U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended September 30, 1996 or
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission File No. 0-23226
ROCHEM ENVIRONMENTAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
UTAH 76-0422968
(STATE OF (IRS EMPLOYER
INCORPORATION) IDENTIFICATION NUMBER)
610 N. MILBY STREET
HOUSTON, TX 77003
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 224-7626
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common stock, $.001 par value NASDAQ Electronic Bulletin Board
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.____
Issuer's revenues for the fiscal year ended September 30, 1996 were
$1,247,320.
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on the OTC
Electronic Bulletin Board on December 10, 1996, was approximately $1,147,594.
Shares of Common Stock held by each officer and director and by each known
person who may be deemed to be an affiliate have been excluded. As of December
10, 1996, the registrant had 18,834,751 shares of Common Stock, par value $.001
per share, issued and outstanding.
The Company's definitive proxy statement in connection with its annual
meeting of stockholders to be held on March 27, 1997 are incorporated by
reference in Part III, Items 9, 10, 11 and 12.
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FORM 10-KSB REPORT INDEX
10-KSB PART AND ITEM NO.
Part I
Item 1 Description of Business ............................ 3
Item 2 Description of Property ............................ 10
Item 3 Legal Proceedings .................................. 10
Item 4 Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters .............................. 12
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations .... 13
Item 7. Financial Statements ............................... 16
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .............. 16
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons .......................................... 17
Item 10. Executive Compensation ............................ 17
Item 11. Security Ownership of Certain Beneficial Owners
and Management ................................... 17
Item 12. Certain Relationships and Related Transactions .... 17
Item 13. Exhibits and Reports on Form 8-K .................. 17
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PART I
ITEM 1. BUSINESS
GENERAL
Rochem Environmental, Inc., a Utah corporation (the "Company"), is
primarily engaged in the business of providing industrial wastewater treatment
services and capital equipment to companies in the refining, petrochemical and
oil and gas industries. In connection therewith, the Company utilizes patented
technology licensed exclusively to it through a distributor agreement from
Rochem Separation Systems, Inc. ("RSS"), a majority owned subsidiary of Rochem
AG. The patented technology involves the use of Rochem's Disc Tube(TM) form of
membrane separation modules. This technology may be referred to herein as the
"Rochem System" or "Disc Tube" system. Management believes this process is
superior to other technologies in its ability to cost effectively treat a wide
variety of wastewaters with the recovery of relatively pure water and the
concentration of products and by-products for reuse or disposal.
Economics and environmental regulations are requiring industrial and
commercial companies to utilize increasingly sophisticated solutions to meet
wastewater treatment needs. These solutions require that the wastewater be
sufficiently purified so as to minimize the impact on the environment. For many
wastewaters, traditional technologies that only remove a few types of pollutants
cannot sufficiently purify the wastewater to meet stringent discharge standards.
Industrial and commercial companies are searching for methods of handling large
volumes of water related to chemical production or processing to avoid or
minimize waste generation. The ability to recycle this water as well as the
recovery of products and by-products from these streams is economically
attractive as the costs increase for raw materials, including water, and
wastewater treatment. The Rochem system, using reverse osmosis, nanofiltration
and ultrafiltration membranes, can effectively produce clean water as well as
recover products and by-products while reducing the amount of waste that may
require disposal or further treatment.
The Company's customer base includes a broad range of industrial and
commercial companies, such as Chevron USA, Inc. and Borden Chemical & Plastics,
Inc. as well as the successful Superfund remediation at the French Limited Site
which was completed in 1995. The Company believes that it provides its customers
with an unique and cost-effective approach through the use of the patented
Rochem system and responsive service.
The Company was incorporated in Utah in October 1984 and until July 1993
had been an inactive corporation. Effective July 20, 1993, the Company, then
named Radon International, Inc. ("Radon"), acquired all the capital stock of
Separation Technology Systems, Inc. ("STS"), a Texas corporation formed in
December 1992, and accordingly, STS became a wholly-owned subsidiary of Radon.
The stockholders of STS agreed to exchange all of their capital stock in STS for
shares of Common Stock of Radon. Concurrent with the transaction, Radon changed
its name to Separation Technology Systems, Inc. and in September 1993 the name
was again changed to Rochem Environmental, Inc. In 1995, the shareholders of the
Company elected to reincorporate in Texas. The Company anticipates completion of
the reincorporation in 1997.
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WASTEWATER TREATMENT INDUSTRY
Wastewater treatment has developed into a multi-billion dollar global
industry. The use of membrane separation equipment continues to increase as part
of this industry. Reverse osmosis membranes originally developed for
desalination of sea water to produce potable water are now finding applications
as part of the wastewater treatment system or within the chemical process to
improve the efficiency of the production process.
Until recently, most wastewater treatment technologies focused on
treating or removing selected contaminants from wastewaters. Due to increased
pressure to reduce costs and maintain compliance, industrial and commercial
companies are now being forced to evaluate and install technologies that reduce
the entire impact of the toxicity while allowing for the recovery of by-products
and reuse of the water. The costs associated with treating these wastewaters
with conventional technologies have increased and in some cases the treatment is
inadequate to meet reuse or discharge requirements.
Recovery of products and by-products can provide a substantial advantage
in the petroleum and chemical industries. These plants are complex with many
production processes and use numerous raw materials. In most cases, products and
by-products when recovered properly can be reused as a feedstock within the
original generating process or another process within the plant. This leads to
reduced raw material costs as well as a reduction in pollutants that are
discharged to the environment.
Likewise, as sources of high quality water are becoming limited due to
impairment from industrial discharges or simply restrictions on the availability
of water as a natural resource, the cost of water has become an economic
consideration. Therefore, the recovery of water rather than the discharge of
water is gaining interest and is being implemented in a number of industries as
a means of reducing overall plant costs and reducing the liabilities associated
with discharges to the environment.
The market for membrane separations exceeds one billion dollars
(according to Freedonia Group Inc. (1994)) and the use of membrane equipment is
expected to continue to increase as a percentage of the wastewater treatment
market. Membrane equipment provides a highly efficient separation of pollutants
and clean water. Membrane systems can be designed to recover oil, separate
different types of salts, organic compounds and toxic metals as well as to
produce high purity water for critical manufacturing processes.
Accordingly, it is the primary objective of the Company to market its
technology for the recovery of high quality water and the concentration of
products and by-products for reuse or disposal. The Company's water processing
system involves the use of an innovative membrane separation system which
utilizes Rochem's patented Disc Tube technology. The technology is unique
because it can be employed for applications that were previously untreatable
through membrane separation and it can reduce the residual volume containing the
products and by-products to a level previously only achievable through
evaporative separation. The system can also be used to break down oil/water
emulsions and to remove organic compounds, metals and other toxic contaminants
from many waste streams.
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The Disc Tube technology is a robust form of membrane separation which
management considers to be far superior to traditional designs. The unique
advances incorporated into the Disc Tube allow it to handle much higher levels
of contaminants, including suspended solids, than previously possible with
membranes. In membrane separation applications (molecular filtration), the Disc
Tube design is also capable of removing a higher percentage of the undesirable
compounds than traditional reverse osmosis equipment. The geometry of the system
allows easy cleaning, reduces fouling and eliminates the binders ("glue") used
in traditional spiral wound reverse osmosis systems. This allows the use of a
much wider range of membrane materials, eliminates the problem of chemical
compatibility with the glue and permits the construction of systems capable of
handling aggressive chemical compounds.
While the Disc Tube technology is relatively new to the U.S. wastewater
industry, the technology has over ten years of operating history in Europe and
other parts of the world where the availability and protection of high quality
water resources have been addressed. During this period, Disc Tube systems have
been in operation handling industrial waste waters and landfill leachate at a
number of the major waste disposal sites in Europe. The technology has also been
demonstrated and used in such varied applications as desalination of water, food
processing, blood component separation and removal of radioactive compounds.
PRINCIPAL PRODUCTS AND SERVICES
The Company can provide a single-source solution to its industrial and
commercial customers by identifying and evaluating wastewater treatment needs,
conducting treatability studies, and designing, manufacturing, selling,
installing and servicing wastewater treatment systems for the production of
purified water and the recovery of products and by-products on a cost-effective
basis. The Company's principal products and services include capital equipment
and treatment services.
