ITEM 1 - BUSINESS: - -----------------
The Company's activities during the four fiscal years, November 1, 1992 to October 31, 1995, when it was known as Kapalua Acquisitions, Inc., consisted primarily of investigating possible business opportunities. On November 17, 1995, the Company completed the acquisition of all of the issued and outstanding shares of the common stock of Startech Corporation, a Connecticut corporation, and then changed its name to Startech Environmental Corp. Startech designs machinery to recover, recycle, reduce and remediate hazardous and nonhazardous waste materials.
On November 18, 1995, the Board of Directors of the Company unanimously approved a change of business purpose of the Company from one seeking an acquisition candidate to one engaged in the business of manufacturing equipment to recover, recycle, reduce and remediate hazardous and nonhazardous waste materials. From that time to the date of this filing, the Company has maintained only this focus.
Background
We are a manufacturing solutions company 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 believe there is no entity that knows more about the utility and capability of our products than we do. 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 2002 fiscal year. The situation has been further exacerbated by the general economic climate throughout the world. We believe this new way of approaching the market will help achieve maximum penetration in the shortest timeframe.
Significant events are driving demand for our Plasma Converter. They include:
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 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. These products 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 the product they need 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 plasma 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. In 2001, recognizing the increasing importance of alternative energy and power sources in general, and hydrogen in particular, we expanded our product line to include StarCell(TM), a hydrogen separation technology. Working in conjunction with our core product, the Plasma Converter(TM), StarCell provides a green and renewable source of hydrogen. A rising comfort level with plasma based technologies resulting in part from our educational and informational efforts has created a much more receptive marketplace. We have taken steps to transform our business model from being solely a seller of equipment to a total solutions provider, including facility ownership or management.
Our business model and its market development strategies arise from our mission, which is to change the way the world views and employs discarded materials; what many would now call waste. 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 build own operate/build own transfer of ownership facilities, joint development projects, engineering services and Plasma Converter sales with after sales support and service.
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 PCB's 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.
Power/Energy
This segment includes projects that incorporate equipment that create power/energy products to work in conjunction with our core plasma technology. We have established a strategic alliance with Hydro-Chem, a division of Linde, located in Canton, Georgia to promote the production of hydrogen and methanol created by using our Plasma Converter. Hydro-Chem is a leading U.S. based manufacturer of methanol plants and will be scaling its units to match the Plasma Converted Gas output of our Plasma Converters. Similar alliances in this segment will be pursued with other significant power/energy equipment and/or generation companies.
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 will be specifically targeting customers that will receive the most economic gain form using our technology. Examples of such waste streams are:
o Medical waste o Pharmaceutical waste o PCBs 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. - 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
We believe that the primary factors that will create 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.
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.
Engineering Services
This segment relates to a wide range of bundled and unbundled services that we can provide for our customers including material testing, waste analysis, environmental processing solutions, pro-forma test analysis, and application engineering services. We expect to grow the contract testing and services areas of our business as demand for testing and analysis of specialized waste streams from customers' increases.
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 four key marketing strategies that make up the overall model. They are:
1. 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 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. 2. 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. 3. 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. 4. Engineering Services: This area will include testing and application engineering services for outside companies other than Plasma Converter customers, as well as material testing, waste analysis, and environmental processing solutions for Plasma Converter system customers.
Key to 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 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. An exception to this arrangement is where we would be shipping systems for a wholly owned build own operate project or build own transfer of ownership project.
The Company requires down payments and progress payments to be scheduled (for direct sales and co-venture projects) so that cash flow in the manufacturing process will be positive. Startech will obtain project financing against guaranteed waste streams/ tipping fees for BOO projects to fund manufacturing, shipping, and installation costs before facility startup. As well, the Company will incorporate performance insurance for BOO projects to guarantee performance on the specific waste stream to be processed as well as the obtaining of necessary local permits to begin operation.
Primary Customer
For the fiscal year ended October 31, 2002, 85% of our revenue was derived from Eico Systems Corporation, while all of our revenue for the fiscal year ended October 31, 2001 was derived from the same customer.
Plasma Converter(TM) Development and Technology
We believe that the primary factors that will create 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.
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 this intense field of radiant energy within the Plasma vessel that causes the dissociation of the molecular bonds of solid, liquid, and gaseous compounds or materials of both hazardous and non-hazardous wastes. We refer to this destruction process as "molecular dissociation."
Dissociation causes the molecules of the waste material to be separated into their elemental components (atoms), and reformed by the Startech System into special recoverable, commodity products. The process is not combustion or burning process, and the system should not be confused with an incinerator or a vitrification process. It is the intense energy field produced by the plasma plume within the Plasma Converter vessel that drives the dissociation process.
The Plasma Converter vessel operates at normal atmospheric pressure quietly and safely. While the interior temperature of the plume is about 30,000 degrees Fahrenheit, the temperature of the refractory walls inside the vessel is maintained at about 3,000 degrees Fahrenheit and is the lowest temperature experienced within the vessel. On the average most waste material will be dissociated or melted at temperatures exceeding 6,000 degrees Fahrenheit.
The Plasma Converter consists of many well-proven process components currently used in the metallurgical and chemical industries. Solid wastes being fed to our system are automatically fed to the system through an air-locked infeed port, and the feeding is ordinarily on a continuous basis. Liquids, gases and sludges can also be fed or pumped directly into the vessel through a pipe port. Bulk solids, liquids, gases and sludge may be fed in and processed simultaneously.
The Plasma Converted Gas (PCG)(TM) synthesis gas recovered from our system, after dissociation, is drawn out of the top of the vessel and put through our gas-polishing unit. The molten silicates, inorganics and metals, if any, are removed at the lower side of the Plasma Converter vessel through a melt discharge port and recovery procedure.
Recovered products can be used or sold as commodities for use in various manufacturing processes. It is expected that most of the Plasma Converted Gas will be used as a fuel gas and to a lesser degree, as a chemical feed stock;
silicate materials recovered will be used in the ceramics, abrasives or the construction industries; the metallic components can be used or be readily available for sale with little or no additional processing. There is a newly developing interest in PCG(TM) to produce hydrogen by use of our patented StarCell(TM) system. The economic justification for the use of our systems in hazardous waste applications does not depend on any revenues from the use or sale of the recovered commodity products, but the emergence of StarCell Hydrogen may modify that attitude.
