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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, 2003
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
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(Exact name of registrant as specified in its charter)
State or other jurisdiction of (I.R.S.Employer
incorporation or organization Identification No.)
- ----------------------------- -------------------
Colorado 84-1286576
15 Old Danbury Road, Suite 203
Wilton, Connecticut 06897-2525
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(Address of principal executive offices) Zip Code
(203) 762-2499
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(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 ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [ x ]
As of January 26, 2004 16,334,793 shares of no par value common stock were
outstanding. The aggregate market value of shares held by non-affiliates as of
January 26, 2004 was $38,285,354 based on the closing 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, 13 and 14 of Part III
of this report are incorporated by reference to Registrant's definitive proxy
statement for its 2003 Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission on or before February 28, 2004.
PART I
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K 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:
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Startech is an environmental technology company commercializing its proprietary
plasma processing technology known as the Plasma Converter(TM) that achieves
closed-loop elemental recycling that irreversibly destroys hazardous and
non-hazardous waste and industrial by-products while converting them into useful
commercial products. These products include a rich synthesis gas called PCG
(Plasma Converted Gas)(TM) surplus energy for power, hydrogen, metals and
silicates for use and for sale.
The Company's activities during the four fiscal years, November 1, 1992 to
October 31, 1995 consisted primarily of the research and development of the
Plasma Converter. On November 17, 1995, a company known as Kapalua Acquisitions,
Inc., 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.
On November 18, 1995, the Board of Directors of the Company unanimously approved
a change of the business purpose of Kapalua Acquisitions Inc. from one seeking
an acquisition candidate to one engaged in the business of manufacturing and
selling the Plasma Converter system to recover, recycle, reduce and remediate
hazardous and nonhazardous waste materials. From that time to the date of this
filing, the Company has maintained this as its principal focus.
Background
Startech is an environmental technology corporation that manufactures, markets
and sells a recycling system called the Plasma Converter for the global
marketplace. Until January 2002, we were solely engaged in the manufacture and
sale of equipment for use by others. Thereafter, we have attempted to broaden
the scope of our available revenue opportunities. This change was brought about
by management's decision to expand its market penetration strategies and
opportunities. Rather than only market and sell our products for use by others,
we are now seeking opportunities to become directly involved in the operation
and use of our products. We reconsidered our stated philosophy of not engaging
in the processing of feedstock materials and/or waste and decided that it was
timely to seek out and include all possible market penetration strategies,
including build own operate, build own transfer of ownership, and joint
development projects.
By concentrating on re-positioning our company for long-term growth, we have not
achieved the sales goals we had anticipated would occur in the 2003 fiscal year.
We believe this new way of approaching the market over time will help achieve
maximum penetration in the shortest timeframe.
We believe significant events are driving demand for our Plasma Converter. They
include:
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o Increases in waste, and in particular hazardous wastes, due to rising
consumer/industrial consumption and population growth in most nations.
o Current waste disposal and remediation techniques such as landfills
and incineration are becoming regulatory, socially and environmentally
unacceptable.
o A need for critical resources such as power and water to sustain local
economies.
o The emphasis being placed upon the production of distributed power and
the need to provide alternatives to fossil fuels.
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. We believe these products will add value to our customers'
business' so they can now realize revenue streams from disposal or processing
fees, a reduction in material disposal costs, as well as from the sale of
resulting commodity products and services. Alternatively, this will allow them
to generate a valuable product while at the same time using a zero cost basis,
or revenue generating source of raw material (waste). The costs of hazardous
waste treatment and disposal methods continue to rise, and now range from
approximately $900 to more than $2,000 per ton. This does not include the
additional processing, handling, packaging, insurance and management costs
sustained by the hazardous waste generator within its facility prior to final
disposal.
Since 1995, we have been actively educating and promoting to our customers the
benefits of the plasma converter over other forms of waste remediation
technologies. Ongoing education of the public and government is continuing. Like
most new technologies we have been met with varying degrees of resistance. A
rising comfort level with our plasma converter technology resulting in part from
our educational and informational efforts has created additional awareness in
the 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 world views and employs discarded materials; what
many would now call waste we view as a feedstock. We 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
strategy will be implemented through Plasma Converter sales with after sales
support and service, build own operate/build own transfer of ownership
facilities, joint development projects and engineering services.
Markets
We view the future of our business as divided into three key market segments;
power/energy, waste remediation, and engineering services. Projects are
generally categorized according to the specific or stated objective of the
customer, waste remediation or power generation. A customer may have a need to
remediate a particularly onerous waste such as PCBs but has no need to produce
commodity products. The goal is to simply get rid of waste. That would be
considered a waste remediation project. Conversely, a customer in an area with
limited or high cost power may want to select a waste stream to give the
greatest amount of Plasma Converted Gas (TM) with which to produce power to run
his system or for other power uses. The production of power is the desired
benefit and the feedstock (waste material) selected is chosen for the highest
quality commodity product produced, in this case electric power. The market for
Converters is for on-site use by industrial, institutional and government
facilities, and also for commercial facilities that process waste under
contract.
Our market for the sale of Plasma Converter Systems will be made up of sales to:
A) Generators of waste
B) Processors of waste
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Startech's revenues and profits are produced by:
(1) the sale of its systems that may also include a continuing,
revenue-producing "tolling fee" for each pound of material processed,
and also by,
(2) building and owning commercial Plasma Converter facilities operated
separately by the Company or in partnership.
Power/Energy
This segment includes projects that incorporate equipment that create
power/energy products to work in conjunction with our core Plasma Converter
Technology. Distributed power requirements and peak power demands have
identified expanded opportunities.
Waste Remediation
This part of our business includes projects where the emphasis of the customer
is to dispose of its waste material in an environmentally responsible, and cost
effective, manner. Waste material disposal costs vary greatly depending on the
composition of the waste. We are specifically targeting customers that will
receive the most economic gain from using our technology. Examples of such waste
streams are:
o Medical waste
o Pharmaceutical waste
o PCBs
o Municipal solid wastes
o Incinerator ash
o Biological contaminants
o Sewer and power-plant-scrubber sludge
o Paints and solvents
o Electronic industry waste
o Contaminated soils
o Asbestos and other hazardous waste streams
We further delineate these markets into the following categories:
o Onsite Treatment
- Hospitals and medical centers.
- Industrial hazardous waste generators such as petrochemical,
chemical, refining, and metals companies.
- Industrial hazardous waste processors.
- Government agencies such as Department of Defense, Department of
Energy.
o Offsite Treatment (at an integrated waste management facility)
- Waste management and/or transport companies.
o Mobile Treatment
- All of the above who value the ability to move quickly from site
to site.
Sales Strategy
Central to our growth strategy is maximizing market penetration and reducing the
barriers of entry while optimizing our revenue sources. To achieve that
objective, we have identified three key marketing strategies that make up the
overall model. They are:
1. Equipment Sales: We will continue to be a direct seller of our
products to customers who prefer to purchase and operate our
equipment. We will sell 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.
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2. Build Own Operate/Transfer Of Ownership Projects: We are actively
seeking to develop opportunities to own and operate Plasma Converter
facilities in various markets. These projects are attractive where
long-term agreements with guaranteed waste streams and high value
processing and or disposal fees are contracted for and will
significantly increase ongoing revenue streams. The revenue generated
by these types of projects has been shown to be up to ten times that
realized from a straight equipment sale over the life of the project.
3. Joint-Development Projects: 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.
An important part of our development of world markets is our sales network. We
sell 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. Distributors are also responsible for supplying after sales parts and
service.
Our senior management also sells directly to customers, in addition to seeking
out projects for build, own, operate and build, own, transfer of ownership
facilities. Such customers and projects 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.
We manufacture modular, skid-mounted systems that are easy to transport in
standard tri-modal containers for shipment to any market in the world.
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 Build Own & Operate (BOO) projects to
fund manufacturing, shipping, and installation costs before facility startup. In
addition, the Company will incorporate performance insurance for BOO projects to
guarantee performance on the specific waste stream to be processed as well as
obtaining necessary local permits to begin operation.
Revenues will occasionally be derived from engineering services and testing. We
perform paid-for engineering services, where we believe those services may lead
to equipment sales.