CAPITAL EQUIPMENT. The Company sells both pre-engineered and customized
treatment systems for membrane separation applications. The Company manufactures
or supplies systems and components that utilize, but are not limited, to each of
the following processes:
REVERSE OSMOSIS. Solutions are desalted or concentrated by driving them
through membranes using relatively high hydraulic pressure as the driving force.
Contaminants are excluded, or rejected, by the membranes and the purified water
is recovered separately.
NANOFILTRATION. Solutions are selectively desalted by utilizing
membranes with varying "openness". In this process, problematic pollutants can
be separated from the lower molecular weight compounds that are non toxic or
innocuous.
ULTRAFILTRATION. Moderate hydraulic pressure is used to transfer water
and low molecular weight species through a membrane while blocking contaminants
such as suspended solids, colloids and large organic molecules. Ultrafiltration
is generally used for separations where particle sizes are larger than those of
metal or salt ions.
SERVICES. The Company's service business currently represents
approximately 84% of its revenues. The Company provides the service of the
treatment of wastewaters at industrial and commercial customer sites. The
services provided to Chevron, Borden and the French Limited
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Site have demonstrated the Company's ability to provide a reliable,
cost-effective operation at customers' plants. The Company provides the
equipment, manpower and technical know-how to perform the necessary operation.
The Company operates on extended contracts as well as job-to-job contracting.
SALES AND MARKETING
The Company believes that the value of the Disc Tube System lies in its
ability to cost effectively treat a wide variety of wastewaters with the
recovery of relatively pure water and the concentration of products and
by-products for reuse or disposal. The Company believes that the Disc Tube
System will provide industrial clients with the necessary technology to reliably
comply with current and future federal and state legislation. While there are
other technologies that also provide water treatment, the Company believes that
the Disc Tube System has a unique advantage over many of the existing
technologies as it has a robust design and the ability to utilize different
membranes for specific applications. Accordingly, the Company believes that the
market for the Disc Tube System is large and will continue to grow as the
economic and environmental benefits of water and product/by-product recycling
are demonstrated.
The Company is focusing its marketing efforts on companies engaged in
oil and gas production, petroleum refining and petrochemical manufacturing in
the United States. Although, due to the broad applicability of the Disc Tube
technology, the Company continues to be approached with opportunities outside
the aforementioned target industry and geographical area. Management reviews
each new opportunity to evaluate its financial benefit but remains focused on
the target market to avoid fragmenting its efforts. If it is determined that the
work identified outside the target area is sufficiently profitable, the Company
will perform the job but not actively differentiate its marketing efforts.
The Company currently employs sales personnel with their primary mission
to generate revenue through direct sales to customers that represent end users
for our products and services. The Company participates in trade shows and
technical conferences to showcase the Disc Tube system and to publicize the
successful application of the system within different industries.
MANUFACTURING
The Company acquires major component equipment from Rochem AG and RSS
with which it designs and assembles final operational units configured to
satisfy the particular needs of each customer. Additionally, the Company has the
option to purchase completed units from Rochem AG for the purpose of service
units or outright equipment sales. Other raw materials, primarily steel,
filtration media and component parts such as pumps and valves are available from
several sources. Units are constructed for either stationary or mobile
operation. The Company has not experienced difficulty in obtaining the materials
and components used in its operations.
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COMPETITION
The wastewater treatment industry is currently fragmented and highly
competitive. Many companies compete to varying degrees with the Company in its
markets. The Company knows of no reliable statistics that provide a basis from
which to estimate the Company's relative competitive position in these markets.
The principal methods of competition in the markets in which the Company
competes are technology, service, price, product specifications, customized
design, product knowledge and reputation, timely delivery, the relative ease of
operation and maintenance and the prompt availability of spare parts. While no
competitor is considered dominant, there are some competitors that have
significantly greater resources than the Company.
The major competing technology is chemical treatment. Most chemical
treatment methods utilized in wastewater treatment are associated with large
biological treatment and/or dissolved air flotation systems. These systems,
while effective for large, in-plant fixed sites, are not particularly well
suited for recovery and reuse of water or products/by-products. Alternative
disposal options, including incineration and deep well injection, will offer
some competition, however, these options are believed to operate at a
significant cost or long-term liability disadvantages to the Disc Tube
technology. Alternative technologies, including electrocoagulation, ion
exchange, dissolved air flotation units and combinations of equipment including
spiral wound reverse osmosis and evaporation also offer competition to the
Company. Each of these technologies, while having certain applications, are
limited and are not believed to be able to reliably compete on a wide scale with
the Disc Tube system to meet cost and toxicity reduction goals.
Management expects that some major competitors will continue to acquire
other water treatment technology companies which will consolidate some of the
competition. Due to the unique nature of the Disc Tube system, the effects can
not be assessed at this time.
CUSTOMER BASE
The Company's customer base includes a broad range of major industrial
and commercial companies. With the growing demands for purified water and a
diminishing supply of usable water, many companies require increasingly
sophisticated solutions to their wastewater treatment needs. The following are
industries and customers and some of the products used therein:
OIL FIELD AND REFINERY. The petroleum industry uses large quantities of
water for steam and water flooding of oil fields for the secondary recovery of
oil. The Company's systems remove oil contaminants and suspended solids from
produced water and resurfaced water for reuse or discharge. The technology is
applicable to both land-based and offshore fields. Refineries can use the
Company's membrane separation equipment to remove oil and suspended solids from
process water and refinery effluents, as well as a wide range of organic
compounds, metals and dissolved solids. At the Chevron refinery in Pascagoula,
MS, the Company performs water treatment services under a four year contract
that expires in April 2000.
CHEMICAL AND PETROCHEMICAL. The chemical and petrochemical industries
have a broad range of wastewater treatment needs. The Company's technology can
be used to purify contaminated wastewaters as well as for the
recovery/separation of reusable products and by-
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products. Depending on the application, all of the membrane separation systems
that the Company offers can be effective. Rochem's technology is used to
accomplish the separation of contaminants and purification of water in harsh
environments and from problematic streams. At the Borden Chemical and Plastics'
Geismar, Louisiana ("Borden") facility the Company performs service work on
demand pursuant to purchase orders.
REMEDIATION AND LANDFILL LEACHATE TREATMENT. The Company's remediation
systems are used to remove organic compounds and soluble metals from
contaminated groundwater and surface waters. The Company's leachate systems
combine the recovery of clean water with the recirculation of the "reject"
stream to enhance biological activity in the landfill. The Company successfully
completed the clean-up of over 40 million gallons of contaminated pond water at
the French Limited Task Group (FLTG) Superfund site in Crosby, Texas, in October
1994.
PATENTS, TRADEMARKS AND DISTRIBUTOR AGREEMENT
In October 1993, the Company entered into a distributor agreement with
RSS for the exclusive rights to sell the Rochem Disc Tube system for refining
and petrochemical operations, oil and gas production and related activities. The
agreement was finalized to reflect a term of ten years and included an extension
for an additional five year term solely at the option of the Company. There are
no minimum purchase requirements. The Company is required to promote and
maintain the Disc Tube System and is required to maintain a minimum of $1
million of general liability coverage. In January 1996, the Company gained the
right to buy equipment and modules directly from Rochem AG at an increased
discount. Additionally, in January 1996, the Company gained the right to be the
exclusive agent for RSS for applications utilizing the leachate and desalination
systems in the State of Arkansas for a period of two years.
The Company has the right to use the Rochem name and related tradenames
and trademarks. The Disc Tube and related equipment are covered by, but not
limited to, the following U.S. and foreign patents:
United States 4,698,154 expiration date: 10/2004
United States 4,892,657 expiration date: 01/2007
United States 5,069,789 expiration date: 12/2008
United States 5,183,567 expiration date: 02/2010
United States 5,545,320 expiration date: 08/2013
Canada 459824 expiration date: 10/2004
Denmark 3441/1984 expiration date: 10/2004
Japan SHO-60-51507 expiration date: 10/2004
European 0132546 expiration date: 10/2004
Rochem AG has other patents pending for additional innovations in the
Disc Tube(TM) modules. To the extent the Company licenses such patents and other
proprietary rights, there can be no assurance that any patents licensed to the
Company will provide significant commercial protection. Further, there can be no
assurance that others will not independently develop superior know-how or obtain
access to know-how utilized by the Company that the Company now considers
proprietary. The issuance of a valid patent does not prevent other companies
from independently developing technology similar to the technology licensed by
the Company and,
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accordingly, there can be no assurance that any particular aspect of the
Company's technology would not be found to infringe upon the claims of other
existing patents.