Recovered Commodity Products
The Plasma Converter processes the wastes (matter) in such a way that the elemental components of the feedstock can be recovered in from one to three distinct phases:
(1) synthesis gas (PCG(TM), Plasma Converted Gas) that exits the chamber; (2) inorganic, glass-like (obsidian-like) silicates which form a separate layer above the liquid metal (if there is a sufficient quantity of metal in the feed stock, with small quantities of metal encapsulated in the silicate stone); and (3) liquid metallic elements, if in sufficient quantities, which collect and are automatically discharged at the base of the vessel.
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 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 radiant energy. The arc in the plasma plume within the vessel can be as high as 30,000 degrees Fahrenheit ... three times hotter than the surface of the Sun. When waste materials are subjected to the intensity of the energy transfer within the vessel, the excitation of the wastes' molecular bonds is so great that the waste materials' molecules break apart into their elemental components (atoms). It is the absorption of this energy by the waste material that forces the waste destruction and elemental dissociation.
How The System Works
The basic Plasma Converter system consists of the following:
In-feed System Plasma Vessel Gas Polisher Computer Control Station Power Supply
Figure 1. Process Overview of PCS
(GRAPIC 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 system is a continuous melt extraction feature which maintains the level of molten material in the plasma vessel at or below a preset limit without interrupting the operation of the system. This melt extraction system can be deployed with all sizes of Plasma Converters.
The plasma vessel is specially designed to ensure that no feedstock material is able to reach the exit port without first passing through the plasma energy field and undergoing complete molecular dissociation. The method by which this is accomplished forms a part of Startech's intellectual property. In addition, the plasma vessel is maintained at a slight negative pressure to ensure that no gases can escape to atmosphere.
The plasma torch system is a commercially available product that Startech can purchase from any number of reputable vendors. Comparable plasma systems have been used extensively in the metallurgical industry for decades. The most maintenance-intensive aspect of the PCS is the need to periodically replace electrodes, which occurs approximately every 300 to 500 hours of operation. Electrode replacement can be accomplished in approximately 30 minutes thus ensuring minimum downtime of the PCS.
The PCS is also equipped with a torch positioner system that allows the operator to aim the torch at different points within the plasma vessel. This aspect of the PCS allows the operator to quickly and efficiently treat feedstocks as they enter the vessel and move around inside the vessel to avoid any build-up of solidified melt that may occur on the vessel walls.
Gas Treatment System
The gas treatment system is comprised of six stages:
o High temperature cyclone separator to remove particulates o Quench stage (with heat recovery, if desired) o Cartridge dust collector to remove particulates o Selective catalytic reduction to remove NOx o Packed column scrubber to remove acids and volatized metals o Final polishing
High Temperature Cyclone Separator
The initial step of the gas treating process is a pre-quench in which the PCG is cooled from approximately 1000(degree)C down to 650(degree)C by direct water injection with a conventional spray dryer arrangement. The PCG port then flows through a refractory lined pipe into a conventional, insulated cyclone fabricated with high temperature alloy and designed to operate at high temperatures. The purpose of the cyclone is to remove particulate matter, which is then collected and batch-fed back into the plasma vessel.
Quench
PCG then flows to a spray dryer designed to rapidly reduce the gas temperature from approximately 650(degree)C down to 120(degree)C. The importance of this temperature reduction is to ensure that dioxins and furans, troublesome by-products of incineration, do not form. In order for dioxins and furans to form, the gas would need to remain in a specific temperature zone (e.g., 190(degree)C to 330(degree)C) for some period of time - conditions which are precluded by the quench.
Cartridge Dust Collector
PCG then flows to a commercial pulsejet cartridge dust collector with high-temperature cartridges and heating elements to prevent condensation. This unit is capable of automatically "blowing back" collected solids that are collected and batch-fed back into the plasma vessel.
Selective Catalytic Reduction (SCR)
Upon exiting the dust collector, the PCG is reheated to approximately 310(degree)C for selective catalytic reduction of NOx in a standard unit designed for this application where hydrogen present in the PCG reacts with NOx to form atmospheric nitrogen and water. During periods where there is no hydrogen in the PCG (e.g. during start-up, with processing materials that do not contain carbon), urea is added to reduce the NOx.
Packed Column Scrubber
Upon exiting the SCR, PCG undergoes a final quench with direct water injection to reduce the temperature below 50(degree)C. This prepares the PCG for acid gas removal, which is accomplished in a standard horizontal packed column scrubber. Other inorganic species dissolve into the scrubbing liquid as common ions including chloride, fluoride, sulphate, phosphate, sodium and calcium. To manage the build-up of salts, the scrubbing solution is removed and replenished with fresh water. The wastewater typically requires no further treatment prior to discharge to sewer, except in the event there is a high concentration of heavy metals entering the system as feedstock. Approximately 75% of metals go into the melt with the remainder being volatilized and entrained in the PCG where they are captured in the scrubber and carbon filter. The wastewater also contains particulates below one micron.
Final Polishing
Final polishing of the PCG is then accomplished by passing the gas through a mesh mist eliminator, a standard HEPA filter and granular activated carbon filter.
Finally, a standard variable speed fan at the exit of the gas treatment train pulls PCG through the entire system and maintains a constant, slight negative pressure within the plasma vessel.
The system has been designed so that it is comfortable, intuitive, and easy to use. The skill level of the operator need not be any higher than one having a reasonable technical aptitude.
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 2002 as more and more companies and governmental agencies look to validate our technology for their specific applications.
StarCell(TM) development and technology
On March 7, 2001, we announced the unveiling of our StarCell(TM) system. StarCell is the Company's patented hydrogen selective membrane device that separates hydrogen from Plasma Converted Gas (PCG(TM)). PCG(TM) is a synthesis-fuel gas mixture produced from processing material through the Plasma Converter. The increasing importance of the need for alternative energy sources and the emergence of the "Hydrogen Economy" drove our development of StarCell.
There are essentially two principal uses of energy:
o first, stationary energy for electrical power generation and heating;
o second, mobile energy such as that used for transportation propulsion systems ... the energy you can put in a fuel tank and take with you.
Any discussion on energy-related issues, such as air pollution, dependable energy supplies, and global climate change, further illuminates the need for alternative fuels. Hydrogen offers very large benefits by eliminating polluting emissions and greenhouse gases, and, with the Plasma Converter-StarCell technology, hydrogen can become a more readily and cheaply available alternate primary energy fuel. Hydrogen, like electricity, is a premium-quality energy carrier. It can be used with high efficiency, and with zero tailpipe and zero stack emissions.