Primary Customer
For the fiscal year ended October 31, 2003, all of our revenue was derived from
Concurrent Technology Corporation, while 85% of our revenue for the fiscal year
ended October 31, 2002 was derived from Eico Systems Corporation.
Plasma Converter(TM) Demand
We believe that the primary factors that create the demand for our Plasma
Converters include the need for customers to:
o Reduce the costs for hazardous and toxic waste disposal;
o 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.
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We believe our Plasma Converter will meet 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.
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 an intense field of
radiant energy within the plasma vessel that causes the dissociation of the
molecular bonds of solid, liquid, and gaseous compounds for 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 Plasma Converter System
into special recoverable, commodity products. The process is not a 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 plasma 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 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) a synthesis gas recovered from our system is
drawn out 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(TM)
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 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
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(3) liquid metallic elements, if in sufficient quantities, which collect
and are automatically discharged at the base of the vessel.
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. Our system may 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.
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
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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 Process Works
The basic Plasma Converter system consists of the following:
In-feed System
Plasma Vessel
Cooling Process
Filtration Process
Neutralization Process
Figure 1. Process Overview of PCS
[GRAPHIC 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
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
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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.
Our Plasma Converter that is being used for our demonstration and training unit
in our Bristol, Connecticut facility continues to be 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 Eico Systems Corp. and also running some surrogate testing for
specific customers. We expect testing activity to increase in 2004 as more and
more companies and governmental agencies look to validate our technology for
their specific applications.
StarCell(TM) development and technology
StarCell(TM) 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(TM).
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 StarCell(TM) 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.
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StarCell(TM) 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(TM) Hydrogen can feed fuel cells and hydrogen engines. StarCell(TM)
Hydrogen is a fuel that can produce clean electricity and clean propulsion
systems. The combination of the Plasma Converter with StarCell(TM) 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(TM) 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
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 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 technology is huge and the existence of
competing technologies provides credibility to the industry.
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
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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 breadth of manufacturing knowledge and experience
o Greater access to capital markets as a public company over private
companies
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
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 potential competitors in the plasma
industry:
1) Integrated Environmental Technologies (IET); and
2) 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.
11
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 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.
On or about June 4, 2002, we submitted an application for a patent to the United
States Patent and Trademark Office. The patent involves a torch positioning
apparatus designed and developed by our engineers. This is the only patent we
have applied for to date. We have designed and developed other proprietary
intellectual property that will be protected as trade secrets. We may, in the
future, US and 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 are the licensee on one patent. The inventions and related know how could
enhance the commercial capability of our core plasma system for certain
applications. The patent relates to 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 and forms the basis for our StarCell(TM) system.
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 patentable or that any patents issued to us will
provide competitive advantages or will not be challenged by third parties. 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
12
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 system and related equipment on job
sites. In addition, because we are marketing the Plasma Converter system
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 system 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.
Environmental matters
Our customers operations are subject to numerous federal, state 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.
13
Manufacturing operations
Our products and systems are presently being manufactured by third party vendors
who build specific component parts to our specifications. Some of the
manufacturing components are constructed at our 30,000 square foot manufacturing
facility located in Bristol, Connecticut. 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. 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 also used by StarCell. 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 ended October 31, 2003 we expensed
$310,219 for research and development. As we expand our research and development
focus in fiscal year 2004 our efforts are expected to be devoted to the
development of patentable 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 January 15, 2004, the Company had 15 full-time employees, of these
full-time employees, 7 are in engineering, 1 is in research and development, 1
is in manufacturing and production, 1 is in sales and marketing and 5 are in
management or administrative positions. 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 or collective bargaining agreement, and we believe that our
relations with our employees are good.
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 and taxes provides for monthly payments of
$15,634, 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 $2,475 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 $5,265. The
Lease will expire on July 1, 2004.
14
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
---- -----------
2004 290,436
2005 29,700
2006 0
ITEM 3 - LEGAL PROCEEDINGS:
- ---------------------------
On June 5, 2002, the Company received a Demand for Arbitration filed with the
American Arbitration Association in East Hartford, CT by Peter Francisco and
Fran Environmental, LLC. Fran Environmental has a Representatives Agreement with
the Company. Peter Francisco is the principal member of Fran Environmental. The
claim being made is that Startech has failed to provide proper support to assist
this representative in its effort to market and sell our products in Brazil. The
relief sought is for no less than $150,000. The Company does not believe the
claim is subject to Arbitration under the terms of its agreement with the
representative and has so advised the American Arbitration Association. On
January 6, 2003 a temporary injunction was granted to Startech to stop the
arbitration process and conduct a hearing as to whether a permanent injunction
should be granted to enjoin the arbitration proceeding from continuing. A
hearing was held for this purpose on February 24, 2003. However, no final
determination was made as the moving party requested a continuance. As of the
date of this filing the temporary injunction is still in place and no final
determination has been made.
There are no other material pending legal, regulatory or administrative matters
to which we are a party.
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 2000 through July 2, 2003 our common stock was traded on the
NASDAQ - Small Cap under the symbol STHK. On July 3, 2003 our common stock began
trading on the Over the Counter Bulletin Board under the symbol STHK. The table
below shows the high and low closing price of our Common Stock during the
quarters indicated.
Fiscal Year Ended October 31: 2003 2002
- ----------------------------- ---- ----
High Low High Low
---- --- ---- ---
First Quarter $ 1.28 $ 0.84 $ 3.67 $ 1.95
Second Quarter $ 1.55 $ 1.03 $ 3.63 $ 2.47
Third Quarter $ 1.30 $ 0.77 $ 3.38 $ 1.40
Fourth Quarter $ 1.45 $ 1.00 $ 2.05 $ 1.20
Closing Price
-------------
Quarter Ended High Low
------------- ---- ---
January 31, 2004 (January 29, 2004) $ 4.55 $ 1.15
(b) Stockholders
------------
As of January 24, 2004, there were 699 holders of record 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.
(d) Securities Authorized for Issuance under Equity Compensation Plans
------------------------------------------------------------------
Shares of Common Stock
remaining available for
Shares of Common Stock to be future issuance under
issued upon exercise of Weighted-average equity compensation plans
outstanding options, exercise price of (excluding securities
warrants and rights (in outstanding options, reflected in column (a))
thousands) warrants and rights (in thousands)
Plan Category (a) (b) (c)
- ------------------------------------------------------------------------------------------------------------
Equity compensation plans 357,000 $1.98 643,000
approved by security holders
Equity compensation plans not 3,786,286 4.90 8,089
approved by security holders
- ------------------------------------------------------------------------------------------------------------
Total 4,143,286 4.65 651,089
16
ITEM 6 - SELECTED FINANCIAL DATA:
- ---------------------------------
The selected financial data set forth below for the five years ended October 31,
2003 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,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Net sales $ 70,000 $ 136,471 $ 2,400,000 $ 1,069,441 $ 2,268,964
Loss from operations 3,076,921 4,038,425 2,437,759 2,731,336 1,346,399
Other income (expense) (344,936) 136,673 167,067 319,093 68,071
Net loss $ 3,421,714 $ 3,915,300 $ 2,298,480 $ 2,430,576 $ 1,289,192
============ ============ ============ ============ ============
Earnings loss per share of weighted
average shares of common
stock outstanding (0.29) (0.40) (0.30) (0.63) (0.19)
Weighted-average number of
shares of common stock
outstanding 11,641,052 9,746,165 8,359,111 7,430,838 6,875,999
Total assets $ 4,885,586 $ 3,138,230 $ 4,663,005 $ 7,077,881 $ 6,374,818
Total liabilities 1,497,349 743,802 740,957 1,196,596 359,458
Long-term obligations 4,316 17,580 43,299 13,225 7,718
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:
- --------------------------------------------------------------------------------
Critical Accounting Policies
Startech's discussion and analysis of its financial condition and results
of operations are based on the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported revenues and expenses during the reporting periods. On an ongoing
basis, management evaluates its estimates and judgments, including those related
to revenue recognition, accounts receivable reserves, marketable securities,
valuation of long-lived and intangible assets accounting for joint ventures and
software development. Management bases its estimates on historical experience
and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The following accounting policies are deemed critical to the understanding
of the consolidated financial statements included under Item 8--Financial
Statements and Supplementary Data.