RESEARCH AND DEVELOPMENT
Research and development associated with the Disc Tube technology has
been conducted by Rochem AG, RSS and the Company. Rochem AG and RSS continue to
spend in excess of $1,000,000 to fund and conduct extensive research and
development efforts aimed toward the further improvement of the technology. The
results of these efforts are demonstrated in the continued issuance of new
patents and the introduction of new nanofiltration and ultrafiltration membrane
modules. The Company has access to findings resulting from the Rochem AG and RSS
research and development efforts.
The Company's efforts focus mainly on application research and
development in the marketing areas. These efforts are typically aimed at
developing innovative approaches in the use of the technology or in the
combination of the Disc Tube technology with other synergistic systems and are
augmented by customer-research spending. In each of the last two years the
Company spent less than $20,000 on research and development.
ENVIRONMENTAL REGULATION
Demand for the Company's products is affected in part by federal, state
and local environmental laws and regulations requiring the Company's customers
to meet environmental standards. A decline in enforcement or in expenditures to
address those regulations could have an adverse effect on the demand for the
equipment and services offered by the Company.
To date, Congress has addressed the problem of pollution of water
resources through federal legislation including the Clean Water Act. The Clean
Water Act authorizes construction of sewage works and use of alternative waste
treatment techniques, establishment of discharge standards, and regulation of
point source discharge pollutants. Dischargers of water, pursuant to the Clean
Water Act, are required to obtain permits and provide state regulatory agencies
with certification evidencing compliance with the legislation. As these required
permits are coming up for renewal, state agencies are continuing to reduce the
contaminants allowable in wastewater discharges from industrial operations. The
Company believes that the Disc Tube technology will remove the contaminants
targeted by the Clean Water Act and enable customers to meet the reduced
discharges required by the permits.
The Clean Air Act of 1990, as one of its many means of reducing air
pollutants, further restricts hydrocarbon levels allowable in water contained in
atmospheric sewers. This requirement will dramatically change the manner in
which refineries and petrochemical plants must handle waste water streams
containing light hydrocarbons, including benzene. The Company believes the Disc
Tube technology will provide an economical solution which will enable the plants
to comply with this regulation.
A variety of regulations and agency actions at both the state and local
level are beginning to restrict the use of injection wells as a means of
disposal. For all practical purposes, this leaves incineration as the only
viable option for disposal outside of the plant boundaries. Existing
incineration capacity is limited and, as a result, is expensive. Thus, owners
and operators of the
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plants are vigorously pursuing in-plant treatment alternatives. The Company
believes the Disc Tube to be an excellent and cost competitive technology in
these applications.
For most of its history, the Environmental Protection Agency and the
associated state agencies have concentrated only a small portion of their
attention on the pollution generated from oil and gas operations. In the last
few years, these regulators have begun to tighten the specifications on water
permitted to be discharged. This has become a major source of concern,
particularly for the offshore operations. The Disc Tube technology is
particularly well suited for the treatment of produced water generated from
offshore production operations.
While the effect of the above regulations can be substantial to the
success of the Company's business, the cost to the Company to adhere to
governmental regulations is minimal.
EMPLOYEES
As of September 30, 1996, the Company had ten employees, six of whom
were involved in field operations and testing, two devoted full time to sales
activities and two involved in the general, administrative and financial areas.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal place of business is located at 610 N. Milby
Street, Houston, Texas, 77003. The Company leases approximately 6,600 square
feet of office space with accompanying warehouse and shop space of 45,000 square
feet in Houston, Texas, pursuant to a three year lease initiated on March 15,
1994. The Company leases office space under an operating lease which expires in
March 1997. Future minimum rental payments under this lease are $32,500 for
1997.
Minimum payments have not been reduced by sublease rentals aggregating
approximately $10,000 over the next year, under non-cancelable subleases with
related parties. Building rental expense for the Company for the years ended
September 30, 1996 and 1995 was approximately $23,050 (net of approximately
$53,700 of sublease revenues) and $29,000 (net of approximately $48,000 of
sublease revenues), respectively. The Company is currently sub-leasing, to a
related party, on a month-to-month basis, approximately 1,650 square feet of its
office space and 20,000 square feet of its warehouse for $2,558 per month. A
second tenant, also a related party, is currently sub-leasing through March 1997
approximately 1,650 square feet of office space and 3,400 square feet of
warehouse space for approximately $1,700 per month.
ITEM 3. LEGAL PROCEEDINGS
In July 1996, Separation Technology Systems, Inc. ("STS"), a
wholly-owned subsidiary of the Company, filed a suit in the 61st Judicial
District of Harris County, TX, seeking a declaratory judgment as to the
construction of written agreements between STS and Harris-Forbes, Inc. and the
status and relationship of the parties. Harris-Forbes, Inc. filed a
counter-claim seeking the recovery of $540,000 for financial consulting services
alleged to have been performed under one of the agreements plus interest,
attorney's fees, and a motion seeking to have the dispute sent to arbitration. A
hearing on the Harris-Forbes, Inc.'s motion to compel arbitration was postponed
and has not been rescheduled. No trial date has yet been set by the court. No
discovery has been
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propounded. The Company's counsel is unable to determine at the present time
whether the Company will have any liability in this matter. The Company believes
it has meritorious defenses and will vigorously defend its interests in this
matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began active trading on September 23, 1993
and is quoted on the OTC Electronic Bulletin Board under the symbol "RCEM". On
December 15, 1996, there were approximately 227 stockholders of record of the
Common Stock of the Company.
The following table sets forth the high and low bid prices for the
Company's Common Stock, on the OTC Electronic Bulletin Board , for the quarter
presented. The market for the Company's Common Stock is highly volatile and
sporadic. The bid prices represent inter-dealer quotations, without adjustments
for retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
BID PRICES
----------
FISCAL YEAR 1995 HIGH LOW
---------------- ---- ---
First Quarter $ 0.38 $ 0.19
Second Quarter $ 0.44 $ 0.19
Third Quarter $ 0.28 $ 0.16
Fourth Quarter $ 0.28 $ 0.15
FISCAL YEAR 1996 HIGH LOW
---------------- ---- ---
First Quarter $ 0.31 $ 0.16
Second Quarter $ 0.16 $ 0.12
Third Quarter $ 0.16 $ 0.06
Fourth Quarter $ 0.16 $ 0.13
Any payment of cash dividends in the future will be dependent upon the
amount of funds legally available, the Company's earnings, financial condition,
capital requirements and other factors that the Board of Directors may deem
relevant. The Company does not anticipate paying cash dividends in the
foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company was organized in November 1992 and from inception through
June 1, 1993, the Company was involved primarily with raising start-up capital.
During May 1993, the Company entered into its first major contract at the FLTG
Superfund Site in Crosby, TX. The majority of the Company's revenue for fiscal
years 1993 and 1994 were derived from this single contract. The project for FLTG
was successfully completed in October 1994. In November 1994, the Company began
work for the Chevron refinery in Pascagoula, MS on a month to month contracting
basis utilizing the Disc Tube system. Subsequently, in April 1995, a contract to
continue providing this service to Chevron for a period of twelve months was
finalized. In April 1996, Chevron and the Company negotiated a four year
contract which will expire in 2000. The Company commenced providing services for
Borden Chemical in June 1994. This work which involves catalyst removal has
continued into fiscal year 1997 and involves certain know-how developed by
employees of the Company that may be applicable to other customers. During the
fiscal year ended 1996, the Company conducted testing and various service
projects for other customers.