Besides producing the Plasma Converter, we are also developing equipment that can recover hydrogen from a variety of feedstocks including coal and the wastes of the world. This capability will help make it possible to have a large-scale dependable energy system with essentially no pollutants and with no climate-changing gases.
Hydrogen is clearly recognized as a very real alternative to our always-depleting reservoir of fossil fuel. But more than that, hydrogen is the pristine fuel. When used as a fuel, it produces only water vapor (fresh water) as the by-product. Although energy production is not our main objective, the ability to separate this highly sought after gas from an already valuable synthesis gas will be another step forward in our mission to achieve broad market acceptance of our primary product, the Plasma Converter.
StarCell is not a fuel cell; it is a ceramic membrane filtration system that extracts hydrogen from PCG(TM). Because hydrogen is such a small molecule, smaller than all the others in the PCG(TM) gas mixture, it can be pushed through the filtering membrane to allow the hydrogen to be separated from the PCG(TM).
PCG(TM) is produced from wastes; it is a gas mixture containing a large quantity of hydrogen. Hydrogen is a valuable commodity with many commercial uses. It also is a pristine fuel that produces no carbon by-products. Pound-for-pound, hydrogen contains more energy punch than all the other fuels; and, when used in fuel cells or engines produces only clean water vapor.
StarCell Hydrogen can feed fuel cells and hydrogen engines. StarCell Hydrogen is a fuel that can produce clean electricity and clean propulsion systems. The combination of the Plasma Converter with StarCell can produce hydrogen on a large scale from the wastes of the world, and at a very low cost. Our customers who use a Plasma Converter with a StarCell will get paid for processing the incoming waste at the front end, and will be paid for the hydrogen at the back end. People sometimes forget that waste, even hazardous waste, is an ever-present, and much overlooked, valuable and renewable resource.
Hydrogen is a very valuable commercial gas that is produced by various thermo-chemical industrial methods. Hydrogen gas is used in many industrial processes to make products that we use every day. These products include cooking oils, peanut butter, soap, insulation, metals, drugs, vitamins, adhesives,
cosmetics, ammonia, fuels, plastics and so on. Hydrogen is also used extensively to propel spacecraft because it is very light and has a very high energy content. Hydrogen is used as a fuel to produce pollution-free electricity in fuel cells.
The paradox is, that while hydrogen is the most abundant material in the universe, it is not readily accessible. Expensive and sophisticated chemical-industry processes must extract it. Nearly all of the hydrogen produced today is made from fossil fuels. These fuels consist primarily of molecules made up of carbon and hydrogen. To produce hydrogen from these fossil fuel molecules, they must be "reformed" with steam and/or oxygen in a complex thermo-chemical process consisting of many steps. The products of reformation are hydrogen gas and carbon-gas species. The traditional industrial process further purifies and separates the hydrogen from the rest of the stream by various methods. This expensive reformation process is exactly what our Plasma Converter does in the process of destroying most feedstock. In other words, we get the reformation process from the Plasma Converter for no additional costs.
Competition
We believe the following technologies may be the potential competition to plasma-based technology:
We believe we are the industry leader in the use of plasma technology to rid the world of its waste problem and/or create valuable alternative power sources and industrial products. There are other plasma-based technologies in various stages of development that claim to achieve some, but not all, of the benefits achieved by our system. However, the fact that the commercial use of plasma for waste destruction resulting in power and product creation is in its early stages makes competitive comparisons difficult. We welcome the presence of other plasma technologies. The market for plasma is huge and the existence of competing technologies provides credibility to the industry. We are the only plasma company whose shares are traded on a recognized stock exchange.
We believe we are positioned to take advantage of the recognition of plasma technology as an alternative to conventional forms of waste disposal. We have spent substantial money, time and effort educating the public and private sectors on the benefits of our technology and believe we will reap the rewards of that effort.
We believe the following are a few of our competitive advantages:
o Low total system cost that allows our customers to make money with our system
o Operating performance far safer than prevailing environmental standards
o The ability to process solids, liquids, and gases simultaneously
o Versatile feed systems and vessel openings that allow a wide variety of feed streams
o Advanced stage of power producing peripheral equipment
o Unmatched advanced design and operating performance of our complete system
o Management's experience with plasma and its commercial application
o Depth and breath of manufacturing knowledge and experience
o Greater access to capital markets as a public company over private companies and
o Fully trained distributors and representatives
o Multiple modes of operations
We believe the following are our competitive disadvantages;
o Our cash position relative to other multi-national companies who may enter this field as it grows
o Resistance to new technologies when dealing with the public health and safety
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 Converter can handle great deviations in the waste stream content. We believe many of the potentially competitive technologies have yet to demonstrate capabilities beyond small laboratory or bench scale devices that use precisely controlled waste streams under precisely controlled conditions. They may also produce undesirable and hazardous by-products.
We believe the following companies are our most serious competitors in the plasma industry:
Integrated Environmental Technologies (IET); and
MSE Technology Applications, Inc.
IET offers a very different system from our technology. IET uses a carbon rod plasma arc system whereas we use a plasma torch based system. MSE, like Startech, is a plasma torch based system.
There are difficulties present in comparing technologies in our industry that are not present in established industries. The commercial nature of any plasma-based system is based upon the performance data received and the versatility of the material feedstock that can be processed. Further, in addition to the performance data and versatility of feedstock, the commercial uses for the system can be greatly enhanced by the number of peripheral devices that can be added to the system to make use of the saleable gas, silicate and metals that the system produces to create a total solution. Because this industry is just beginning to develop, there is very little empirical evidence in the public domain regarding the performance data of each competing technology. Therefore, performance comparisons are not available. However, some of our competitive advantages are not data related, but are the direct result of the versatility in the feedstock variations we can accommodate and in the advanced level of our system design. Additionally, we know of no competitor who is offering the variety of uses for the gas and silicates that Startech can offer.
Besides those companies mentioned specifically, there are a number of other companies that advertise a capability using plasma technology. We have no way of knowing the status of these companies or if they are even ongoing concerns with demons ratable systems. 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, 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 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 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 Waste Converter and related equipment on job sites. In addition, because we are marketing the Plasma Waste Converter internationally and expect those sales to represent a significant portion of our revenues, our customers will be required to comply with laws and regulations and, when applicable, obtain permits or approvals in those other countries. There is no assurance that these required permits and approvals would be obtained. Furthermore, particularly in the environmental remediation market, we may be required to conduct performance and operating studies to assure government agencies that the Plasma Waste Converter and its by-products do not prove to be environmental risks. There is no assurance that these studies, if successful, will not be more costly or time-consuming than anticipated. Further, if new environmental legislation or regulations are enacted or existing legislation or regulations are amended or are interpreted or enforced differently, our prospective working partners and/or its customers may be required to meet stricter standards of operation and/or obtain additional operating permits or approvals. There can be no assurance that our system's performance will satisfy all of the applicable regulatory requirements.