Inventories--Inventories, which are stated at the lower of cost or net
realizable value, consist of inventory held for resale to customers. Cost is
determined on the first-in, first-out basis and includes freight and other
incidental costs incurred. Judgment is involved in evaluating backlog and in
assessing the recoverability of inventory held at the balance sheet date.
Startech provides inventory allowances based on the determination of excess and
obsolete inventories as determined through the evaluation of future sales and
changes in technology.
Research and Development Costs--Research and development costs are expensed
as incurred.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of--Startech reviews the valuation of long-lived assets, including property and
equipment and capitalized equipment, under the provisions of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS No.86.
Startech is required to assess the recoverability of long-lived assets and
capitalized equipment costs whenever events and circumstances indicate that the
carrying value may not be recoverable. Factors we consider important that could
trigger an impairment review include the following:
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired assets or
the strategy of our overall business;
o significant negative industry or economic trends; and
o significant decline in our stock price for a sustained period.
In accordance with SFAS No. 144, when we determine that the carrying value
of applicable long-lived assets may not be recoverable based upon the existence
of one or more of the above indicators of impairment, we evaluate whether the
carrying amount of the asset exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of that asset. If such
a circumstance exists, we would measure an impairment loss to the extent the
carrying amount of the particular long-lived asset or group exceeds its fair
value. We would determine the fair value based on a projected discounted cash
flow method using a discount rate determined by our management to be
18
commensurate with the risk inherent in our current business model. In accordance
with SFAS No. 86, when we determine that the carrying value of certain other
types of long-lived assets may not be recoverable we evaluate whether the
unamortized cost exceeds the expected future net realizable value of the
products. If the unamortized costs exceed the expected future net realizable
value of the products, the excess amount is written off.
Results of Operations
Comparison of Years Ended 2003 and 2002
Revenues. Our total revenues were $ 70,000 for the year ended October 31, 2003,
as compared to $136,471 for the same period in 2002, a decrease of $ 66,471 or
48.7%. There were no Plasma Converter Systems shipped in fiscal year 2003,
revenues were limited to testing for Concurrent Technologies Corporation.
Gross profit. Our gross profit was $21,324 for the fiscal year ended October 31,
2003 as compared to a gross loss of $330,348 for the same period in 2002, a
increase of $351,672 or 106.5%. The gross margin increase for fiscal year 2003
was a result of the completion of the CTC demonstration program. The gross
margin decrease for fiscal year 2002 was due to unexpected costs related to
modifications of the Plasma Converter and higher customer installation costs
related to the Eico system located in Japan.
General and administrative expenses. Our general and administrative expenses for
the year ended October 31, 2003 were $1,998,893 compared to $2,636,550 for the
same period in 2002, a decrease of $637,657, or 24.2%. This decrease resulted
from the reduction in staff and related salaries, taxes, and employee benefits.
Reductions also occurred in the areas office of expenses, legal expenses and
supplies.
Research and development expenses. Our research and development expenses for the
year ended October 31, 2003 were $310,219 an increase of $149,434 or 92.9%, from
the same period in 2002. These expenditures are a result of costs incurred for
the continued research, development and design of StarCell (TM). In addition,
costs were incurred from further development of utilization efficiencies plasma
medium gases in our operations, as well as continued improvements to our gas
polisher components.
Selling expenses. Our selling expenses for the year ended October 31, 2003 were
$789,133 a decrease of $121,609 or 13.4%, for the similar period in 2002. The
decreased costs related to selling expenses were as result of lower consulting
expenses and printing expenses.
Interest income. Our interest income for the year ended October 31, 2003 was
$9,220, as compared to $26,569 in the similar period 2002 a decrease of $17,349
or 65.3%. 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, 2003 resulted in a
credit balance of $143 as compared with $13,548 in the similar period 2002. The
tax credit balance was a result of refunds received during fiscal year 2003. We
have minimal tax obligations due to the fact that we have not had profitability
to this point. We have loss carry forwards of approximately $15.5 million to
offset against future profits.
One time management restructuring charges amounted to $346,052 for the year
ended October 31, 2003 versus $0 for the year ended October 31, 2002. This one
time charge is for expenses related to severance, legal, and various other
expenses as a result of restructuring charges.
19
Comparison of Years Ended 2002 and 2001
Revenues. Our total revenues were $ 136,471 for the year ended October 31, 2002,
as compared to $2,400,000 for the same period in 2001, a decrease of $ 2,263,529
or 94.3%. As no Plasma Converter Systems were shipped in fiscal year 2002,
revenues were limited to additional components for the Eico System.
Gross profit. Our gross loss was $330,348 for the fiscal year ended October 31,
2002 as compared to a gross profit of $937,404 for the same period in 2001, a
decrease of $1,267,752 or 135.2%. The margin decreased as a result of
unanticipated costs related to modifications of the Plasma Converter and higher
customer installation costs related to the Eico system located in Japan.
General and administrative expenses. Our general and administrative expenses for
the year ended October 31, 2002 were $2,636,550 an increase of $265,668, or
11.2%, from the same period in 2001. This increase resulted from higher salary
and related expenditures due to the hiring additional personnel, depreciation
expenses, facility rental expenses, and increased insurance premiums.
Research and development expenses. Our research and development expenses for the
year ended October 31, 2002 were $160,785 an increase of $9,618 or 6.4%, from
the same period in 2001. The increase is related to costs associated with the
installation for the Eico project. In addition costs were incurred for the
continued 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(TM) ability to operate as a
stand-alone system for the production of hydrogen.
Selling expenses. Our selling expenses for the year ended October 31, 2002 were
$910,742 an increase of $57,628 or 6.8%, for the similar period in 2001. The
increased costs related to selling expenses comprised of a new customer
orientation video, Plasma Converter System scale models, attendance and
showcasing at several tradeshows, as well as the creation of new marketing
materials.
Interest income. Our interest income for the year ended October 31, 2002 was
$26,569, as compared to $182,193 in the similar period 2001 a decrease of 85.4%.
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, 2002 were $13,548 as
compared with $27,788 in the similar period 2001. We have minimal tax
obligations due to the fact that we have not had profitability to this point. We
have loss carry forwards of $11.7 million to offset against future profits.
20
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 Eico Systems Corporation located in Japan.
This Eico 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(TM) 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.
21
Project Update
Hydrogen from Tires
On December 2, 2003, we announced that we had signed a contract valued at
approximately $500,000 with Media and Process Technology Inc. for the U.S.
Department of Energy to produce and demonstrate our commercial-size StarCell(TM)
system, and also produce hydrogen derived from processing tires through the
Startech Plasma Converter System (TM). The work will be performed in Startech's
Technology Park facility in Bristol, Connecticut with the Company's StarCell(TM)
partner, Media and Process Technology Inc.
The tires will be put into the Startech Plasma Converter where they will be
irreversibly destroyed and converted into Plasma Converter Gas (PCG)(TM). PCG is
a clean synthesis gas mixture rich in hydrogen. The PCG will then be fed into
the Company's StarCell(TM) system to separate the hydrogen from the PCG to
produce StarCell(TM) Hydrogen for energy and power. The balance of the PCG
comprised principally of carbon-based molecules can also be used for energy and
power.
StarCell(TM) is the Company's proprietary ceramic filtration system: it is not a
fuel cell. StarCell(TM) is a patented hydrogen selective membrane that separates
hydrogen from the PCG produced in processing wastes in the Converter.
Startech included in Water and Energy Bill
President Bush, on December 1, 2003 signed the "Water and Energy Bill" into Law
108-137 that specifies $500,000 for the "Startech Hydrogen Project." This
Project will process many different kinds of feedstock, both hazardous and
non-hazardous, through our Plasma Converter System for the specific purpose of
demonstrating the hydrogen content of the Plasma Converter Gas (PCG)(TM)
produced from each kind of material. PCG is a clean synthesis gas mixture
containing hydrogen.
Hydrogen used for power is the most pristine of all fuels. In producing power
the only resulting by-product is H2O or better known as fresh water. This
contract will also be administered through the Department of Energy.
