- ------------
Income taxes consist of State taxes on capital. The Company has net operating
loss carry-forwards of approximately $7.8 million expiring in various years
through 2015. The deferred tax asset arising from the carry-forwards has been
fully reserved against, since the likelihood of realization cannot be
determined.
Earnings (Loss) Per Share
- -------------------------
Earnings (loss) per share are based on the weighted average number of shares of
common stock outstanding during the year. The Company has 2,091,009 potential
common shares, 2,799,249 potential common shares, and 2,325,190 potential common
shares in 2001, 2000, and 1999, respectively, that were not used in the
computation of diluted earnings per share because they would have been
anti-dilutive for each of the three years ended October 31, 2001, 2000 and 1999.
The Company has issued 4,795 additional common shares through January 8, 2002 as
a result of preferred shares that were converted.
Off Balance Sheet Risk
- ----------------------
The Company had more than $100,000 in a single bank during the year. The Federal
Deposit Insurance Corporation does not insure amounts over $100,000. However,
management does monitor the financial condition of the institution where these
funds are invested.
Note 2 - Inventory:
- ------------------
Inventory consists of the following at October 31, 2001 and October 31, 2000:
2001 2000
---- ----
Raw materials $145,000 $148,616
Work in process 134,502 125,090
-------- --------
Total inventory $279,502 $273,706
======== ========
32
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2001, 2000 and 1999
Note 3 - Property, Plant and Equipment:
- --------------------------------------
Equipment is summarized by major classifications as follows:
2001 2000
Computer equipment $ 96,181 $ 79,358
Demonstration equipment 1,595,119 114,720
Furniture and fixtures 162,717 149,867
Vehicles 14,002 14,002
Leasehold improvements 95,088 78,361
---------- ----------
1,963,107 436,308
Less: accumulated depreciation 211,732 70,092
---------- ----------
1,751,375 336,216
Cost of demonstration equipment being manufactured 40,488 719,734
---------- ----------
Total property, plant and equipment $1,791,863 $1,157,950
========== ==========
Note 4 - Operating Lease:
- ------------------------
The Company leases its offices in Wilton and its showroom and manufacturing
facilities in Bristol, Connecticut, under lease agreements that expire in
December 2004 and October 2005. Rental expense for the years ended October 31,
2001, 2000 and 1999, were $216,756, $163,042, and $28,847, respectively. There
is an option for the Company to extend the Wilton, Connecticut lease for a
five-year term with the Landlord having the option to cancel after two years.
Annual non-cancelable rent payments for the next five years are as follows:
October 31,
-----------
2002 $ 254,180
2003 281,946
2004 270,046
2005 45,408
33
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2001, 2000 and 1999
Note 5 - Stockholders' Equity:
- -----------------------------
Preferred Stock
- ---------------
During 1999 the Company issued 696,978 shares of its 8% Series A cumulative,
convertible, redeemable, preferred stock. The Company incurred commissions and
issuance costs of $585,581 in connection with issuance. The shares are
convertible into the Company's common stock, four months after the closing date,
at a rate determined by dividing the purchase price per share ($10) by eighty
percent of the market price per share of common stock from the average closing
price for the previous five trading days. However, in no event shall the
conversion price be less than $4 per share, or more than $6 per share. On
September 15, 2002, the convertible preferred stock may be redeemed at the
option of the Company for $10 per share, plus all accumulated and unpaid
dividends. If not redeemed, the shares will automatically be converted to common
shares at $5 per share, or the current market price of the common shares. The
dividends shall be paid in additional convertible preferred stock, and are
payable on the last business day of March, June, September, and December. During
the year ended October 31, 2001, 477,150 preferred shares were converted to
common shares compared to 243,890 preferred shares converted during the year
ended October 31, 2000.