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.
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, CT. We also assemble, ship and test our systems there.
Research and development
While the principal research and development to produce commercial Plasma Converters has been completed, we will continue to perform research and development activities with respect to product improvement and new product development, utilizing internal technical staff as well as independent consultants. These activities have to date been entirely paid for and sponsored by the company. No further research and development is required for Plasma Converters currently being marketed and sold. We will continue to develop and design operational improvements that will be primarily in the area of the use of the Plasma Converted Gas produced by the Plasma Converter. Expenditures for research and development will be geared to achieving lower costs designs and higher efficiencies consistent with our business model of offering complete systems solutions. In the twelve months ending October 31, 2002 we expensed $160,785 for research and development. As we expand our research and development focus in fiscal year 2003 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, 2003, the Company had 18 full-time employees, of these full-time employees, 8 are in engineering, 1 in research and development, 2 are in manufacturing and production, 2 are 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. In addition to 18 full-time employees the Company has one part-time employee.
ITEM 2
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 per month. The Lease will expire on July 1, 2004.
The following table listed below is the annual rent expense for the corporate headquarters at Wilton, Connecticut, and the Product showroom in Bristol, Connecticut, and the Manufacturing facility in Bristol, Connecticut:
Year Annual Rent 2003 278,472 2004 282,720 2005 95,580
ITEM 3
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. There are no other pending legal, regulatory or administrative matters to which we are a party.
ITEM 4
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.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' - ------------------------------------------------------------------------ MATTERS: - -------
(a) Market Information ------------------
From November 1995 through November 1, 2000 our common stock was traded on the OTC Bulletin Board under the symbol STHK. On November 2, 2000 our common stock began trading on the Nasdaq Small Cap Market under the symbol STHK. The table below shows the high and low closing price of our Common Stock during the quarters indicated.
Closing Price ------------- Quarter Ended High Low
January 31, 2003 (January 23, 2003) $ 1.66 $ 0.84
October 31, 2002 $ 2.05 $ 1.20 July 31, 2002 $ 3.38 $ 1.40 April 30, 2002 $ 3.63 $ 2.47 January 31, 2002 $ 3.67 $ 1.95
October 31, 2001 $ 4.83 $ 2.05 July 31, 2001 $ 5.15 $ 3.95 April 30, 2001 $ 7.44 $ 3.82 January 31, 2001 $ 9.88 $ 5.38
(b) Stockholders ------------
As of January 24, 2003, there were 680 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. During the fiscal year 2002 the Company paid $22,310 in preferred dividends payable in additional shares of Series A Convertible Preferred Stock.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS: - -------------
Results of Operations
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, an 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's ability to operate as a stand-alone system for the production of hydrogen.
Selling expenses. Our selling expenses for the year ended October 31, 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.
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's ability to operate as a stand-alone system for the production of hydrogen.
Selling expenses. Our selling expenses for the year ended October 31, 2001 were $853,114 a decrease of $2,266 or less than 1%, for the similar period in 2000. The costs related to selling expenses comprised mainly of demonstrations at our Bristol showroom facility, as well as travel and consulting arrangements associated with marketing activities.
Interest income. Our interest income for the year ended October 31, 2001 was $182,193, as compared to $324,221 in the similar period 2000 a decrease of 43.8%. The decrease is due to lower cash balances and lower interest rates earned on our investments resulting from the Federal Reserve lowering short-term interest rates.
Income taxes. Income taxes for the year ended October 31, 2001 were $27,788 as compared with $18,333 in the similar period 2000. We have minimal tax obligations due to the fact that we have not had meaningful profitability to this point. We have loss carry forwards of $7.8 million to offset against future profits.
Comparison of Years Ended 2000 and 1999
Revenues. Our total revenues were $ 1,069,441 for the year ended October 31, 2000, as compared to $ 2,268,964 for the same period in 1999, a decrease of $ 1,199,523 or 52.9%. Our decrease in revenue was due to the fact that in the 1999 period we were working on the Army sub-contract, whereas for the year ended October 31, 2000, we were receiving no additional revenue from the Army sub-contract as we had completed the Assembled Chemical Weapons Assessment Army (ACWA) Project. In addition to the above, revenues were lower than expected due to delays in progress payment for the three systems we had contracted to build during that period for Taiwan, South Africa and Japan. While initial deposits of varying amounts have been received for these systems, and preliminary design work was completed, their manufacture has been delayed at the request of the purchasers for reasons unrelated to our ability to manufacture and ship as contracted.
Gross profit. Our gross profit was $266,814 for the fiscal year ended October 31, 2000 an increase of $136,109 or 104.0% from the same period in 1999. Our gross margins on revenue were 24.9% for the year ended October 31, 2000. The improved gross profit margins for the year ended October 31, 2000 were attributable to revenues earned from the final payment fee from the US Army for the Assembled Chemical Weapons Assessment Army (ACWA) Project, improved profit margins associated with our strategic agreement with UXB International, and lower associated costs related to our distributors. For the year ended October 31, 1999 lower gross profit margins resulted mainly from the higher than expected initial costs relating to the Assembled Chemical Weapons Assessment Army (ACWA) project.
General and administrative expenses. Our general and administrative expenses for the year ended October 31, 2000 were $2,068,236 an increase of $591,133, or 40.1%, from the same period in 1999. The significant acceleration in expenses is due to substantial increases in the following areas: hiring additional professional and administrative personnel to support our operations, international and domestic travel, printing expenses related to required SEC filings, office rental expenses, professional services fees and insurance expenses.
Research and development expenses. Our research and development expenses for the year ended October 31, 2000 were $74,534 up 100.0%, from the same period in 1999 during which no research and development expenses were reported. The increase is due to costs related to improved design and engineering of our Plasma Waste Converter, and the development of StarCell.
Selling expenses. Our selling expenses for the year ended October 31, 2000 were $855,380, an increase of $788,522, or 1,179%, from the similar period 1999. The increase is due to salaries for existing personnel, higher marketing and demonstration cost.