Mihama Contract
On November 10, 2003 we announced we signed a $1,250,000 contract with Mihama
Inc. of Japan to modify the existing Plasma Converter System in Japan, formerly
owned by Eico Systems Corp to safely and irreversibly destroy incinerator ash,
PCBs, and PCB contaminated materials. Mihama is a Startech distributor for Japan
and has acquired the Plasma Converter System formerly owned by Eico System Corp,
now liquidated. PCBs is an abbreviation for a family of manufactured industrial
products called polychlorinated biphenyls. The major use of PCBs has been in
industrial electric equipment especially in transformers, capacitors, voltage
regulators and electromagnets. PCBs are dangerous and harmful, and PCBs have
been found in water, soil, animals and in the food chain. PCBs are pernicious
materials that enter the body through the digestive system, lungs and even
through the skin. They interfere with many biological functions, including the
immune system, nervous system, endocrine systems and fetuses appear to be
particularly vulnerable to these actions. There is the tendency for PCBs to
accumulate in the fatty tissue of humans, animals and fish. PCB
biomagnifications concentrations have even been found accumulated in "mother's
milk." In 2001, the Japanese Ministry of Environment reported that there are
about 270,000 high-voltage transformers and capacitors stored in Japan
containing 70% of the PCB that ever was deployed in the country. In October 2002
the Ministry of Environment notified six prefectures that they have to develop
plans and facilities to take care of the PCB containing products and maintain
control of them until they are safely are irreversible destroyed.
22
EICO-Plasma (Poland) Contract
The project although significantly delayed is still expected to be initiated at
the completion of financing. The customer has completed the identification of
their waste stream and with the Municipality of Bytom as part owner has secured
the site and permits. This customer had relied on Governmental Eco-Funds to
provide a significant portion of the financing but has not been able to arrange
the allocation although the project was previously approved. At this time, new
financing approaches are delaying the initiation of the project, however the
customer anticipates financial closure this year.
Ekologia (Poland) Contract
This project to remediate hazardous waste in the Bydgoszcz, Poland area is also
seeking financing. The customer has multiple activities underway to secure the
funding and is anticipating a 2004 authorization to proceed. This project also
has completed the securing of the waste streams, site approval and permitting.
Chempol (Poland) Contract
Chempol (Tuczepy, Poland) has a site that is fully permitted and has been
authorized to initiate waste acceptance and storage. Recently, the Chempol
organization has restructured to accept new investors and is now redeveloping
their business plan and operating strategy. They anticipate securing their
financing this year and expect to proceed with the PCS acquisition.
Desert Charm (South Africa)
Desert Charm has acquired the project assets of the Amandla Company in South
Africa and is proceeding to complete the development of the initial 50 TPD Waste
Processing Facility. The South African project has successfully completed all
the technical evaluations and recently also completed their site specific EIA.
Their efforts have now received governmental acceptance. Final stage financing
is underway and expected to close in a few months. Startech has agreed to
participate in this initial project and has offered a system discount in
exchange for project equity.
China
Working through our representative in China, Startech has achieved a series of
high level meetings with the Central Government Ministry of Environmental
Protection (SEPA). These in-depth discussions have led to visitations to our
Bristol demonstration facility whereby they where able to witness system
operations. Additional communications are presently underway.
Ireland
It is the determination of the Company that the two projects that were announced
previously do not have the requisite financial structure and accordingly have
ceased to be viable projects.
Vitech Enterprises, Inc.
Startech has been working in cooperation with Vitech Enterprises Inc., a
privately held North Carolina corporation for the joint development of an
initial 10 TPD Plasma Converter facility to process out-of-date, recalled and
unwanted pharmaceuticals. These are sometimes called "reverse logistical
materials". The Company will own a 25% interest in Vitech in exchange for a
discount on the sale of the initial 10 TPD Plasma Converter System (PCS) along
with engineering support and assistance to Vitech in its effort to secure the
initial facility.
With the cooperation of Vitech, Startech has recently brought a potential
investor to Vitech to finance the complete 10 TPD facility, including Vitech's
purchase of a system. Discussions between Vitech and the potential investor have
been and continue to be in progress. Depending on how quickly the financial
arrangement between Vitech and the potential investor are completed, the initial
facility could be on-line in early 2005.
23
Vitech's plans call for multiple, strategically located facilities for each to
process 10 to 25 tons per day in a market it estimates to exceed 3.5 million
tons per year for finished, recalled and unwanted pharmaceuticals.
End of Life Electronics
On October 21, 2003, the Company announced that it had received the acceptance
and approval of its Final Report on its successful completion of a $70,000
contract from the Concurrent Technologies Corporation (CTC) to demonstrate the
Plasma Converter's ability to safely process and irreversibly destroy "end of
life electronics" often referred to as "e-waste."
Under contract with the Department of Defense, CTC operates the National Defense
Center for Environmental Excellence.
Waste Age said, "The United States generates more e-waste than any other nation,
according to the EPA. More than 500 million computers will become obsolete by
2007, which will result in at least 1.58 billion pounds of lead and 6.32 billion
pounds of plastic needing disposal, and that amount is expected to rise. The EU
estimates that the e-waste accounts for 6 million tons of garbage across Europe"
E-waste is a new additional market for the Company.
Other Developments
New Directors and Committees
On September 4, 2003, Joseph F. Longo appointed four new Directors to the Board.
They are Messrs. Ballew, Equale, Perna and Slepicka. Their biographies are shown
in our Proxy Statement as well as the press release issued on September 4, 2003.
On November 5, 2003 we appointed a new Audit Committee comprising of Joseph A.
Equale, as Chairman, with Douglas R. Ballew, and Nicholas S. Perna as members.
Also on November 5, 2003 a Compensation Committee was appointed, comprising of
Kenneth J. Slepicka as its Chairman with Joseph A. Equale and Nicholas S. Perna
as members. Joseph F. Longo was appointed as Chairman of the Board. The Board is
now comprised of these five individuals.
New Law Firm
Kramer Levin Naftalis & Frankel LLP was engaged as the Company's attorneys of
record in July of 2003. Kramer Levin is a world-class, full service law firm
with offices in New York and Paris. With more than 280 attorneys in more than 20
practice areas the Firm has the knowledge and expertise to provide a full range
of solutions, support and advice to the Company.
New Public Relations Firm
In November of 2003, the Company engaged the Schwartz Communications Company of
Boston, Massachusetts. Schwartz Communications is the Nation's second largest
independent public relations firm focused on high-tech, medical and
biotechnology companies. Founded in 1990, Schwartz Communications has offices in
Waltham Massachusetts and San Francisco. It currently represents such companies
as Biogen, Blue Martini, Check Free, Gateway, and MapInfo.
24
New Chief Financial Officer
On November 3, 2003, we announced that the Board of Directors appointed Peter J.
Scanlon to the position of Chief Financial Officer effective November 1, 2003.
Mr. Scanlon is 54 years old and has served as the Vice President of Finance and
Administration for the past five years. His extensive financial experience
includes 18 years with IBM where he was manager of the International Financial
Systems Group developing financial systems and procedures for IBM's European
manufacturing operations. Mr. Scanlon has a Bachelor of Science Degree in
Accounting from Manhattan College, and lives with his wife of 32 years and his
daughter in Watertown, Connecticut. Former Chief Financial Officer Robert L.
DeRochie departed the Company upon the completion of his Employment Contract on
October 31, 2003. Mr. DeRochie is available to assist the Company as a
consultant on an as-needed basis.
Effects of Inflation
Due to the low rate of inflation there has been very little effect on the
Company's net revenues for fiscal 2003.
Liquidity and Capital Resources
This liquidity section 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.
The Company had net working capital of $1,446,346 as of October 31, 2003 and had
cash and cash equivalents of $2,601,558 as of October 31, 2003.
Working capital was provided primarily from the Private Placements that were
completed in 2003, from which we raised net proceeds of $4,341,256 after
commissions and expenses. We have and will continue to be dependent upon the
deposits and progress payments from the sale of equipment and the private sale
of securities. It is anticipated that our capital requirements for future
periods will increase and our future working capital needs will be obtained from
the above sources as well as additional private placements, demonstration and
testing programs, joint development programs, build own and operate facilities,
and from cash generated from the operations of our business.
We believe the completed private placements which raised over $4,500,000 after
expenses will provide enough operating capital to sustain company operations at
the current level for more than 1 year. It must be noted, however, that if the
progress payments are not received in a timely manner or additional sales of
Plasma Converters or funding is not available we may have to significantly cut
expenses to maintain our operations.