Warrants
- --------
In conjunction with the issuance of the preferred stock in 2000, the Company
issued warrants to purchase 396,464 shares of common stock at a price of $15.00
per share. These Warrants may expire on August 31, 2001, provided the average
closing bid prices of the common stock for the previous thirty trading days is
$16.50 or higher. In the event the common stock is lower than $16.50 per share,
the exercise period of the Warrants will be extended until the common stock
exceeds $16.50 per share for ten consecutive trading days. At that point, the
Company can give the Warrant holders thirty days' notice that the Warrants will
expire. Should the Company choose not to cause the expiration of the Warrants
sooner, they will expire on August 31, 2004.
In June 2000 the Company issued to the Connecticut Development Authority (CDA)
Warrants to purchase 433,268 shares of our common stock at $7.00 per share. The
CDA Warrants are exercisable at any time through December 31, 2001. The CDA
Warrants provide for a limit on the shares of common stock that can be sold upon
exercise of the CDA Warrants during any five day period equal to 7.0% of the
average weekly reported trading volume of the common stock during the four
calendar weeks preceding the date of sale. In addition if on or before July 1,
2002 the holder publicly sells any shares of our common stock at a price per
share less than $7.00, we shall pay the holder an amount equal to his realized
loss in cash or, at our discretion, in shares of our common stock valued at the
current market price at the time of payment or in any combination of cash and
shares. If we have paid the holder on account of a realized loss and later, but
not later than July 1, 2002, the holder publicly sells additional shares at a
price per share greater than $7.00, the holder shall promptly repay to us an
amount equal to the lesser of (1) the amount by which the aggregate proceeds
from such sale exceeds $7.00 and (2) the total realized loss previously paid by
us to the holder. The repayment to us may be made in cash or in shares of common
stock valued at the current market price at the time of repayment or in any
combination of cash and shares. For the year ended October 31, 2001, 30,000 CDA
Warrants have been exercised for a net proceeds of $210,000.
34
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2001, 2000 and 1999
Note 6 - Non-qualifying Stock Option Plan:
- -----------------------------------------
1995 Stock Option Plan
- ----------------------
In November 1995, the Company registered 2,000,000 common shares, issuable upon
exercise of stock options issued by the Company under its 1995 Non-qualifying
Stock Option Plan (the Plan) for employees, directors and other persons
associated with the Company whose services have benefited the Company. The
options must be issued within 10 years from November 20,1995. Determination of
the option price per share and exercise date is at the sole discretion of the
Compensation Committee. During the years ended October 31, 2001 and 2000, the
Company issued 297,500 and 895,000 stock options, respectively. The options have
an exercise price of $5.63 and $6.12 per share, respectively. On the issuance
dates, the market value was the same as the exercise price, therefore, no
compensation expense was recorded. As of October 31, 2001, 28,089 options have
not been granted.
Options outstanding - 1995 Plan
Options outstanding, October 31, 1997 --
Options granted in 1998 34,544
Options exercised in 1998 (34,544)
----------
Options outstanding, October 31, 1998 --
Options granted in 1999 20,000
----------
Options outstanding, October 31, 1999 20,000
Options granted in 2000 895,000
Options exercised in 2000 (10,000)
Options expired in 2000 (5000)
----------
Options outstanding, October 31, 2000 900,000
Options granted in 2001 297,500
----------
Options outstanding, October 31, 2001 1,197,500
==========
2000 Stock Option Plan
- ----------------------
Our 2000 Stock Option Plan was adopted by our board of directors in January 2000
and was approved by our stockholders in February 2000. The plan authorizes the
issuance of up to 1,000,000 shares of our common stock. No options have been
granted from this plan as of October 31, 2001.
The plan provides for the grant of incentive stock options intended to qualify
under Section 422 of the Internal Revenue Code and non-statutory stock options.
Our officers, directors, employees and consultants, and employees and
consultants of our majority-owned affiliated companies, are eligible to receive
awards under the plan.
The options may be granted at an exercise price greater than or equal to the
fair market value of our common stock on the date of grant or not less than 110%
of the fair market value in the case of incentive stock options granted to
persons holding more than 10% of the voting power of the Company. Fair market
value for purposes of the plan is the closing market price of our common stock
on the relevant date.