Interest income. Our interest income for the year ended October 31, 2000 was $324,221, as compared to $101,520 in the similar period 1999 and increase of 219.0%. The increase is due to higher cash balances as a result of the completed preferred private placement dated October 20, 1999, and warrants that were exercised during the year 2000.
Income taxes. Income taxes for the year ended October 31, 2000 were $18,333 as compared with $10,864 in the similar period 1999. We have minimal tax obligations due to the fact that we have not had meaningful profitability to this point. We have loss carry forwards of $5.6 million to offset against future profits.
Project Update - --------------
Eico
On January 8, 2003 we were notified by a firm representing Eico Systems Corporation that Eico had filed for Civil Rehabilitation under Japan's Civil Rehabilitation Law. We had been attempting for the previous month to establish a timetable with Eico regarding system turn-on and commercial operation but had not received confirmatory responses. As previously announced, the Plasma Converter System installed in Japan is operationally ready to process 5 ton per day of hazardous incinerator ash. All of the scheduled modifications to our system that we previously announced have been installed. We continue to await Eico's initiation of commercial operations. Our current understanding of the situation is that Eico will undergo a restructuring that will include the small portion of their business that operates the Startech Plasma Converter. We have been informed by Eico that they will continue to cooperate with Startech and that Eico has received permission from their largest shareholder, Sanyo, to continue the plasma business during this period of restructuring.
To the best of our knowledge the restructuring was required due to the general state of the Japanese economy and the recent increase in heating oil prices which has had a substantial negative affect on Eico's distributed power business.
We will continue to monitor the situation closely and strive to continue towards operating the Plasma Converter. We have been told that Eico is currently working on its strategy to implement a new business and strategic plan. Eico's operation are entirely outside Startech's control and we will continue to provide whatever assistance we reasonably can to make this transition period as short as possible, and we remain prepared to support bringing the system on-line for full scale commercial use.
Poland
Our signed contracts with two private concerns in Poland, Ekologia and Chempol, continue to move forward. The timing on these projects entering the production cycle is dependent upon the receipt of partial funding from an ecological fund that provides grants to certain approved environmental projects. According to our representative both of the contracts we have entered into have received approval from this funding source and that the parties are now confirming the extent of funding that will be provided and the timing of that funding. The timing of these grants has also driven the timing of the receipt of the balance of funds from private sector sources. One of the projects has also received a small additional grant that had been applied for from a separate public fund.
Our project in Bytom, Poland also continues to move forward. We have just been advised that all the necessary site and operational permits to begin the project have been received by the potential customer. The permits were required before the customer could follow our signed Letter of Intent with a signed contract. With the receipt of these payments we plan to be in Poland during the first week of February to move this project to the contract stage.
Philippines
The situation in the Philippines has advanced to the point where we are discussing the contractual language that will provide the necessary comfort to a funding source. Based upon the difficulties experienced in this part of the world, funding this long awaited project has been the major obstacle. We believe that satisfying these last concerns of the investor will allow the contract to be implemented and the payment schedule to be finalized.
Effects of Inflation
Due to the low rate of inflation there has been very little effect on the Company's net revenues for fiscal 2002.
Liquidity and Capital Resources
The Company had working capital of $369,185 as of October 31, 2002 and had cash and cash equivalents of $509,321 as of October 31, 2002.
Working capital was provided primarily from revenues earned from the Eico Systems Corporation and a private placement that was completed on March 25, 2002 from which we raised net proceeds of $2,283,712 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 and demonstration and testing programs, joint development programs, build own and operate facilities, and from cash generated from the operations of our business.
In October 2002 the Company announced that contracts to sell two Plasma Converters were signed aggregating in excess of $10 million dollars in sales. The contracts include an established payment schedule coordinated to provide progress payments at various stages of the manufacturing and delivery cycle. We believe these progress payments, along with a recently completed sole source private placement which raised $700,000 after commissions and expenses will provide enough operating capital to sustain company operations at the current level for more than 1 year. The private placement requires the issuance of 882,353 shares of our unregistered common stock at $.85 per share. We also are required to issue one common stock purchase warrant for each share of common stock purchased, exercisable at a price equal of $1.80 per share. The 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. 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 over the next year.
The Company has historically satisfied its capital needs primarily by the sale of 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.
Our investing activities have consisted primarily of short-term high quality liquid investments, with maturities of three months or less when purchased, which are considered cash equivalents. The primary investments are high quality commercial paper, U.S. Treasury notes and U.S. Treasury bills.
For the year ended October 31, 2002 we declared four quarterly dividends on our Series A Convertible Preferred stock in the aggregate amount of $22,310, which was paid by the issuance of 2,231 shares of Series A Convertible Preferred stock.
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.
ITEM 7. - 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
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 management's presence.
/s/ Joseph S. Klimek ---------------------------------- Joseph S. Klimek Chairman, President and Chief Executive Officer
/s/ Robert L. DeRochie ---------------------------------- Robert L. DeRochie Chief Financial Officer and Vice President of Investor Relations
Financial Statements and Supplementary data and the Independent Auditors Report thereon are listed and included Part IV, Item 14 of this Form 10-K.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE: - --------------------
None
PART III Directors and Executive Officers of the Registrant
Note: The information pursuant to Items 10, 11, 12 and 13 is omitted from this report (in accordance with Instruction G for Form 10-K) since the Company is filing with the Commission (by no later than February 28, 2003), a definitive proxy statement pursuant to Regulation 14A, which involves the election of Directors at the annual shareholders' meeting of the Company, expected to be held on or about March 7, 2003.
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Financial Statements
October 31, 2002, 2001 and 2000
i
STARTECH ENVIRONMENTAL CORPORATION
For The Years Ended October 31, 2002, 2001 and 2000
Independent Auditors' Report.................................................F-1
Consolidated Balance Sheets..................................................F-2
Consolidated Statements of Operations........................................F-3
Consolidated Statements of Changes in Stockholders' Equity...................F-4
Consolidated Statements of Cash Flows........................................F-5
Notes to the Consolidated Financial Statements...............................F-6
ii
Pond View Corporate Center 76 Batterson Park Road Farmington, CT 06032
[GRAPHIC OMITTED] Farmington - New London Main Line: (860) 678-6000 Toll Free: (800) 286-KRCO Business Advisors and Certified Fax: (860) 678-6110 Publis Accountants 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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, 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, 2002, in conformity with accounting principles generally accepted in the United States of America.