In December 1994, the Company successfully completed a sale of a Disc
Tube system to a landfill in Georgia for treating leachate. The Company believes
that the technology is an excellent treatment system in this application. As
this application is not exclusively specified within the license agreement with
RSS, future sales for this application can only be pursued on a case by case
basis with the approval of RSS. In January 1996, the Company gained two year
right to act as the exclusive agent for RSS in the State of Arkansas where
management believes that the economics and regulatory environment are
appropriate for the application of this technology for landfill leachate
treatment. In June 1996, the Company sold a leachate treatment system to a
landfill in Arkansas as part of the development of this territory.
Management's strategy is to pursue testing and service work that will
produce future sales as well as technology advancements making the Disc Tube
system applicable to a wider range of potential waste waters. Management is
pursuing opportunities to present technical papers in the proper forums to gain
recognition and stimulate interest among decision makers and industry
professionals.
MANAGEMENT CHANGES
In December 1995, Mr. Kenneth Miller informed the Board of Directors of
his intent to resign from the Company as an employee, officer and director. This
resignation was effective January 31, 1996. Mr. Miller entered into a 12 month
consulting agreement with the Company whereby the Company has access to Mr.
Miller's services, on an as needed basis. To date these services have not been
required. Following Mr. Miller's resignation, the Board of Directors employed
Mr. Erick Neuman as President and CEO effective January 1, 1996. The
transitional period caused by this management change did adversely impact the
results of operations for the current year and therefore management does not
believe that these results are indicative of results of operations to be
achieved in future periods.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
in the Consolidated Statement of Operations and the percentages of the total
revenues such items represent and the percentage increase or decrease in such
items for the years indicated.
Percentage
YEAR ENDED SEPTEMBER 30, INCREASE/(DECREASE)
1996 1995 1996 VS. 1995
---- ---- -------------
Revenues 100% 100% (20%)
Cost of sales 78 75 (16)
Gross profit 22 25 (31)
Selling, general and
administrative expenses 106 117 (28)
Operating loss (85) (110) (39)
Interest expense (0.7) (0.4) 66
Net loss (85) (110) (38)
TWELVE MONTHS ENDED SEPTEMBER 30, 1996 ("FISCAL 1996") COMPARED WITH TWELVE
MONTHS ENDED SEPTEMBER 30, 1995 ("FISCAL 1995")
REVENUES. Revenues were $1,247,320 in Fiscal 1996 as compared to
$1,554,611 in Fiscal 1995 representing a decrease of 20%. Revenues derived from
service contracts totaled $1,051,585 in Fiscal 1996 as compared to $1,402,077 in
Fiscal 1995. Revenues from a property and equipment sale was $195,000 in Fiscal
1996 as compared to product sales of $152,534 in Fiscal 1995. During Fiscal 1996
and 1995, 75% and 70%, respectively, of the Company's revenues were derived from
two customers (Chevron and Borden Chemical). During Fiscal 1996, approximately
$17,000 of service contract revenues were attributable to pilot testing revenues
as compared to approximately $173,000 in Fiscal 1995. The decrease in revenues
was due mainly to customers delaying expenditures and lack of project backlog
developed in Fiscal 1995. Management has made changes within the sales functions
and has focused on creating a backlog of projects which are expected to begin to
come into fruition in fiscal year 1997.
GROSS PROFIT. Cost of sales related to service revenues for Fiscal 1996
totaled $744,540 of which $172,008 were non cash expenses of depreciation. This
total represents a gross profit for service related activities of 26% of revenue
as compared to 23% of revenue for Fiscal 1995. Cost of sales related to the sale
of property and equipment was $199,026 for Fiscal 1996 compared to cost of
product sales of $73,080 in Fiscal 1995. In Fiscal 1996, the Company incurred a
loss on the sale of property and equipment of $4,026 as compared to a gross
profit on product sales of $79,454 in Fiscal 1995. The loss on the sale of the
equipment was a noncash expense as the system that was sold was a spare system
that had been previously used by the Company for providing testing services.
14
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were reduced by 28% and totaled $1,321,811 for Fiscal
1996, compared with a total of $1,825,230 in Fiscal 1995. Non cash related
expenses comprised of depreciation and amortization were $503,942 for Fiscal
1996 compared to $768,323 in Fiscal 1995. Cash expenses decreased to $817,869 in
Fiscal 1996 from $1,056,907 in Fiscal 1995. This decrease was attained through
staff reductions and realignments as well as continued controls on expenses
commensurate with the sales and marketing efforts of the Company during this
period.
The majority of the non cash expenses in Fiscal 1995 were amortization
of certain intangible assets associated with the Lefco Environmental Technology,
Inc. ("Lefco") Marketing Agreement and the Disc Tube Distribution Agreement. As
a result of realizing no benefit during the previous two years of the Lefco
Marketing Agreement, the Company took an additional charge of $279,773 during
Fiscal 1995 to completely write-off this intangible asset. Amortization in
Fiscal 1996 was completely associated with the Disc Tube Distribution Agreement.
NET LOSS. The net loss decreased by 38% to $1,056,956 for Fiscal 1996,
compared to a net loss of $1,713,937 in Fiscal 1995. The losses included various
non cash expenses of $893,726 in Fiscal 1996 and $1,267,318 in Fiscal 1995. Cost
controls which were instituted by new management during Fiscal 1996 effectively
reduced operating expenses which reduced the net loss recorded in Fiscal 1996
even though revenues declined in Fiscal 1996 as compared to Fiscal 1995. The
Company's focus for Fiscal 1997 is to increase revenues while continuing to
restrain operating costs in order to generate operating cash flows for ongoing
activities and investments.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had a working capital deficit of
$232,541 and a quick ratio of 0.5 to 1.0 as compared to net working capital
deficit of $372,945 and a quick ratio of 0.3 to 1.0 on September 30, 1995. Net
cash used for operating activities during Fiscal 1996 was $284,820 as compared
to $171,387 in Fiscal 1995. This increase has been impacted primarily from the
conversion in Fiscal 1995 to a factoring agreement with Citizens Bank from which
the Company receives cash for receivables at the time the invoice is issued
which provided approximately $175,000 in additional cash flows during Fiscal
1996. Net cash used for the purchase of capital equipment during Fiscal 1996 was
$0 as compared to $103,235 during Fiscal 1995. In Fiscal 1995 investment in
equipment additions were made on an as needed basis for individual projects. In
Fiscal 1996, the sale of the leachate treatment system provided $195,000 in
cash. This unit had previously been used by the Company as testing equipment
which generated revenue in prior reporting periods. The Company realized a loss
of $4,026 on the sale of the system.
During the fiscal year ended September 30, 1996, financing activities
provided net cash of $161,980 compared with $301,293 in the previous year. To
date, the Company has not generated sufficient internal cash flow to fund
operations and to satisfy the debt obligations to Rochem AG and Lefco. In
January 1996, the Company entered into an agreement with Rochem AG whereby
Rochem AG converted the principal amount of its January 1995 $50,000 loan into
500,000 shares of Company Common Stock, purchased an additional 500,000 shares
of Company common stock for $50,000, and agreed to provide the Company a
$100,000 credit facility to meet working capital needs during Fiscal 1996.
Through this credit facility, Fluid Separation Systems, an affiliate of Rochem
AG, loaned the Company $25,000 in December 1995, $50,000 in February 1996
15
<PAGE>
and $25,000 in July 1996. On January 31, 1996, the Company used the proceeds of
these transactions to retire a $50,000 loan from Citizens Bank. In December
1996, Fluid Separation Systems granted a six month extension to the maturity
date and waived interest payments until the maturity date of the loan. The loans
bear interest of prime plus 2% for the December 1995 loan and 10% for the
February and July 1996 loans and are due June 1997, July 1997 and December 1997,
respectively.
Additionally, in January 1996, Lefco agreed to convert its January 1995
$50,000 loan into 500,000 shares of Company common stock and provided a $50,000
credit facility to be utilized by the Company to meet working capital needs
during the 1996 fiscal year. In September 1996, the Company exercised the
$50,000 credit facility with Lefco. The credit facility provided for monthly
payments of $1,062.35, including interest, for eleven months with final payment
due on September 20, 1997.