The Company has historically satisfied its capital needs primarily by the sale
of equity securities. We are currently in discussions with several funding
sources to raise additional capital through the issuance of additional equity
securities. However, there is no assurance that this financing will be available
when needed or that management will be able to obtain this or any additional
financing on terms acceptable to the Company. As stated, we believe these
financing needs will be satisfied but there can be no assurance this will be the
case.
The Company believes that continuing operations for the longer term will be
supported primarily through anticipated growth in revenues and, if necessary,
through additional sales of the Company's securities.
25
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.
ITEM 7A. - QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK:
- ---------------------------------------------------------------------
Management does not believe that there is any material market risk exposure with
respect to derivative or other financial instruments that would require
disclosure under this item.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
- -----------------------------------------------------
Report of Management
Management of Startech Environmental Corporation, is responsible for the
integrity of the financial information presented in this 10-K. The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. Where necessary, they reflect estimates
based on management's judgment.
Management relies upon established accounting procedures and related systems of
internal control for meeting its responsibilities to maintain reliable financial
records. These systems are designed to provide reasonable assurance that assets
are safeguarded and that transactions are properly recorded and executed in
accordance with management's intentions.
The Audit Committee of the Board of Directors meets regularly with management
and its independent auditors to discuss audit scope and results, internal
control evaluations, and other accounting, reporting, and financial matters. The
independent auditors have access to the Audit Committee without managements'
presence.
/s/ Joseph S. Klimek
Joseph S. Klimek
President and Chief Executive Officer
/s/ Peter J. Scanlon
Peter J. Scanlon
Chief Financial Officer and Vice President
Financial Statements and Supplementary data and the Independent Auditors Report
thereon are listed and included Part IV, Item 15 of this Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
- ------------------------------------------------------------------------
None
26
ITEM 9A. CONTROLS AND PROCEDURES:
- ---------------------------------
Our management, including our chief executive officer and chief financial
officer, have carried out an evaluation of the effectiveness of our disclosure
controls and procedures as of October 31, 2003, pursuant to Exchange Act Rules
13a-15(e) and 15(d)-15(e). Based upon that evaluation, our chief executive
officer and chief financial officer have concluded that as of such date, our
disclosure controls and procedures in place are adequate to ensure material
information and other information requiring disclosure is identified and
communicated on a timely basis. There were no significant changes in the
registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
27
PART III
The information required to be filed by Part III (Items 10, 11, 12, 13 and 14)
are hereby incorporated by reference from the Company's definitive proxy
statement (to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A), which proxy statement will be filed no later than 120 days
after October 31, 2003.
28
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Financial Statements
October 31, 2003, 2002 and 2001
29
STARTECH ENVIRONMENTAL CORPORATION
Table of Contents
For The Years Ended October 31, 2003, 2002 and 2001
Page
----
Independent auditors' report F-2
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of changes in stockholders' equity
and other comprehensive income F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7
F-1
KOSTIN RUFFKESS & COMPANY, LLC Pond View Corporate Center
76 Batterson Park Road
Business Advisors and Certified Public Accountants Farmington, CT 06032
Farmington - New London Main Line: (860) 678-6000
Toll Free: (800) 286-KRCO
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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, 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, 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Kostin Ruffkess & Company, LLC
- ----------------------------------
Farmington, Connecticut
December 15, 2003, except note 13
As to which the date is
December 19, 2003.
F-2
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Balance Sheets
October 31, 2003 and 2002
2003 2002
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 2,601,558 $ 509,321
Accounts receivable 0 290,000
Inventory 320,048 273,706
Prepaid expenses 15,000 5,000
Other current assets 2,773 17,380
------------ ------------
Total current assets 2,939,379 1,095,407
Equipment, at cost, net of accumulated depreciation 1,669,787 1,794,067
Other Assets 276,420 248,756
------------ ------------
Total Assets $ 4,885,586 $ 3,138,230
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 40,167 $ 260,116
Customer Deposits 1,040,000 120,000
Capital lease - short-term 15,994 44,885
Other accrued expenses 396,872 301,221
------------ ------------
Total current liabilities 1,493,033 726,222
Long-term liability:
Capital lease payable net of current portion 4,316 17,580
------------ ------------
Total liabilities 1,497,349 743,802
------------ ------------
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized;
2,645, and 35,655 at October 31, 2003 and 2002 respectively
(aggregate liquidation preference of $26,453 and $360,553
at October 31,2003 and 2002, respectively) 26,453 356,553
Common stock; no par value; 800,000,000 shares authorized
shares issued and outstanding: 16,134,122 at October 31,
2003 and 10,293,392 at October 31, 2002 19,536,077 14,790,453
Additional paid-in-capital 1,742,745 1,742,745
Deficit (17,917,038) (14,495,324)
------------ ------------
Total stockholders' equity 3,388,237 2,394,427
------------ ------------
Total Liabilities and Stockholders' Equity $ 4,885,586 $ 3,138,230
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
F-3
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Statements of Operations
For The Years Ended October 31, 2003, 2002 and 2001
Year Ended October 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenue $ 70,000 $ 136,471 $ 2,400,000
Cost of goods sold 48,676 466,819 1,462,596
------------ ------------ ------------
Gross profit (loss) 21,324 (330,348) 937,404
Operating Expenses :
Selling Expense 789,133 910,742 853,114
Research and Development 310,219 160,785 151,167
General and Administrative 1,998,893 2,636,550 2,370,882
------------ ------------ ------------
Total Operating Expenses 3,098,245 3,708,077 3,375,163
------------ ------------ ------------
Loss from operations (3,076,921) (4,038,425) (2,437,759)
------------ ------------ ------------
Other income (expense):
Interest income 9,220 26,569 182,193
Interest expense (6,926) (12,762) (15,126)
Other Income (1,178) 122,866 --
Management restructuring 346,052 0 0
------------ ------------ ------------
Total other income(expense) (344,936) 136,673 167,067
------------ ------------ ------------
Income tax (benefit) expense (143) 13,548 27,788
------------ ------------ ------------
Net loss ($ 3,421,714) ($ 3,915,300) ($ 2,298,480)
Less: preferred dividends 0 22,310 257,504
------------ ------------ ------------
Loss attributable to common stockholders ($ 3,421,714) ($ 3,937,610) ($ 2,565,984)
============ ============ ============
Net Loss per share--basic ($ 0.29) ($ 0.40) ($ 0.30)
Weighted average common shares outstanding 11,641,052 9,746,165 8,359,111
============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements
F-4
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
For The Years Ended October 31, 2003, 2002 and 2001
Additional
Common Preferred Paid-In
Shares Amount Shares Amount Capital Deficit
------------ ------------ ------------ ------------ ------------ ------------
Balance, October 31, 2000 8,085,660 $ 7,532,267 502,220 $ 4,641,483 $ 1,742,745 $ (8,035,210)
============ ============ ============ ============ ============ ============
Preferred shares converted to common
shares 1,178,720 4,423,877 (477,150) (4,423,877) -- --
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 -- -- -- -- -- (2,298,480)
Accretion of dividend on preferred
shares -- -- -- -- -- --
Dividends -- -- 22,441 257,504 -- (227,189)
------------ ------------ ------------ ------------ ------------ ------------
Balance, October 31, 2001 9,282,880 $ 12,265,072 47,511 $ 475,110 $ 1,742,745 $(10,560,879)
============ ============ ============ ============ ============ ============
Preferred shares converted to common
shares 38,163 140,867 (14,087) (140,867) -- --
Shares issued during the year
for services rendered 4,200 15,624 -- -- -- --
Shares issued for cash 927,969 2,283,712 -- -- -- --
Shares issued for 401(k) plan 40,180 85,178 -- -- -- --
Net loss during the year
ended October 31, 2002 -- -- -- -- -- (3,915,300)
Dividends -- -- 2,231 22,310 -- (19,145)
------------ ------------ ------------ ------------ ------------ ------------
Balance, October 31, 2002 10,293,392 $ 14,790,453 35,655 $ 356,553 $ 1,742,745 $(14,495,324)
============ ============ ============ ============ ============ ============
Preferred shares converted to common
shares 177,702 330,100 (33,010) (330,100) -- --
Shares issued for 401(k) plan 69,848 74,268 -- -- -- --
Shares issued for cash 5,593,180 4,341,256 -- -- -- --
Net loss during the year
ended October 31, 2003 -- -- -- -- -- (3,421,714)
Dividends -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, October 31, 2003 16,134,122 $ 19,536,077 2,645 $ 26,453 $ 1,742,745 $(17,917,038)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
F-5
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Statements of Cash Flows
For The Years Ended October 31, 2003, 2002 and 2001
Year Ended October 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(3,421,714) $(3,915,300) $(2,298,480)
Adjustments to reconcile net loss to net
cash used in operating activities:
Expenses paid for through the
issuance of common stock 0 15,624 29,987
(Gain) Loss on sale of assets (193) 4,633 --
401(k) match through issuance
of common shares 74,268 85,178 68,941
Depreciation 196,733 190,588 141,640
Preferred stock accrual 0 3,165 30,315
(Increase) decrease in:
Accounts receivable 290,000 10,000 38,000
Prepaid expense (10,000) -- (5,000)
Inventory (46,342) 5,796 (5,796)
Other current assets 14,607 (15,519) 12,015
Other assets (27,664) (171,305) (4,256)
Increase (decrease) in:
Accounts payable (219,949) 144,627 (333,727)
Customer Deposits 920,000 120,000 0
Accrued expenses 95,651 (242,028) (166,999)
----------- ----------- -----------
Net cash used in operating activities (2,134,603) (3,764,541) (2,493,360)
----------- ----------- -----------
Cash flows used in investing activities:
Proceeds from sale of asset 5,593 500 --
Purchase of equipment (74,242) (172,385) (685,345)
----------- ----------- -----------
Net Cash used in investing activities (68,649) (171,885) (685,345)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from common stock issuance 4,341,256 2,283,712 210,000
Repayment of capital lease payable (45,767) (45,293) (45,121)
----------- ----------- -----------
Net cash provided by financing activities 4,295,489 2,238,419 164,879
----------- ----------- -----------
Net decrease in cash and cash
equivalents 2,092,237 (1,698,007) (3,013,826)
Cash and cash equivalents, beginning 509,321 2,207,328 5,221,154
----------- ----------- -----------
Cash and cash equivalents, ending $ 2,601,558 $ 509,321 $ 2,207,328
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements
F-6
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2003, 2002 and 2001
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.