Farmington, Connecticut December 20, 2002
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2002, 2001 and 2000
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, 2002, 2001 and 2000, 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, 2001, and fiscal 2000 financial statements to conform to the presentation used in the fiscal 2002 financial statements. The reclassifications had no effect on shareholders' equity or net losses as previously reported.
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies: (Continued) - ---------------------------------------------------
Inventory - ---------
Inventory consists of raw materials and work in process, and is stated at lower of cost or market. Cost is determined by the first-in, first-out method.
Equipment - ---------
Depreciation of equipment is provided using the straight-line method over the estimated useful lives of the assets. Expenditures for major renewals and betterments which extend the useful lives of the equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Other Assets - ------------
Other assets consist of security deposits on office leases and utility deposits in 2002, 2001 and 2000. In addition we have incurred $174,305 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 $11.7 million expiring in various years through 2022. The deferred tax asset arising from the carry-forwards has been fully reserved against, since the likelihood of realization cannot be determined.
Earnings (Loss) Per Share - -------------------------
Earnings (loss) per share are based on the weighted average number of shares of common stock outstanding during the year. The Company has 2,783,907 potential common shares, 2,091,009 potential common shares, and 2,799,249 potential common shares in 2002, 2001, and 2000, 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, 2002, 2001 and 2000. The Company will issue an additional 199,171 common shares when all the preferred shares are converted. In addition, an additional 882,353 common shares were issued as a result of a recent private placement completed on January 14, 2003.
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.
Note 2 - Inventory: - ------------------
Inventory consists of the following at October 31, 2002 and October 31, 2001: 2002 2001 ---- ----
Raw materials $145,000 $145,000 Work in process 128,706 134,502 -------- --------
Total inventory $273,706 $279,502 ======== ========
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2002, 2001 and 2000
Note 3 - Property, Plant and Equipment: - --------------------------------------
Equipment is summarized by major classifications as follows:
2002 2001
Computer equipment $ 123,007 $ 96,181 Demonstration equipment 1,742,347 1,595,119 Furniture and fixtures 167,580 162,717 Vehicles -- 14,002 Leasehold improvements 108,096 95,088 ---------- ---------- 2,141,030 1,963,107 Less: accumulated depreciation 393,452 211,732 ---------- ---------- 1,747,578 1,751,375 Cost of demonstration equipment being manufactured 46,489 40,488 ---------- ----------
Total property, plant and equipment $1,794,067 $1,791,863 ========== ==========
Note 4 - Operating Lease: - ------------------------
The Company leases its offices in Wilton and its showroom and manufacturing facilities in Bristol, Connecticut, under lease agreements that expire in December 2004 and October 2005. Rental expense for the years ended October 31, 2002, 2001 and 2000, were $269,418, $216,756, and $163,042, respectively. There is an option for the Company to extend the Wilton, Connecticut lease for a five year term with the Landlord having the option to cancel after two years. Annual non-cancelable rent payments for the next three years are as follows:
October 31, ----------- 2003 $ 278,472 2004 282,720 2005 95,580
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2002, 2001 and 2000
Note 5 - Stockholders' Equity: - -----------------------------
Common Stock - ------------
During 2002 the Company completed a private placement of its securities pursuant to which we issued 927,969 shares of its unregistered common stock at $2.60 per share, resulting in aggregate net proceeds of $2,283,712 after commissions of $59,850 and expenses of $69,158. In August 2002 the Company completed a registration statement in which all of the shares and the warrants attached became effective.
Preferred Stock - ---------------
During 1999 the Company issued 696,978 shares of its 8% Series A cumulative, convertible, redeemable, preferred stock. On September 15, 2002 the Company sent a notice to the preferred shareholders announcing the remaining 35,655 preferred shares are to be converted at a $1.81 per share as mandated by the offering agreement, this conversion represents 199,171 common shares. Common shares outstanding as of October 31, 2002 do not reflect the preferred shares converted. During the year ended October 31, 2002, 14,087 preferred shares were converted to common shares compared to 477,150 preferred shares converted during the year ended October 31, 2001.
Warrants - --------
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 $3.34.
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.
In June 2000 the Company issued to the Connecticut Development Authority (CDA) Warrants to purchase 433,268 shares of our common stock at $7.00 per share. Since June 2000 CDA has purchased a total of 45,000 common shares at $7.00 per share, and for the year ended October 31, 2002 no CDA Warrants were exercised. The remaining CDA Warrants have since expired. The CDA Warrants provide for a limit on the shares of common stock that can be sold upon exercise of the CDA Warrants during any five day period equal to 7.0% of the average weekly reported trading volume of the common stock during the four calendar weeks preceding the date of sale. In addition if on or before July 1, 2002 the holder publicly sells any shares of our common stock at a price per share less than $7.00, we shall pay the holder an amount equal to his realized loss in cash or, at our discretion, in shares of our common stock valued at the current market price at the time of payment or in any combination of cash and shares. If we have paid the holder on account of a realized loss and later, but not later than July 1, 2002, the holder publicly sells additional shares at a price per share greater than $7.00, the holder shall promptly repay to us an amount equal to the lesser of (1) the amount by which the aggregate proceeds from such sale exceeds $7.00 and (2) the total realized loss previously paid by us to the holder. The repayment to us may be made in cash or in shares of common stock valued at the current market price at the time of repayment or in any combination of cash and shares.
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2002, 2001 and 2000
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, 2002 and 2001, the Company issued 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, 2002, 8,089 options have not been granted.
Options outstanding - 1995 Plan
Options outstanding, October 31, 1998 -- Options granted in 1999 20,000 ---------- Options outstanding, October 31, 1999 20,000 Options granted in 2000 895,000 Options exercised in 2000 (10,000) Options cancelled in 2000 (5000) ---------- 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 1,207,500 ==========
2000 Stock Option Plan - ----------------------
Options outstanding - 2000 Plan
Options outstanding, October 31, 2000 0 Options granted in 2002 277,000 Options cancelled in 2002 (5,000) ---------- Options outstanding, October 31, 2002 272,000 ==========
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, 2002, 277,000 options have been granted at an average exercise price of $2.04 per share and 5,000 options have been cancelled. On the issuance dates, the market value was the same as the exercise price, therefore, no compensation expense was recorded. As of October 31, 2002, 728,000 options are available to be granted.
The plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code and non-statutory stock options. Our officers, directors, employees and consultants, and employees and consultants of our majority-owned affiliated companies, are eligible to receive awards under the plan.