Furthermore, in January 1996, the Company agreed with RSS to convert
approximately $100,000 of accounts payable due to RSS into 1,000,000 shares of
Company common stock. In addition, the Company obtained the rights to buy
equipment and modules directly from Rochem AG at a preferred price and the right
to become the exclusive agent for RSS for applications utilizing the leachate
and desalination systems in the State of Arkansas. In January 1996, the Company
agreed with GH Venture Group to terminate its consultant service agreement and
in connection therewith convert the outstanding accounts payable to GH Venture
Group into 500,000 shares of the Company Common Stock and $5,000 cash.
Management believes that cash flow from operations will be sufficient to
fund operations for the remainder of the 1997 fiscal year. The Company has
created a backlog of projects that are expected to produce cash sufficient to
meet working capital needs. Because the timing of these projects cannot be
controlled, the Company is evaluating and exploring other financing
alternatives. With the four year extension of the contract with Chevron, the
Company is considering financing part or all the equipment to generate
sufficient financing to reduce expenses related to rental of equipment and the
factoring of receivables.
In the event additional funding is required, the Company will consider
other alternatives such as joint ventures, equity investors, venture capital
groups, institutions, issuance of convertible or subordinated debt or a form of
business combination. Should the need arise for the use of any of these methods
to raise capital, there can be no assurances that any of these will be available
to the Company. As a result of these liquidity issues the Report of Independent
Accountants includes an emphasis of matter paragraph concerning the Company's
ability to continue as a going concern.
ITEM 7. FINANCIAL STATEMENTS
Financial statements included on pages 19 to 35.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
16
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
This information is incorporated by reference to the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission ("Commission") not later than 120 days after the end of the Company's
fiscal year covered by this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
This information is incorporated by reference to the Company's
definitive proxy statement to be filed with the Commission not later than 120
days after the end of the Company's fiscal year covered by this Form 10-KSB.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
This information is incorporated by reference to the Company's
definitive proxy statement to be filed pursuant to with the Commission not later
than 120 days after the end of the Company's fiscal year covered by this Form
10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the Company's
definitive proxy statement to be filed pursuant to with the Commission not later
than 120 days after the end of the Company's fiscal year covered by this Form
10-KSB.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are incorporated by reference thereto:
Exhibit
Number Identification Of Exhibit
------ -------------------------
2.1(1) - Reorganization Agreement
3.1(2) - Amended and Restated Articles of Incorporation
3.2(5) - Bylaws
4.1(5) - Common Stock Specimen
4.2(4) - Certificate of Designation of Preferences, Rights
and Limitations of Series A Preferred Stock
4.3(4) - Certificate of Designation of Preferences, Rights
and Limitations of Series B Preferred Stock
10.1(2) - Distributor Agreement
10.2(4) - Asset Purchase Agreement
10.3(2) - Term Sheet
10.4(6) - Facilities Lease Agreement
10.5(6) - Termination Agreement Between Company and GH
Venture Group
10.6(6) - Agreement Between Company and Lefco Environmental
Technology, Inc.
17
<PAGE>
10.7(6) - Agreement Between Company and Rochem Separation
Systems, Inc.
10.8(6) - Agreement Between Company and Rochem AG
16.1(3) - Letter regarding change in certifying accountant
16.2(3) - Letter regarding change in certifying accountant
- --------------
(1) Previously filed as an exhibit on Form 8-K dated July 20, 1993.
(2) Previously filed as an exhibit on Form 8-K dated September 30, 1993.
(3) Previously filed as an exhibit on Form 8-K dated November 5, 1993.
(4) Previously filed as an exhibit on Form 8-K dated November 19, 1993.
(5) Previously filed as an exhibit on Form 8-A dated January 13, 1994.
(6) Previously filed as an exhibit on Form 10-KSB for the fiscal year
ended September 30, 1995.
(b) No Reports on Form 8-K were filed with the Securities and Exchange
Commission during the fourth quarter of fiscal year 1996.
18
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . 20
Consolidated Balance Sheet as of September 30, 1996 and 1995. . . . . 21
Consolidated Statement of Operations
for the years ended September 30, 1996 and 1995. . . . . . . . 22
Consolidated Statement of Stockholders' Equity
for the years ended September 30, 1996 and 1995. . . . . . . . 23
Consolidated Statement of Cash Flows
for the years ended September 30, 1996 and 1995. . . . . . . . 24
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 25
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders,
Rochem Environmental, Inc.
We have audited the consolidated balance sheet of Rochem Environmental, Inc. and
subsidiary as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rochem
Environmental, Inc. and subsidiary as of September 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 16 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficit that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 16. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Coopers & Lybrand LLP
January 3, 1997
Houston, Texas
20
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 151,079 $ 78,919
Restricted cash 23,348 35,327
Trade accounts receivable 7,141 21,065
Prepaid expenses 44,509 51,769
------------ -----------
Total current assets 226,077 187,080
Inventory 197,576 204,263
Property and equipment, net 1,190,238 1,690,801
Intangible assets, net 4,525,415 4,902,752
Other assets 31,556 25,579
------------ -----------
Total assets $ 6,170,862 $ 7,010,475
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 0 $ 50,000
Notes payable to related parties 150,000 100,000
Accounts payable 212,775 168,025
Accrued expenses 65,820 76,075
Payable to related parties 30,023 165,925
------------ -----------
Total current liabilities 458,618 560,025
Commitments and Contingencies (Note 7 and 17)
Stockholders' equity:
Common stock, $.001 par value, 50,000,000
shares authorized, 18,834,751 and
15,834,751 issued and outstanding
at September 30, 1996 and 1995, respectively 18,835 15,835
Preferred stock, no par value, 10,000,000 shares
authorized, none outstanding
Additional paid-in capital 10,265,180 9,949,430
Accumulated deficit (4,571,771) (3,514,815)
------------ -----------
Total stockholders' equity 5,712,244 6,450,450
------------ -----------
Total liabilities and stockholders' equity $ 6,170,862 $ 7,010,475
============ ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
21
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
1996 1995
------------ ------------
Revenues:
Service $ 1,052,320 $ 1,402,077
Product Sales -- 152,534
Property and Equipment Sale 195,000 --
------------ ------------
Total income 1,247,320 1,554,611
Cost of sales:
Service 774,540 1,085,097
Product Sales -- 73,080
Property and Equipment Sale, net of
accumulated depreciation 199,026 --
------------ ------------
Total cost of sales 973,566 1,158,177
------------ ------------
Gross profit 273,754 396,434
Selling, general and administrative expenses:
Depreciation and amortization expense 503,942 768,323
Other expenses 817,869 1,056,907
------------ ------------
Total selling, general and
administrative expenses 1,321,811 1,825,230
Impairment of intangible assets -- 279,773
Interest expense (income), net 8,899 5,368
------------ ------------
Net loss (1,056,956) (1,713,937)
------------ ------------
Net loss per share ($ 0.06) ($ 0.11)
============ ============
Weighted average shares outstanding 18,078,587 14,917,491
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
22
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
---------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1994 14,634,751 $14,635 $ 9,764,010 ($1,800,878) $ 7,977,767
Private placement of common
stock for cash, net 1,200,000 1,200 185,300 -- 186,500
Warrants issued -- -- 120 -- 120
Net loss -- -- -- ($1,713,937) ($1,713,937)
---------- ------- ----------- ----------- -----------
Balance, September 30, 1995 15,834,751 $15,835 $ 9,949,430 ($3,514,815) $ 6,450,450
Private placement of common
stock for cash 500,000 500 49,500 -- 50,000
Conversion of Rochem AG
loan payable to common stock 500,000 500 49,500 -- 50,000
Conversion of Lefco loan
payable to common stock 500,000 500 49,500 -- 50,000
Conversion of RSS accounts
payable to common stock 1,000,000 1,000 99,000 -- 100,000
Conversion of GH accounts
payable to common stock 500,000 500 49,500 -- 50,000
Compensation cost recorded
for stock warrants -- -- 18,750 -- 18,750
Net Loss -- -- -- (1,056,956) (1,056,956)
---------- ------- ----------- ----------- -----------
Balance, September 30, 1996 18,834,751 $18,835 $10,265,180 ($4,571,771) $ 5,712,244
========== ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
23
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,056,956) ($1,713,937)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 675,950 928,913
Compensation element of stock warrants 18,750 --
Impairment of intangible assets -- 279,773
Loss on disposal of equipment 6,948 58,632
Changes in assets and liabilities:
Trade accounts receivable 13,924 174,648
Prepaid expenses 7,260 21,014
Inventory 6,687 (13,734)
Other assets (5,975) 30,588
Accounts payable 44,750 53,592
Accrued expenses 10,255 (13,022)
Payable to related party 14,098 97,725
Deferred revenue -- (75,579)
----------- -----------
Net cash used in operating activities (284,819) (171,387)
----------- -----------
Cash flows from investing activities:
Capital expenditures -- (103,235)
Proceeds from sale of equipment 195,000 --
----------- -----------
Net cash provided by (used in) investing activities 195,000 (103,235)
----------- -----------
Cash flows from financing activities:
Decrease (increase) in restricted cash 11,979 (35,327)
Proceeds from sale of common stock, net 50,000 186,500
Proceeds from issuance of warrants -- 120
Proceeds from loans 150,000 150,000
Payment on loans (50,000) --
----------- -----------
Net cash flows provided by financing activities 161,979 301,293
----------- -----------
Net increase in cash and cash equivalents 72,160 26,671
Cash and cash equivalents beginning of year 78,919 52,248
----------- -----------
Cash and cash equivalents end of year $ 151,079 $ 78,919
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
24
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1) ORGANIZATION:
Rochem Environmental, Inc. (the "Company"), and its wholly-owned
subsidiary, Separation Technology Systems, Inc. ("STS"), are engaged
primarily in the business of providing industrial waste water treatment
services and equipment to companies in the refining, petrochemical, oil
and gas production and related industries. Patented technology licensed
through a distributor agreement from Rochem Separation Systems, Inc.