35
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2001, 2000 and 1999
Note 6 - Non-qualifying Stock Option Plan: (Continued)
- -----------------------------------------
Our compensation committee administers the plan. The committee has the authority
to adopt, amend and repeal the administrative rules, guidelines and practices
relating to the plan and to interpret its provisions. The committee selects the
recipients of awards and determines the number of shares of common stock covered
by the options and the dates upon which the options become exercisable and
terminate, subject to provisions of the plan. Incentive stock options must
terminate within ten years of the grant. Non-statutory options must terminate
within fifteen years of the date of grant. The committee has the right to alter
the terms of any option when granted or while outstanding pursuant to the terms
of the plan, except the option price.
All options automatically become excisable in full in the event of a change in
control, as defined in the 2000 plan, death or disability of the option holder
or as decided by the compensation committee. Upon retirement, options held at
least one year become exercisable in full. If an option holder's employment with
us is terminated for any reason, except death, disability or retirement, the
option holder has three months in which to exercise an option, but only to the
extent exercisable immediately after termination, unless the option by its terms
expires earlier. Termination or other changes in employment status may affect
the exercise period.
Note 7 - Major Customers:
- ------------------------
All revenues were derived from one major customer in 2001, while approximately
87 percent of revenues were derived from three major customers in 2000 and 98
percent of revenues from one customer in 1999.
Note 8 - Capital Lease Payable:
- ------------------------------
The Company has entered into capital lease obligations for computer and
telephone equipment. The terms of the leases range from 24 to 39 months, with
principal and interest due in monthly installments ranging from $101 to $1,715
at rates ranging from zero to 32.3%. The equipment was capitalized at $148,328
and is being depreciated over five to fifteen years. Depreciation expense for
2001 was $15,770 and accumulated depreciation at October 31, 2001, is $25,237.
Total remaining lease payments:
2002 $ 49,361
2003 41,302
2004 6,395
-----------
97,058
Less: unamortized interest 14,839
-----------
82,219
Less: current portion 38,920
-----------
$ 43,299
36
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2001, 2000 and 1999
Note 9 - Fair Value of Financial Instruments:
- --------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate that
value:
Cash and other current assets are carried in the accompanying balance sheets at
cost, which is a reasonable estimate of their fair value. Accounts payable,
capital lease payable and accrued expenses are also carried at cost, which is a
reasonable estimate of their fair value.
Carrying Estimated
Amount Fair Value
ASSETS:
Cash $2,207,328 $2,207,328
Accounts receivable 300,000 300,000
LIABILITIES:
Accounts payable 115,489 115,489
Capital lease payable 38,920 38,920
Accrued expenses 543,249 543,249
Note 10 - Commitments:
- ---------------------
The Company has an agreement with certain individuals for the use of certain
patents. The agreement provides for monthly payments of $1,000, plus five
percent of sales related to these patents, and has no expiration date. We have
an additional agreement with a legal firm to provide legal and consulting
services. The agreement provides for monthly payments of $2,500 per month and
will expire in December 2001.
The Company has entered into employment agreements with three of its executives.
Two of the agreements are for a term of four years, and one is for three years.
The agreements provide for salaries ranging from $140,000 to $195,000 and will
allow for annual increases based upon performance reviews. Two of the agreements
require the Company to grant each executive no less than 10,000 common stock
options each year. In the event of a change in control of the Company the
agreements provide the executives with severance benefits that include: a lump
sum payment of 150% of the amount the executive would have earned if he had
received his salary payments through the expiration date of this agreement; an
additional lump sum payment of $250,000; an immediate vesting of all options
awarded to the executive as part of this agreement; an immediate right to sell
the shares obtained through the exercise of those options without restriction as
to dates, times or amounts, immediate vesting and transfer of ownership of all
life insurance policies, and life and health benefits, including supplemental,
vision and dental benefits if applicable, in an equal or better plan than the
one currently provided to the executive and his family by the Company for a
period of three years from the date of termination or constructive termination.