The options may be granted at an exercise price greater than or equal to the fair market value of our common stock on the date of grant or not less than 110% of the fair market value in the case of incentive stock options granted to persons holding more than 10% of the voting power of the Company. Fair market value for purposes of the plan is the closing market price of our common stock on the relevant date.
The Stock Options in January 2000, the Company established the 2000 Stock Compensation Plan (the 2000 Plan), which replaced the 1995 Stock Compensation Plan (the 1995 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, 2002, there were 736,089 shares reserved for outstanding options under all plans and 728,000 shares available for granting of options under the 2000 Plan.
In fiscal 2002, and 2001, the Company granted 287,000, and 297,500 options, respectively, to its employees, directors, and outside consultant. Fiscal 2001 options were granted under the 1995 Plan. Fiscal 2002 options were granted under the 2000 Plan and 1995 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.
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2002, 2001 and 2000
Note 6 - Non-qualifying Stock Option Plan: (Continued) - -----------------------------------------
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.
Note 7 - Major Customers: - ------------------------
All of our revenues were derived from two major customers in 2002; All of the revenues were derived from on major customer in 2001, while approximately 87 percent of revenues were derived from three major customers in 2000.
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 $4,749 at rates ranging from zero to 27.45%. The equipment was capitalized at $139,906 and is being depreciated over five to fifteen years. Depreciation expense for 2002 was $15,306 and accumulated depreciation at October 31, 2002, is $27,048.
Total remaining lease payments: 2003 $ 51,485 2004 16,130 2005 2,831 --------- 70,446 Less: unamortized interest 7,981 --------- 62,465 Less: current portion 44,885 --------- $ 17,580 =========
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2002, 2001 and 2000
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 $ 509,321 $ 509,321 Accounts receivable 290,000 290,000
LIABILITIES: Accounts payable 260,116 260,116 Capital lease payable 62,465 62,465 Accrued expenses 421,221 421,221
Note 10 - Commitments: - ---------------------
The Company has entered into employment agreements with three of its executives. Two of the agreements are for a term of four years, and one is for three years. The agreements provide for salaries ranging from $140,000 to $185,000 and will allow for annual increases based upon performance reviews. Two of the agreements require the Company to grant each executive no less than 10,000 common stock options each year. In the event of a change in control of the Company the agreements provide the executives with severance benefits that include: a lump sum payment of 150% of the amount the executive would have earned if he had received his salary payments through the expiration date of this agreement; an additional lump sum payment of $250,000; an immediate vesting of all options awarded to the executive as part of this agreement; an immediate right to sell the shares obtained through the exercise of those options without restriction as to dates, times or amounts, immediate vesting and transfer of ownership of all life insurance policies, and life and health benefits, including supplemental, vision and dental benefits if applicable, in an equal or better plan than the one currently provided to the executive and his family by the Company for a period of three years from the date of termination or constructive termination. In the event any payment or benefit received, or to be received, by the executive in connection with the termination of his employment, whether pursuant to his agreement or otherwise, is determined to be an excess parachute payment as defined in the Internal Revenue Code, and thus subject to the 20 percent Federal Excise tax, the amount of the benefits payable under his Agreement will be reduced until they are no longer subject to such tax.
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, 2002 were $85,178, $68,941, and $23,573 for the years ended October 31, 2002, 2001, 2000 respectively. These contributions were paid through the issuance of 40,180, 15,450 and 2,106 shares of our common stock respectively.
STARTECH ENVIRONMENTAL CORPORATION
Notes To The Consolidated Financial Statements
For The Years Ended October 31, 2002, 2001 and 2000
Note 12 - Research and Development Costs: - ----------------------------------------
Research and development costs are charged to operations when incurred. The amounts charged were $160,785 in 2002, $151,167 in 2001 and $74,534 in 2000.
Note 13 - Subsequent Events: - ---------------------------
On January 14, 2003 we completed a sole source private placement of our securities we raised $700,000 after commission and expenses and issued 882,353 shares of our unregistered common stock at $.85 per share. We also issued one common stock purchase warrant for each share of common stock purchased, exercisable at a price equal of $1.80 per share, expiring in January 2006, provided the common stock is trading at $1.80 per share at that 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.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K: - -------------------------------------------------------------------------
(a) (1) Financial Statements --------------------
The financial statements are listed below and included under Item 8, are filed as part of this report.
Report of Independent Auditors
Consolidated balance sheet at October 31, 2002 and October 31, 2001
Consolidated statement of operations for each of the three years in the period ended October 31, 2002
Consolidated statement of changes in stockholder's equity for each of the three years in the period ended October 31, 2002
Consolidated statement of cash flows for each of the three years ended October 31, 2002
Notes to the consolidated financial statements
(2) Financial Statement Schedules -----------------------------
All schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
(b) Reports on Form 8-K
On October 25, 2002, a form 8-K was filed with respect to announcing the addition of Richard M. Messina as a Board of Director.