gives the Company exclusive rights to market this product to these
industries in the 48 contiguous States and in other areas outside the
United States on a case by case basis. The patented technology licensed
by the Company is based on the recovery of clean water and valuable
products using membrane separation technology. The Company currently
markets reverse osmosis, nanofiltration and ultrafiltration membrane
separation systems. Target applications have been the use of the
patented technology to recover purified water for discharge or reuse
from waste waters, process waters and ground waters.
In November 1992, STS, a Texas corporation, began operating in Texas and
Louisiana with patented technology licensed exclusively from Rochem
Separation Systems, Inc. ("RSS"), a wholly-owned subsidiary of Rochem
AG. Effective July 20, 1993, Radon International, Inc. ("Radon"), a
publicly traded corporate shell incorporated in Utah in 1984, acquired
all of the outstanding capital stock of STS. In connection with the
acquisition, all of the officers and directors of Radon resigned and
were replaced by the officers and directors of STS. In September 1993,
Radon changed its name to Rochem Environmental, Inc. For accounting
purposes, the acquisition of STS by Radon was treated as a reverse
acquisition resulting in a recapitalization of STS. Although the
Company, formerly Radon, has been a Registrant of the Securities and
Exchange Commission for many years, the financial information included
in these financial statements reflect only the activity of STS since its
inception on November 1, 1992. Pro forma information giving effect to
the acquisition is not considered necessary as the reverse acquisition
is essentially a capital stock transaction rather than a business
combination.
At September 30, 1996, the Argentaurum SA, an affiliate of Rochem AG and
RSS owned approximately 47.9% of the outstanding stock of the Company.
Another 10.6% of the outstanding stock of the Company is owned by Lefco
Environmental Technology, Inc. and its related parties.
2) SUMMARY OF SIGNIFICANT ESTIMATES AND ACCOUNTING POLICIES:
MANAGEMENT'S ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the
25
<PAGE>
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company's largest significant estimate in the financial statements
is the valuation of the intangible asset related to the distributor
agreement. The Company is depreciating this intangible asset over the
agreements life using the straight-line method. Despite recurring
losses, the management believes that it is at least reasonably possible,
by its estimation, to recover the value of this asset from future cash
flows. Management's estimates are based on the continuing success of the
technology in Europe, the existing and growing needs for membrane
separation technology in the US and the sales and marketing efforts of
the Company. However, management's estimates of future cash flows is
subject to change and any reductions in these estimated cash flows could
materially reduce the carrying value of the intangible asset.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, STS. Significant intercompany
accounts and transactions have been eliminated upon consolidation.
CASH AND CASH EQUIVALENTS:
The Company considers all investments purchased with an original
maturity of three months or less to be cash equivalents.
INVENTORY:
Inventory is primarily comprised of work in progress and related
component parts and supplies held for use in the assembly of equipment
or the operation of the Company. These component parts and supplies are
stated at the lower of cost or market and are accounted for on the
specific identification method.
PROPERTY AND EQUIPMENT:
Property and equipment are carried at cost and are depreciated using
estimated service lives, which range from three to ten years.
Depreciation is computed using the straight-line method. Repairs and
maintenance costs are charged against income and betterments are
capitalized as additions to the related assets. Retirements, sales and
disposals of assets are recorded by removing the costs and accumulated
depreciation accounts with any resulting gain or loss reflected in
income.
INTANGIBLE ASSETS:
Intangible assets consist of a distributor agreement (see Note 13) and
organization costs. These assets are carried at cost and amortized on a
straight-line basis over their estimated useful lives of fifteen years
and five years, respectively.
REVENUE RECOGNITION:
The Company offers its waste water treatment equipment for use in
service projects, for sale or lease. The associated revenues are either
recognized upon performance of
26
<PAGE>
the services, the shipment of the related product or over the terms of
the related lease contract.
LOSS PER SHARE:
The computation of loss per share is based on the weighted average
number of shares outstanding during the period.
INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes". Under this method, deferred income taxes are recorded to reflect
the tax consequences in future years of temporary differences between
the tax basis of the assets and liabilities and their financial amounts
at year end. The Company provides a valuation allowance to reduce
deferred tax assets to their estimated net realizable value.
VALUATION OF LONG-LIVED ASSETS:
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," and reviews
long-lived assets and intangible assets to be held and used for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Management estimates
the future cash flows resulting from the use of the asset and its
eventual disposition. If the sum of the expected future cash flows is
less than the carrying value of the asset, an impairment loss is
recognized. The impairment loss is measured as the amount by which the
carrying amount exceeds the fair value of the asset as determined by
quoted market prices when available, or the present value of the
expected future cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, and notes payable
approximates fair value because of the short-term maturity of these
instruments.
3) INVENTORY:
Inventory at September 30, 1996 and 1995 consisted of the following:
1996 1995
-------- --------
Stores inventory $ 1,470 $ 8,472
Work-in-process -- 124,906
Component parts inventory 196,106 70,885
-------- --------
$197,576 $204,263
======== ========
27
<PAGE>
4) PROPERTY AND EQUIPMENT:
Property and equipment at September 30, 1996 and 1995 consisted of the
following:
1996 1995
----------- -----------
Testing equipment $ 691,713 $ 960,167
Operating equipment 1,235,271 1,235,271
Leasehold improvements 24,724 24,724
Other 52,085 56,526
----------- -----------
2,003,793 2,276,688
Less accumulated depreciation (813,555) (585,887)
----------- -----------
$ 1,190,238 $ 1,690,801
=========== ===========
The Company utilizes test equipment for the demonstration of the
patented technology for customers to evaluate the performance of the
systems. The use and sale of this equipment generated revenues of
$201,453 and $173,064 for the years ended September 30, 1996 and 1995,
respectively.
Depreciation expense was $298,614 and $298,838 for the years ended
September 30, 1996 and 1995, respectively.
In January 1995, the Company entered into an equipment swap with RSS
whereby an idle specialized high pressure unit with a net book value of
approximately $250,000 was returned for a similar low pressure unit of
equal value which management believes is more versatile and more readily
marketable. No gain or loss resulted from this exchange for financial
reporting purposes.
In June 1996, the Company sold a Disc Tube System to an Arkansas
landfill for $195,000. This unit had previously been used by the Company
as testing equipment which generated revenue in prior reporting periods.
The Company realized a loss of $4,026 on the sale of the system.