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, 2003, 2002 and 2001, 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.
Reclassifications
- -----------------
Certain reclassifications have been made to the fiscal 2002, and fiscal 2001
financial statements to conform to the presentation used in the fiscal 2003
financial statements. The reclassifications had no effect on shareholders'
equity or net losses as previously reported.
F-7
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2003, 2002 and 2001
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, money markets, U.S. Treasury Notes, and
T-Bills. Regarding supplementary cash flows information, income taxes paid were
$8,840 for the year ended October 31, 2003, $13,548 for the year ended October
31, 2002, and $27,788 for the year ended October 31, 2001. Interest paid for the
three years ended October 2003 was $6,926, $12,762 and $15,126 respectively. The
Company also had the following non-cash transactions:
2003
- ----
Shares Amount
------ ------
Common shares issued for 401(k) match 69,848 $ 74,268
Series A convertible preferred shares converted to common shares 177,302 330,100
Equipment acquired through capital lease -- 3,612
2002
- ----
Shares Amount
------ ------
Common shares issued for services rendered in 2002 4,200 $ 15,624
Common shares issued for 401(k) match 40,180 85,178
Series A convertible preferred shares converted to common shares 14,087 140,867
Equipment acquired through capital lease -- 25,539
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) --
F-8
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2003, 2002 and 2001
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, ranging from 3 to 15 years. 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 2003, 2002 and 2001. In addition we have incurred $206,850 of project costs
related to two specific projects we are currently undertaking. Upon completion
of these projects our investments in them will be accounted for under the equity
method.
Income Taxes
- ------------
Income taxes consist of State taxes on capital. The Company has net operating
loss carry-forwards of approximately $15.5 million expiring in various years
through 2023. The deferred tax asset arising from the carry-forwards has been
fully reserved against, since the likelihood of realization cannot be
determined.
Stock Options
- -------------
At October 31, 2003, we had two stock-based employee compensation plans, which
are described more fully in Note 6. We have adopted the disclosure provisions
allowed by Statement of Financial Accounting Standards ('SFAS') No. 148,
'Accounting for Stock-Based Compensation -- Transition and Disclosure -- An
Amendment of FASB Statement No. 123.' In addition, we have elected to continue
using the intrinsic value method to measure the compensation costs of
stock-based awards granted to employees in accordance with Accounting Principles
Board ('APB') Opinion No. 25, 'Accounting for Stock Issued to Employees'; as a
result, we recognize compensation expense for employee stock options granted at
a price less than the market value of our common stock on the date of grant. The
following table illustrates the effect on net loss and net loss per share had
stock-based employee compensation been recorded based on the fair value method
under SFAS No. 123.
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Net loss applicable to common stockholders -- as reported $(3,421,714) $(3,937,610) $(2,565,984)
Stock-based compensation - pro forma (76,000) (542,340) (1,514,275)
Net loss applicable to common stockholders -- pro forma $(3,497,714) $(4,479,950) $(4,080,259)
Net loss per share applicable to common stockholders
(basic) -- as reported $ (.29) $ (.40) $ (.30)
Net loss per share applicable to common stockholders
(basic and) -- pro forma $ (.30) $ (.46) $ (.49)
F-9
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2003, 2002 and 2001
Note 1 - Summary of Significant Accounting Policies: (Continued)
- ----------------------------------------------------
Option valuation models require highly subjective assumptions, including the
expected stock price volatility, which may be significantly different from those
of traded options. Because changes in subjective assumptions can materially
affect the fair value estimate, it is our opinion that the existing models do
not necessarily provide a reliable single measure of the fair value of our
stock-based awards. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. The pro forma stock-based employee
compensation was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions for each year:
2003 2002 2001
---- ---- ----
Risk-free interest rate 4.24% 3.82% 5.03%
Expected life of options -- years 10.00 9.90 9.75
Expected stock price volatility 76% 107% 99%
Expected dividend yield N/A N/A N/A
In accordance with APB Opinion No. 25, we use the intrinsic value method to
measure the compensation costs of stock-based awards granted to employees as the
excess of the market value of our common stock on the date of grant over the
amount that must be paid to acquire our common stock. We record these
compensation costs over the vesting period of the stock-based award.
We account for stock-based awards granted to non-employees at fair value in
accordance with SFAS No. 123, 'Accounting for Stock-Based Compensation.'
In accordance with Financial Accounting Standards Board ('FASB') Interpretation
No. 44, 'Accounting for Certain Transactions Involving Stock Compensation,' we
record compensation charges or benefits related to re-priced stock options based
on the market value of our common stock until the re-priced stock options are
exercised, forfeited or expire.
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 3,754,286 potential
common shares, 2,783,907 potential common shares, and 2,091,009 potential common
shares in 2003, 2002, and 2001, 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, 2003, 2002 and 2001.
The Company will issue an additional 14,069 common shares when all the preferred
shares are converted.
Off Balance Sheet Risk
- ----------------------
The Company had more than $100,000 in a single bank during the year. Amounts
over $100,000 are not insured by the Federal Deposit Insurance Corporation.
However, management does monitor the financial condition of the institution
where these funds are invested.