(c) Exhibits
2. Plan of Reorganization ----------------------
(2)(a) Agreement and Plan of Reorganization between Company and Kapalua Acquisitions, Inc. dated November 17, 1995 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed on November 29, 1995, Commission File No. 0-25312)
3. Articles of Incorporation of the Company ----------------------------------------
(3)(a) Articles of Incorporation of Startech (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form 10, filed on February 19, 1995, Commission File No. 0-25312)
(3)(a)i Articles of Amendment to the Articles of Incorporation*
(3)(b) By-Laws of Startech (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form 10, filed on February 19, 1995, Commission File No. 025312)
(3)(c) Amendment to by-Laws of Startech dated January 24, 2000*
4. Instruments defining the rights of security holders, including -------------------------------------------------------------- indentures ----------
(4)(a) Form of Common Stock Certificate **
(4)(b) Form of Convertible Preferred Stock Certificate *
(4)(c) Form of Warrant Agreement*
(4)(d) Stock Subscription Warrant dated December 29, 1998 between the Company and the Connecticut Development Authority ("CDA")**
(4)(e) Amendment to Stock Subscription Warrant dated March 31, 1999 between the Company and CDA**
(4)(f) Second Amendment to Stock Subscription Warrant dated June 15, 2000 between the Company and CDA**
(4)(g) Form of Warrant Agreement dated March 25, 2002 ******
(4)(h) Form of 2000 Stock Option Plan*******
10. Material Contracts ------------------ (10)(a) 2000 Stock Option Plan*
(10)(b) 1995 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8, filed in November, 1995, Commission File No. 33-99790)
(10)(c) Loan Agreement Dated December 29, 1998 between the Company and CDA**
(10)(d) Term Sheet for Preferred Stock dated August 17, 1999, between the Company and Paradigm Group, LLC**
(10)(e) Strategic Alliance Agreement dated July 22, 1996 between the Company and Bauer Howden, Inc.**
(10)(f) Strategic Alliance Agreement dated October 25, 1996 between the Company and Calumet Coach Company**
(10)(g) Strategic Alliance Agreement dated November 10, 1997 between the Company and Chase Environmental Group, Inc.**
(10)(h) Strategic Alliance Agreement dated April 17, 1998 between the Company and the Ensign - Bickford Company**
(10)(i) Strategic Alliance Agreement dated September 30, 1999 between the Company and UXB International Inc.**
(10)(j) Strategic Alliance Partner Agreement dated March 14, 2000 between the Company and Skidmore, Owings & Merrill LLP**
(10)(k) Lease Agreement dated September 16, 1999 between the Company and the CD Station, LLC.**
(10)(l) Form of Distributor Agreement**
(10)(m) Patent License Agreement dated November 9, 1998 between the Company and Rollan C. Swanson M.D. and Eleonora Swanson.**
(10)(n) License of Technology Agreement dated November 29, 1999 between the Company and Media and Process Technology Inc.**
(10)(o) Employment Agreement dated November 1, 2000 between the Company and Joseph F. Klimek ****
(10)(p) Employment Agreement dated November 1, 2000 between the Company and Kevin M. Black ****
(10)(q) Employment Agreement dated November 1, 2000 between the Company and Robert L. DeRochie ****
(10)(r) Lease Agreement dated September 30, 2000 between the Company and the Century Drive, LLC*****
(10)(s) Lease Agreement dated July 16, 2001 between the Company and the Gaski Leasing Company*****
(10)(t) Strategic Alliance Agreement dated June 30, 2001 between the Company and Hydro-Chem Company ******
(10)(u) Lease Agreement dated July 20, 2001 between the Company and the Gaski Leasing Company, LLC******
(10)(v) Joint Development Agreement dated December 19, 2001 between the Company and ViTech Enterprises Inc. ******
16. Letter re change in certifying accountant -----------------------------------------
(16)(a) Letter, Re: Changes in Certifying Accountant (Incorporated by reference to the Company's Current Report on Form 8-K dated January 28,1997 File No. 0-25312)
21. Subsidiaries of the registrant ------------------------------
Startech Corporation, a Colorado corporation doing business under the name of Startech Corporation ****
23. Consent of experts and counsel ------------------------------
The Consent of Kostin, Ruffkess & Company, LLC dated December 15, 2001 ********
******** Filed herewith
******* Filed with the Registration Statement of Form S-8 on October 31, 2002 Commission File No. 333-
****** Filed with the Registration Statement on Form S-1 on July 17, 2002, Commission File No. 333-96885
***** Filed with Annual Report on Form 10-K for 2001, filed on January 25, 2002.
**** Filed with Annual Report on Form 10-K for 2000, filed on January 25, 2001.
*** Filed with Amendment No. 3 to the Registration Statement on Form S-1, filed on September 20, 2000, Commission File No. 333-35786.
** Filed with Amendment No 1. to the Registration Statement on Form S-1 filed on July 7, 2000, Commission File No. 333-35786
* Filed with the Registration Statement on Form S-1 on April 27, 2000, Commission File No. 333-35786
Exhibit 99.1: Certification by the CEO (annexed hereto)
Exhibit 99.2: Certification by the Principal Financial Officer (annexed hereto)
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 24th day of January, 2003.
STARTECH ENVIRONMENTAL CORPORATION (Registrant)
BY: /s/ Joseph S. Klimek -------------------------------- Joseph S. Klimek Chief Executive Officer President
BY: /s/ Robert L. DeRochie -------------------------------- Robert L. DeRochie Chief Financial Officer and, Vice President Investor Relations, and Principal Financial Officer
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 24th day of January 2003.
SIGNATURES TITLE DATE - ---------- ----- ----
/s/ Joseph S. Klimek Chief Executive Officer - ------------------------ and President January 24, 2003 Joseph S. Klimek
/s/ Kevin M. Black Sr. Vice President, - ------------------------ General Counsel, Kevin M. Black Secretary and Director January 24, 2003
/s/ Brendan J. Kennedy Director January 24, 2003 - ------------------------ Brendan J. Kennedy
/s/ Joseph F. Longo Director January 24, 2003 - ------------------------ Joseph F. Longo
/s/ Richard M. Messina Director January 24, 2003 - ------------------------ Richard M. Messina
/s/ Raymond J. Clark Director January 24, 2003 - ------------------------ Raymond J. Clark
CERTIFICATIONS
Certification requirements set forth in Section 302(a) of the Sarbanes-Oxley Act.
I, Joseph S. Klimek certify that:
1. I have reviewed this annual report on Form 10-K of Startech Environmental Corp;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining internal controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such internal controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's internal controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the internal controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
I am responsible for preparing the Company's consolidated financial statements and the other information that appears in this Form 10-K. I believe that the consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America appropriate in the circumstances to reflect, in all material respects, the substance of events and transactions that should be included, and that the other information in this Form 10-K is consistent with those statements. In preparing the consolidated financial statements, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being accounted for.
In meeting my responsibility for the reliability of the consolidated financial statements, I depend on the Company's system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization, and are recorded properly to permit the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.
Date: January 24, 2003
/s/ Joseph S. Klimek - ------------------------- Joseph S. Klimek President and Chief Executive Officer
CERTIFICATIONS
Certification requirements set forth in Section 302(a) of the Sarbanes-Oxley Act.
I, Robert DeRochie certify that:
1. I have reviewed this annual report on Form 10-K of Startech Environmental Corp;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining internal controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such internal controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's internal controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness of the internal controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
I am responsible for preparing the Company's consolidated financial statements and the other information that appears in this Form 10-K. I believe that the consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America appropriate in the circumstances to reflect, in all material respects, the substance of events and transactions that should be included, and that the other information in this Form 10-K is consistent with those statements. In preparing the consolidated financial statements, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being accounted for.
In meeting my responsibility for the reliability of the consolidated financial statements, I depend on the Company's system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization, and are recorded properly to permit the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.
Date: January 24, 2003
/s/ Robert L. DeRochie - ------------------------ Robert L. DeRochie Chief Financial Officer & Vice President, Investor Relations