5) INTANGIBLE ASSETS AND RELATED IMPAIRMENT:
Intangible assets at September 30, 1996 and 1995 consisted of the
following:
1996 1995
----------- -----------
Distributor agreement $ 5,657,240 $ 5,657,240
Organization costs 1,000 1,000
----------- -----------
5,658,240 5,658,240
Accumulated amortization (1,132,825) (755,488)
----------- -----------
$ 4,525,415 $ 4,902,752
=========== ===========
The distributor agreement is being amortized over a 15 year period. A
marketing agreement with Lefco Environmental Technology, Inc. ("Lefco")
had not yielded significant revenues during the year ended September 30,
1995 and management did not anticipate significant future revenues being
derived during the remaining term of the agreement. Therefore, the
unamortized balance of this asset, in the amount of $279,773, was
expensed during the year ended September 30, 1995.
28
<PAGE>
6) NOTES PAYABLE:
In January 1995, the Company entered into a $50,000 loan facility with
Rochem AG, and a $50,000 loan facility with Lefco, to be utilized for
working capital. In April 1995, the Company secured a $50,000 loan from
Citizens Bank, guaranteed by Rochem AG. The Rochem AG and Lefco credit
facilities provided for interest only payments through the 12 month
term, bore interest at a rate of prime plus 2% (10.75% at September 30,
1995) and matured on January 11, 1996. These loans were collateralized
by certain Company equipment. The loan with Citizen's Bank was also a 12
month term loan requiring interest only payments until the loan matured
on April 13, 1996. Interest on this loan was charged at the prime rate
established by Citizen's Bank which at September 30, 1995 was
approximately 9%.
In January 1996, the Company entered into an agreement with Rochem AG
whereby Rochem AG converted the principal amount of its January 1995,
$50,000 loan into 500,000 shares of Company Common Stock, purchased an
additional 500,000 shares of Company common stock for $50,000, and
agreed to provide the Company a $100,000 credit facility to meet working
capital needs during the 1996 fiscal year. Through this credit facility,
Fluid Separation Systems, an affiliate of Rochem AG, loaned the Company
$25,000 in December 1995, $50,000 in February, 1996, and $25,000 in July
1996. On January 31, 1996, the $50,000 loan from Citizens Bank was paid
in full and the Rochem AG letter of credit was released. In December
1996, Fluid Separation Systems granted a six month extension to the
maturity date and waived interest payments until the maturity date of
the loan. The loans bear interest of prime plus 2% (10.25 at September
30, 1996) for the December 1995 loan and 10% for the January and June
1996 loans and are due June 1997, July 1997 and December 1997,
respectively. The $25,000 loan obtained in December 1995 is
collateralized by certain Company equipment.
Additionally, in January 1996, Lefco agreed to convert its January 1995,
$50,000 loan into 500,000 shares of Company Common Stock and provided a
$50,000 credit facility to be utilized by the Company to meet working
capital needs. In September 1996, the Company exercised the $50,000
credit facility with Lefco. The credit facility provided for monthly
payments of $1,062.35, including interest at a rate of 10.5%, for eleven
months with final payment due on September 20, 1997. This credit
facility is collateralized by certain Company equipment.
Furthermore, in January 1996, the Company agreed with Rochem Separation
Systems ("RSS") to convert approximately $100,000 of accounts payable
due to RSS into 1,000,000 shares of Company Common Stock. In addition,
the Company obtained the rights to buy equipment and modules directly
from Fluid Separation Systems at a preferred price and the right to
become the exclusive agent for RSS for applications utilizing the
leachate and desalination systems in the State of Arkansas. Also in
January 1996, the Company agreed with GH Venture Group to terminate its
consultant service agreement and in connection therewith convert the
outstanding payable of $50,000 into 500,000 shares of the Company Common
Stock and $5,000 cash.
29
<PAGE>
7) COMMITMENTS AND CONTINGENCIES:
The Company has employment agreements with certain employees. These
agreements range from one to four years and are renewable at the option
of the Company. The agreements provide for salary continuation for a
specified period of months under certain circumstances. As of September
30, 1996, the aggregate commitment for future salaries is approximately
$550,000 over a four year period. As of September 30, 1995 the aggregate
commitment for future salaries was $194,000 over a period of one year.
STS, is currently in litigation over a claim for transaction fees
totaling $540,000 made by Harris-Forbes, Inc. The claim stems from an
agreement for financial consulting services that was initiated in
October, 1992 between STS and Harris-Forbes, Inc. and duly terminated in
June 1993 by STS. STS has filed a Petition for Declaratory Judgment with
the District Court of Harris County, Texas. No discovery has been
conducted to date. The Company believes that STS has no contractual
liabilities to Harris-Forbes and intends to vigorously defend its
interest in this matter. However, no potential loss or range of
potential loss is estimable at this time. An adverse outcome in this
litigation could have a material impact to the Company's financial
position and results of operations.
The Company currently only purchases key components of the licensed
technology from the licenser, RSS and Rochem AG, which has been
fabricating these components since 1981. Although the components can be
fabricated using available manufacturing techniques, a loss of this
supplier could cause a delay in manufacturing and a possible loss of
sales, which would adversely affect operating results.
The Company leases office space under an operating lease which expires
in March 1997. Future minimum rental payments under this lease are
$32,500 for 1997. Minimum payments have not been reduced by sublease
rentals aggregating approximately $10,000 over the next year, under
non-cancelable subleases with related parties (see Note 10).
Building rental expense for the Company for the years ended September
30, 1996 and 1995 was approximately $23,050 (net of approximately
$53,700 of sublease income) and $29,000 (net of approximately $48,000 of
sublease revenues), respectively.
The Company extended a limited warranty, for a period of one year, on
the sale of the Disc Tube System (see Note 4). Management believes that
no losses related to this warranty are probable of occuring and
therefore no warranty provision has been recorded. However, it is
reasonably possible that losses could occur but management believes that
these losses, if any, would not have a material impact on the Company's
financial position, results of operations, or cash flows.
8) CONCENTRATION OF CREDIT RISK:
The Company's services and equipment sales are currently concentrated
with a few customers in the petroleum, chemical and environmental
industries. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. All of the
Company's cash and cash equivalents were deposited in one bank at
September 30, 1996 and 1995. At times, such deposits may be in excess of
the federally insured limits. Management has reviewed the credit
worthiness of this financial institution and believes that any credit
risk is minimal.
9) INCOME TAXES:
30
<PAGE>
Deferred income taxes under SFAS No. 109, reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's deferred
tax liabilities and assets as of September 30, 1996 and 1995 are as
follows:
1996 1995
----------- -----------
Deferred tax assets
Net operating loss $ 1,577,000 $ 1,225,000
Valuation allowance (1,577,000) (1,225,000)
----------- -----------
Total net deferred taxes $ 0 $ 0
=========== ===========
At September 30, 1996 and 1995, the Company had net operating loss
carryforwards available to offset future taxable income of approximately
$4,639,000 and $3,603,000 respectively. These amounts expire during the
years 2008 through 2011. Under federal tax law, the amount and
availability of loss carryforwards (and certain other tax attributes)
are subject to a variety of interpretations and restrictive tests
applicable to the Company and its subsidiaries. The utilization of such
carryforwards could be limited or effectively lost upon certain changes
in ownership. Accordingly, while the Company believes certain loss
carryforwards are available to it, no assurance can be given concerning
such loss carryforwards or whether such loss carryforwards will be
available in the future.
10) RELATED PARTY TRANSACTIONS:
During the years ended September 30, 1996 and 1995, the Company
purchased inventory from RSS totaling $29,366 and $145,000,
respectively. The Company leased certain equipment to Lefco for $18,703
and $15,152 for the years ended 1996 and 1995, respectively.
The Company leases certain vehicles from employees. Expenses under these
leases were approximately $30,600 and $37,200 for the years ended
September 30, 1996 and 1995, respectively. The Company also subleases
office space to Lefco and Rochem Technical Services, Ltd. (see Note 7).
11) CAPITAL STOCK TRANSACTIONS:
In connection with a previous offering, 17,000 warrants were issued to
the Company's placement agent. These warrants are exercisable through
September 1998 at an exercise price of $1.80 per share of common stock.
No warrants have been exercised to date.