In the event any payment or benefit received, or to be received, by the
executive in connection with the termination of his employment, whether pursuant
to his agreement or otherwise, is determined to be an excess parachute payment
as defined in the Internal Revenue Code, and thus subject to the 20 percent
Federal Excise tax, the amount of the benefits payable under his Agreement will
be reduced until they are no longer subject to such tax.
37
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2001, 2000 and 1999
Note 11 - Employee Benefit Plan:
- -------------------------------
On June 1, 2000 The Company implemented an employee savings plan designed to
qualify under Section 401(k) of the Internal Revenue Code. This plan is for all
full-time employees who have completed 30 days of service. Company contributions
are made in the form of common stock at the prevailing current market price and
will vest equally over a three-year period. The Company will match the first 6
percent of the employee contribution on a dollar for dollar basis up to the
maximum contribution allowed under Internal Revenue Code. Contributions for the
year ended October 31, 2001 were $68,941 and $23,513 for the year ended October
31, 2000, which was paid through the issuance of 15,450 and 2,106 shares of our
common stock respectively.
Note 12 - Research and Development Costs:
- ----------------------------------------
Research and development costs are charged to operations when incurred. The
amounts charged were $151,167 in 2001 and $74,534 in 2000. No expenses were
incurred in 1999.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
- -------------------------------------------------------------------------
(a) (1) Financial Statements
--------------------
The financial statements are listed below and included under Item
8, are filed as part of this report.
Report of Independent Auditors
Consolidated balance sheet at October 31, 2001 and October 31,
2000
Consolidated statement of operations for each of the three years
in the period ended October 31, 2001
Consolidated statement of changes in stockholder's equity for
each of the three years in the period ended October 31, 2001
Consolidated statement of cash flows for each of the three years
ended October 31, 2001
Notes to the consolidated financial statements
(2) Financial Statement Schedules
All schedules have been omitted since the required information is
not present or not present in amounts sufficient to require
submission of the schedule, or because the information required
is included in the consolidated financial statements and notes
thereto.
Item 14. Exhibits and Financial Statement Schedules
14(b) Exhibits
2. Plan of Reorganization
----------------------
(2)(a) Agreement and Plan of Reorganization between Company and
Kapalua Acquisitions, Inc. dated November 17, 1995 (incorporated
by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K, filed on November 29, 1995, Commission File No.
0-25312)
3. Articles of Incorporation of the Company
----------------------------------------
(3)(a) Articles of Incorporation of Startech (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form 10, filed on February 19, 1995, Commission File No.
0-25312)
(3)(a)i Articles of Amendment to the Articles of Incorporation*
(3)(b) By-Laws of Startech (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form 10, filed on
February 19, 1995, Commission File No. 025312)
(3)(c) Amendment to by-Laws of Startech dated January 24, 2000*
39
4. Instruments defining the rights of security holders, including
--------------------------------------------------------------
indentures
----------
(4)(a) Form of Common Stock Certificate **
(4)(b) Form of Convertible Preferred Stock Certificate *
(4)(c) Form of Warrant Agreement*
(4)(d) Stock Subscription Warrant dated December 29, 1998 between
the Company and the Connecticut Development Authority ("CDA")**
(4)(e) Amendment to Stock Subscription Warrant dated March 31,
1999 between the Company and CDA**
(4)(f) Second Amendment to Stock Subscription Warrant dated June
15, 2000 between the Company and CDA**
10. Material Contracts
------------------
(10)(a) 2000 Stock Option Plan*
(10)(b) 1995 Stock Option Plan (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-8,