F-10
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2003, 2002 and 2001
Note 2 - Inventory:
- -------------------
Inventory consists of the following at October 31, 2003 and 2002:
2003 2002
-------- --------
Raw materials $191,342 $145,000
Work in process 128,706 128,706
-------- --------
Total inventory $320,048 $273,706
======== ========
Note 3 - Property, Plant and Equipment:
- ---------------------------------------
Equipment is summarized by major classifications as follows:
Useful Life 2003 2002
(In years) ---------- ----------
Computer equipment 3-5 $ 129,127 $ 123,007
Equipment 7-15 1,807,523 1,742,347
Furniture and fixtures 3-7 143,995 143,955
Leasehold improvements 4-7 108,096 108,096
Other fixed assets 4-7 23,625 23,625
---------- ----------
2,212,326 2,141,030
Less: accumulated depreciation 589,028 393,452
---------- ----------
1,623,298 1,747,578
Construction in progress 46,489 46,489
---------- ----------
Total property, plant and equipment $1,669,787 $1,794,067
========== ==========
Note 4 - Operating Lease:
- -------------------------
LEASES
The Company leases office space, equipment, computers and vehicles under
non-cancelable operating leases expiring between 2003 and 2006. The future
minimum commitments under these leases, exclusive of lease commitments related
to Startech are as follows:
October 31,
-----------
2004 $308,046
2005 34,011
2006 247
--------
$342,304
========
The Company leases its offices in Wilton, Connecticut 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, 2003, 2002 and 2001, were $285,843, $269,418, and $216,756,
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.
F-11
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2003, 2002 and 2001
Note 5 - Stockholders' Equity:
- ------------------------------
Common Stock
- ------------
During 2003, the Company completed several private placements of its securities
pursuant to which we issued an aggregate of 5,593,180 shares of its unregistered
common stock at average price of $0.79 per share, resulting in aggregate net
proceeds of $4,341,256 after commissions of $44,600 and expenses of $16,625. In
January 2003 the Company completed a private placement for $750,000 and issued
882,353 shares at a price of $0.85 cents per share. On March 28, 2003 the
Company completed a private placement for $152,480 and issued 152,480 shares at
a price of $1.00 per share. On July 15 and July 17th, we issued to one investor
4,000,000 common shares for proceeds of $3,000,000 at a price of $0.75 per
share. On October 17, 2003 we raised $500,000 from the same private investor as
July 15th and July 17th, issuing 558,347 common shares at a price of $0.90 per
share.
Preferred Stock
- ---------------
During 1999, the Company issued 696,978 shares of its 8% Series A cumulative,
convertible, redeemable, preferred stock. Common shares outstanding as of
October 31, 2003 do not reflect the preferred shares converted. During the year
ended October 31, 2003, 33,010 preferred shares were converted to common shares
compared to 14,087 preferred shares converted during the year ended October 31,
2002. There are currently 2,645 preferred shares outstanding.
Warrants
- --------
As it relates to the private placement dated January 2003, 882,353 warrants were
issued at a price of $1.80 per share. These warrants will expire in January 2006
provided the common stock is trading at $1.80 per share at this time. If the
stock is below the $1.80 per share the Company has agreed to extend the period
for up to two consecutive years. There were no warrants issued related to the
other private placements transacted in 2003.
In conjunction with the private placement in 2002 the Company issued one common
stock warrant for each share of common stock purchased, exercisable at a price
equal to 120% of the market price of the common stock on the NASDAQ Small Cap
Market based on the average closing price per share for the ten (10) trading
days immediately preceding March 25, 2002. Accordingly, the exercise price per
share is $3.95 and will expire on February 8, 2005. The Warrant may be callable
anytime at the discretion of the Company 12 months after an effective
registration statement, and after the average closing bid prices exceeds in
excess of a 150% gain over the Exercise price for 10 consecutive trading days.
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 were set to expire on August 1, 2002 however the price
of the stock did not exceed $15.00 per share and the expiration was extended to
August 31, 2004.
F-12
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2003, 2002 and 2001
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, 2003, 2002, and 2001,
the Company issued 0, 10,000 and 297,500 stock options, respectively. The
options have an exercise price of $3.38 and $5.63 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, 2003, 8,089
options have not been granted.
Options outstanding - 1995 Plan
Options outstanding, October 31, 2000 900,000
Options granted in 2001 297,500
---------
Options outstanding, October 31, 2001 1,197,500
=========
Options granted in 2002 10,000
---------
Options outstanding October 31, 2002 and 2003 1,207,500
=========
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. During the year ended
October 31, 2003, 100,000 options have been granted at an average exercise price
of $1.10 per share and 20,000 options have been cancelled. During the year ended
October 31, 2002, 277,000 options have been granted at an average exercise price
of $2.09 per share. On the issuance dates, the market value was the same as the
exercise price, therefore, no compensation expense was recorded. As of October
31, 2003, 643,000 options are available to be granted.
Options outstanding - 2000 Plan
Options outstanding, October 31, 2000 0
Options granted in 2002 277,000
Options cancelled in 2002 0
--------
Options outstanding, October 31, 2002 277,000
========
Options granted in 2003 100,000
Options exercised in 2003 0
--------
Options cancelled in 2003 (20,000)
========
Options outstanding October 31, 2003 357,000
========
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.
F-13
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2003, 2002 and 2001
Note 6 - Non-qualifying Stock Option Plan: (Continued)
- ------------------------------------------
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.
The Company established the 2000 Stock Compensation Plan which replaced the 1995
Stock Compensation Plan. The 2000 Plan authorizes awards of the following type
of equity-based compensation: incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock, deferred stock, annual
grants of stock options to directors, stock options to directors in lieu of
compensation for services rendered as directors, and other stock-based awards
valued in whole or in part by reference to stock of the Company. No incentive
stock options may be granted on or after February 1, 2010, nor shall such
options remain valid beyond ten years following the date of grant.
The total number of shares of stock reserved and available for distribution
under the 2000 Plan originally was 1,000,000 shares, a maximum of 1,000,000 of
which may be issued as incentive stock options.
At October 31, 2003, there were 651,089 shares reserved for outstanding options
under all plans and 643,000 shares available for granting of options under the
2000 Plan.
In fiscal 2003, 2002, and 2001, the Company granted 100,000, 287,000, and
297,500 options, respectively, to its employees, directors, and outside
consultants. Fiscal 2001 options were granted under the 1995 Plan. Fiscal 2002
options were granted under the 2000 Plan and 1995 Plan and Fiscal 2003 options
were granted under the 2000 Plan. Fifty percent of these options vest at the
time of the grant and the other 50% will vest six months after date of grant and
expire not more than ten years from date of grant.
The plan is administered by our compensation committee. 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.
F-14
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2003, 2002 and 2001
Note 7 - Major Customers:
- -------------------------
All of our revenues were derived from one major customer in 2003; all of the
revenues were derived from two major customers in 2002, while all of our
revenues were derived from one major customer in 2001.
Note 8 - Capital Lease Payable:
- -------------------------------
The Company has entered into capital lease obligations for computer, capital
equipment, and telephone equipment. The terms of the leases range from 36 to 48
months, with principal and interest due in monthly installments aggregating
$3,964 at rates ranging from 9.25% to 19.46%. The equipment was capitalized at
$100,324 and is being depreciated over five to fifteen years. Depreciation
expense for 2003 was $14,383 and accumulated depreciation at October 31, 2003,
is $23,644.
Total remaining lease payments:
2004 $ 17,610
2005 4,311
2006 247
-----------
22,168
Less: unamortized interest 1,858
-----------
20,310
Less: current portion 15,994
-----------
$ 4,316
===========
F-15
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2003, 2002 and 2001
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 and cash equivalents $2,601,558
LIABILITIES:
Accounts payable 40,167 40,167
Capital lease payable 20,310 20,310
Accrued expenses 396,872 396,872
Note 10 - Commitments:
- ----------------------
The Company has entered into an employment agreement with one of its executives.
The agreement is for a term of four years which will expire November 1, 2004.
The agreement provides for a salary of $185,000 and will allow for annual
increases based upon performance reviews. The agreement requires the Company to
grant the executive no less than 10,000 common stock options each year. In the
event of a change in control of the Company the agreement 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.
F-16
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2003, 2002 and 2001
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, 2003 were $74,268, $85,178, and $68,941 for the years
ended October 31, 2003, 2002, 2001 respectively. These contributions were paid
through the issuance of 69,848, 40,180 and 15,450 shares of our common stock
respectively. During the years ended October 31, 2003, 2002, 2001 respectively
11,688, 938, and 0 shares of our common stock have been returned to the 401K
plan due to employee shares that were not vested due to attrition.
Note 12 - Research and Development Costs:
- -----------------------------------------
Research and development costs are charged to operations when incurred. The
amounts charged were $310,219 in 2003, $160,785 in 2002 and $151,167 in 2001. As
we expand our research and development focus in fiscal year 2004 our efforts are
expected to be devoted to the development of patentable 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.