filed in November, 1995, Commission File No. 33-99790)
(10)(c) Loan Agreement Dated December 29, 1998 between the
Company and CDA**
(10)(d) Term Sheet for Preferred Stock dated August 17, 1999,
between the Company and Paradigm Group, LLC**
(10)(e) Strategic Alliance Agreement dated July 22, 1996 between
the Company and Bauer Howden, Inc.**
(10)(f) Strategic Alliance Agreement dated October 25, 1996
between the Company and Calumet Coach Company**
(10)(g) Strategic Alliance Agreement dated November 10, 1997
between the Company and Chase Environmental Group, Inc.**
(10)(h) Strategic Alliance Agreement dated April 17, 1998 between
the Company and the Ensign - Bickford Company**
(10)(i) Strategic Alliance Agreement dated September 30, 1999
between the Company and UXB International Inc.**
(10)(j) Strategic Alliance Partner Agreement dated March 14, 2000
between the Company and Skidmore, Owings & Merrill LLP**
(10)(k) Lease Agreement dated September 16, 1999 between the
Company and the CD Station, LLC.**
(10)(l) Form of Distributor Agreement**
40
(10)(m) Patent License Agreement dated November 9, 1998 between
the Company and Rollan C. Swanson M.D. and Eleonora Swanson.**
(10)(n) License of Technology Agreement dated November 29, 1999
between the Company and Media and Process Technology Inc.**
(10)(o) Employment Agreement dated November 1, 2000 between the
Company and Joseph F. Longo ****
(10)(p) Employment Agreement dated November 1, 2000 between the
Company and Joseph F. Klimek ****
(10)(q) Employment Agreement dated November 1, 2000 between the
Company and Kevin M. Black ****
(10)(r) Employment Agreement dated November 1, 2000 between the
Company and Robert L. DeRochie ****
(10)(s) Lease Agreement dated September 30, 2000 between the
Company and the Century Drive, LLC.*****
(10)(t) Lease Agreement dated July 16, 2001 between the Company
and the Gaski Leasing Company.*****
16. Letter re change in certifying accountant
-----------------------------------------
(16)(a) Letter, Re: Changes in Certifying Accountant
(Incorporated by reference to the Company's Current Report on
Form 8-K dated January 28,1997 File No. 0-25312)
21. Subsidiaries of the registrant
------------------------------
Startech Corporation, a Colorado corporation doing business under
the name of Startech Corporation ****
23. Consent of experts and counsel
------------------------------
The Consent of Kostin, Ruffkess & Company, LLC dated December 6,
2001 ****
27. Financial Data Schedule
-----------------------
***** Filed Herewith
**** Filed with Annual Report on Form 10-K for 2000, filed on
January 25, 2001
*** Filed with Amendment No. 3 to the Registration Statement on
Form S-1, filed on September 20, 2000, Commission File No.
333-35786.
** Filed with Amendment No 1. to the Registration Statement on
Form S-1 filed on July 7, 2000, Commission File No. 333-35786
* Filed with the Registration Statement on Form S-1 on April 27,
2000, Commission File No. 333-35786
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 25th day of
January 25, 2001.
STARTECH ENVIRONMENTAL CORPORATION
(Registrant)
BY: /s/ Joseph S. Klimek
--------------------------------
Joseph S. Klimek
Chief Executive Officer,
President
BY: /s/ Robert L. DeRochie
--------------------------------
Robert L. DeRochie
Chief Financial Officer
and, Vice President
Investor Relations, and
Principal Financial
Officer
BY: /s/ Peter J. Scanlon
--------------------------------
Peter J. Scanlon
Director of Finance and,
Accounting, and Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the Company
and in the capacities and on this 25th day of January 2002.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Joseph S. Klimek Chief Executive Officer and
- ------------------------ President January 25, 2002
Joseph S. Klimek
/s/ Kevin M. Black Sr. Vice President, General
- ------------------------ Counsel, Secretary and Director January 25, 2002
Kevin M. Black
/s/ John R. Celentano Director January 25, 2002
- ------------------------
John R. Celentano
/s/ Raymond Clark Director January 25, 2002
- ------------------------
Raymond Clark
/s/ Brendan Kennedy Director January 25, 2002
- ------------------------
Brendan Kennedy
/s/ Joseph F. Longo Director January 25, 2002
- ------------------------
Joseph F. Longo
42