Note 13 - Subsequent Events:
- ----------------------------
On December 19, 2003 we completed a sole source private placement of our
securities from which we raised $200,000 and issued 173,913 shares of our
unregistered common stock at $1.15 per share. Additionally the $500,000
additional investment from Northshore Asset Management has been extended.
F-17
PART IV
Item 15. Financial Statements, Financial Schedules, Exhibits and Reports on Form
8-K
(a) List of documents filed as part of the report:
1. Consolidated Financial Statements
See index to Consolidated Financial Statements on page F-1
2. Financial Statement Schedule
See index to Consolidated Financial Statements on page F-1
3. Exhibits
The following documents are filed as exhibits to this Form 10-K, including
those exhibits incorporated in this Form 10-K by reference to a prior filing of
the Company under the Securities Act or the Exchange Act as indicated in
parenthesis:
Exhibit No. Description
- ----------- --------------------------------------------------------------
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)
2(b) 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(i) 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(i)(a) Articles of Amendment to the Articles of Incorporation (1)
3(ii) By-Laws (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(ii)(a) Amendment to By-Laws of Startech dated January 24, 2000 (1)
4(a) Form of Common Stock Certificate (2)
4(b) Form of Convertible Preferred Stock Certificate (1)
4(c) Form of Warrant Agreement (1)
4(d) Stock Subscription Warrant dated December 29, 1998 between the
Company and the Connecticut Development Authority ("CDA") (2)
4(e) Amendment to Stock Subscription Warrant dated March 31, 1999
between the Company and CDA (2)
4(f) Second Amendment to Stock Subscription Warrant dated June 15,
2000 between the Company and CDA (2)
4(g) Form of Warrant Agreement dated March 25, 2002 (3)
4(h) Form of 2000 Stock Option Plan (4)
F-18
Exhibit No. Description
- ----------- --------------------------------------------------------------
10(a) 2000 Stock Option Plan (1)
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 (2)
10(d) Term Sheet for Preferred Stock dated August 17, 1999, between
the Company and Paradigm Group, LLC (2)
10(e) Strategic Alliance Agreement dated July 22, 1996 between the
Company and Bauer Howden, Inc. (2)
10(f) Strategic Alliance Agreement dated October 25, 1996 between
the Company and Calumet Coach Company (2)
10(g) Strategic Alliance Agreement dated November 10, 1997 between
the Company and Chase Environmental Group, Inc. (2)
10(h) Strategic Alliance Agreement dated April 17, 1998 between the
Company and the Ensign - Bickford Company (2)
10(i) Strategic Alliance Agreement dated September 30, 1999 between
the Company and UXB International Inc. (2)
10(j) Strategic Alliance Partner Agreement dated March 14, 2000
between the Company and Skidmore, Owings & Merrill LLP (2)
10(k) Lease Agreement dated September 16, 1999 between the Company
and the CD Station, LLC (2)
10(l) Form of Distributor Agreement (2)
10(m) Patent License Agreement dated November 9, 1998 between the
Company and Rollan C. Swanson M.D. and Eleonora Swanson (2)
10(n) License of Technology Agreement dated November 29, 1999
between the Company and Media and Process Technology Inc (2)
10(o) Employment Agreement dated November 1, 2000 between the
Company and Joseph F. Klimek (5)
10(p) Employment Agreement dated November 1, 2000 between the
Company and Kevin M. Black (5)
10(q) Employment Agreement dated November 1, 2000 between the
Company and Robert L. DeRochie (5)
10(r) Lease Agreement dated September 30, 2000 between the Company
and the Century Drive, LLC (6)
10(s) Lease Agreement dated July 16, 2001 between the Company and
the Gaski Leasing Company (6)
10(t) Strategic Alliance Agreement dated June 30, 2001 between the
Company and Hydro-Chem Company (3)
10(u) Lease Agreement dated July 20, 2001 between the Company and
the Gaski Leasing Company, LLC (3)
10(v) Joint Development Agreement dated December 19, 2001 between
the Company and ViTech Enterprises Inc. (3)
10(w) Separation Agreement dated as of August 27, 2003 by and
between Kevin M. Black and Startech Environmental Corporation
(7)
10(x) Stock Purchase and Registration Rights Agreement dated as of
July 18, 2003, by and between Northshore Asset Management, LLC
and Startech Environmental Corporation (7)
F-19
Exhibit No. Description
- ----------- --------------------------------------------------------------
10(y) Stock Purchase Agreement dated as of July 22, 2003, by and
between Northshore Asset Management, LLC and Startech
Environmental Corporation (7)
10(z) First Amendment to Stock Purchase Agreement dated as of July
30, 2003, by and between Northshore Asset Management, LLC and
Startech Environmental Corporation (7)
11 Statement re computation of per share earnings *
14 Code of Ethics *
21 Subsidiaries as of October 31, 2003 (5)
23 Consent of Kostin, Ruffkess & Company, LLC dated December 15,
2003*
24 Power of Attorney (see signature page) of this Annual Report
on Form 10-K and incorporated herein by reference
31.1 Certificate of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 *
31.2 Certificate of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 *
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *
- ----------
* Filed herewith
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 on April 27, 2000, Commission File No.
333-35786.
(2) Incorporated by reference to Amendment No 1. to the
Registration Statement on Form S-1 filed on July 7, 2000,
Commission File No. 333-35786.
(3) Incorporated by reference to the Company's Registration
Statement on Form S-1 on July 17, 2002, Commission File No.
333-96885.
(4) Incorporated by reference to the Company's Registration
Statement of Form S-8 on October 31, 2002 Commission File No.
333- 100909.
(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for 2000, filed on January 25, 2001.
(6) Incorporated by reference to the Company's Annual Report on
Form 10-K for 2001, filed on January 25, 2002.
(7) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter needed July 31, 2003
(b) Reports on Form 8-K
1. On November 26, 2003, a Form 8-K was filed pursuant to Item 5 therein
with respect to the extension of the $500,000 that was to be invested
by Northshore Asset Management.
2. On September 5, 2003, a Form 8-K was filed pursuant to Item 5 therein
with respect to the appointment of Douglas Ballew, Joseph Equale,
Nicholas Perna and Kenneth Slepicka to the Board of Directors.
3. On August 1, 2003, a Form 8-K was filed pursuant to Item 5 therein
with respect to a modification to the Stock Purchase Agreement with
Northshore Asset Management.
F-20
4. On July 25, 2003, a Form 8-K was filed pursuant to Item 5 therein with
respect to an investment of $1.4 from Northshore Asset Management.
5. On July 22, 2003, a Form 8-K was filed pursuant to Items 1 and 5
therein with respect to the resignation of the Board of Directors with
the exception of Joseph F. Longo and an investment of $1.6 from
Northshore Asset Management.
(c) Exhibits
See index to exhibits on page
(d) Financial Statement Schedule
See index to Consolidated Financial Statements and Schedule on page F-1.
F-21
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 29th day of
January, 2004.
STARTECH ENVIRONMENTAL CORPORATION
(Registrant)
BY: /S/ Joseph S. Klimek
--------------------------------------------
Joseph S. Klimek
Chief Executive Officer, President
BY: /S/ Peter J. Scanlon
--------------------------------------------
Peter J. Scanlon
Chief Financial Officer, Vice President, and
Principal Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph F. Longo and Peter J. Scanlon, or either
of them, his or her attorneys-in-fact, for such person in any and all
capacities, to sign any amendments to this report and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
either of said attorneys-in-fact, or substitute or substitutes, may do or cause
to be done by virtue hereof.
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 29th day of January 2004.
SIGNATURES TITLE DATE
- ---------- ----- ----
/S/ Joseph F. Longo Chairman, Chief Operating Officer, January 29, 2004
- ------------------- Secretary & Director
Joseph F. Longo
/S/ Douglas R. Ballew Director January 29, 2004
- ---------------------
Douglas R. Ballew Director January 29, 2004
/S/ Joseph A. Equale
- --------------------
Joseph A. Equale Director January 29, 2004
/S/ Nicholas S. Perna
- ---------------------
Nicholas S. Perna Director January 29, 2004
/S/ Kenneth J. Slepicka
- -----------------------
Kenneth J. Slepicka