In November 1993, the Company entered into warrant agreements with two
of its employees which grant the sale of 250,000 shares of common stock
of an exercise price of $1 per share. No warrants have been exercised to
date and were exercisable at September 30, 1996. The warrants expire in
November and December 1998.
31
<PAGE>
In April 1994, the Company purchased from Lefco 150,000 shares of common
stock for $150,000. These treasury shares were sold to an individual
investor for $150,000 during April 1994.
In July 1995, the Company sold a total of 1,200,000 shares of common
stock at a price of $0.175 per share in a private placement transaction
pursuant to Regulation S. Associated with this transaction, the Company
issued warrants to the placement agents to purchase up to a total of
120,000 shares at an exercise price of $0.35 per share. These warrants
expire July 7, 2000 and no warrants have been exercised to date.
In January 1996, the Company entered into a five year employment
agreement with Erick J. Neuman. As part of the agreement, Mr. Neuman was
granted the following five year warrants: (i) one warrant to purchase a
total of 250,000 shares at $0.001 per share provided that Mr. Neuman is
employed with the Company on December 31, 1996: (ii) a warrant to
purchase a total of 250,000 shares at $0.001 per share which vest 25%
per calendar quarter of fiscal year 1997 provided that Mr. Neuman is
employed by the Company on these dates; (iii) a warrant to purchase
250,000 shares at $0.10 per share which vest based upon the Company
attaining certain financial goals; and (iv) a warrant to purchase
250,000 shares at $0.25 per share which vest based upon the Company
attaining certain financial goals. These warrants are effective January
1, 1996 and expire on December 31, 2000. At September 30,1996 no
warrants were exercisable.
Additionally in January 1996, the Company exchanged 3,000,000 shares of
common stock (see Note 6) for $300,000 in debt, credit facilities of
$150,000 and additional technology marketing rights.
12) FACTORING ARRANGEMENT:
On June 23, 1995 the Company entered into a factoring arrangement with
Citizen's Bank to factor the Company's receivables. Under the factoring
arrangement, Citizen's Bank purchases the Company's receivables at a
discount of 1.93%. As a result, the Company receives cash for these
receivables at the time the invoice is issued to the customer. Under the
terms of the factoring arrangement, Citizen's Bank retains 10% of the
total invoice amount in a reserve bank account until the customer pays
the invoice. This account is maintained by the bank under the Company's
name and has been accounted for as restricted cash. In the event a
customer defaults on an invoice, the Company is required to repay the
bank the cash it was advanced for that particular invoice. To assure
repayment in the event of default on an invoice, the Company obtained a
$275,000 line of credit with the bank which can be initiated only in the
event of non payment of an invoice. Substantially all of the Company's
property and equipment is pledged as collateral for this agreement. The
initial six month term of the factoring arrangement with Citizen's Bank
expired on December 20, 1995. The agreement has been extended to March
20, 1997. For accounting purposes, the receivables are considered sold
at the time cash is received by the Company from Citizen's Bank.
Total proceeds to the Company from the factoring of receivables during
the years ended September 30, 1996 and September 30, 1995 was
approximately $437,000 and
32
<PAGE>
$1,034,530 respectively. Of this amount, $23,348 was held in the reserve
account and thereby restricted at September 30, 1996. Approximately
$233,300 of receivables factored during 1996 were unpaid at September
30, 1996, of that amount $13,475 remain unpaid at December 8, 1996. No
balance is outstanding on the related line of credit at September 30,
1996.
13) DISTRIBUTOR AGREEMENT:
In December 1992, STS entered into a five-year distributor agreement
with RSS which included a five year extension solely at the option of
the Company, whereby STS purchased the exclusive rights to distribute
RSS's waste water treatment systems and related equipment and services
for all petroleum based waste water applications in Texas and Louisiana.
This distributor agreement included significant minimum purchase
requirements by the Company and involved the option for RSS to cancel
the agreement in the event these minimum purchase requirements were not
met. In exchange for these distribution rights, STS issued to RSS
875,000 shares of its common stock, valued at management's estimate of
the fair value of the rights under the agreement. In October 1993, the
Company entered into a distributor agreement which includes all
forty-eight (48) contiguous United States in the Company's distribution
territory. Also, the terms of the agreement were extended to 10 years
which included a five year extension solely at the option of the Company
and eliminated all previous minimum purchase requirements. The Company
created, authorized and issued 1,000,000 shares of preferred stock
designated as "Series A Preferred Stock" as payment for extended
territorial rights. As a result of this transaction, the Company
recorded the additional territorial rights at their estimated fair value
of $5,648,490 which is being amortized over the fifteen year life of the
agreement. Pursuant to the terms of the "Series A Preferred Stock", all
of such shares were converted during December 1993 into 5,764,714 shares
of Company common stock.
In January 1996, the Company gained the right to buy equipment and
modules directly from the Rochem Group at an increased discount.
Additionally in January 1996, the Company gained the right to be the
exclusive agent for RSS for applications utilizing the leachate and
desalination systems in the State of Arkansas for a period of two years.
14) SUPPLEMENTAL CASH FLOW INFORMATION:
In January 1996, the Company exchanged 3,000,000 shares of common stock
(see Note 6) for $300,000 in debt, credit facilities of $150,000 and
additional technology marketing rights.
For the year ended September 30,1995, property and equipment additions
included approximately $81,600 of non-cash additions reclassified from
inventory and approximately $68,200 of non-cash additions included in
related party payables.
33
<PAGE>
The Company paid $32,208 and $5,368 in interest for the years ended
September 30, 1996 and 1995, respectively. The Company paid no income
taxes for the years ended September 30, 1996 and 1995, respectively.
15) SIGNIFICANT CUSTOMERS:
During the years ended September 30, 1996 and 1995, the Company had
sales (service contracts) to two customers comprising approximately 75%
and 70% of the Company's revenue, respectively. Loss of either of these
customers would have a material adverse impact on the Company's
financial position and results of operations.
16) LIQUIDITY
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in
Note 6, the Company has exercised loan facilities for $150,000 of which
$125,000 is due and payable within fiscal 1997. The Company had a
working capital deficit of $232,541 at September 30, 1996. The Company
is currently in negotiations for several contracts that the Company
believes will generate sufficient cash flows to fund operations and meet
working capital needs during fiscal year 1997 (see Note 17). Because the
timing of these contracts cannot be controlled, the Company is
evaluating and exploring other financing alternatives. The Company
obtained a four year extension of the contract with Chevron and the
Company is considering financing part or all the equipment associated
with the project to generate sufficient financing to provide working
capital and reduce expenses related to rental of equipment and the
factoring of receivables.
In the event additional funding is required, the Company will consider
alternatives to do so through a combination of efforts or methods
including additional extensions on its notes payable, joint ventures,
equity investors, venture capital groups, institutions, issuance of
convertible or subordinated debt or a form of business combinations.
Should the need arise for the use of any of these methods to raise
capital, there can be no assurances that any of these alternatives will
be available to the Company.
17) SUBSEQUENT EVENT:
In December 1996, the Company has executed a letter of intent with a
company for the lease/purchase of a 75-125 gallon per minute system to
be used for industrial wastewater treatment. The Company is negotiating
a second letter of intent for the supply of membrane modules to another
company for the recovery of high-grade products from low-grade process
residuals. The terms of these agreements are contingent on the customers
obtaining the necessary financing for the development and operation of
the plants as well as performance guarantees and warrantees for the
Rochem-supplied equipment.
Additionally in December 1996, Fluid Separation Systems granted a six
month extension to the maturity date of the notes payable. The notes of
December 1995 ($25,000),
34
<PAGE>
January 1996 ($50,000) and June 1996 ($25,000) and are due June 1997,
July 1997 and December 1997, respectively.
In January 1997, Mr. Neuman exercised warrants to purchase 250,000
shares of common stock per Mr. Neuman's employment contract. (See Note
11).
18) RECENT ACCOUNTING PRONOUNCEMENTS:
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 123, entitled "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS No. 123") in October 1995. Management
has not yet determined whether it will use the disclosure of the
compensation cost recognition methods of the new disclosure rules of
SFAS No. 123 in fiscal year 1997.
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, entitled "ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES". The Company will
adopt this accounting standard in fiscal year 1997. Management has not
yet determined the impact this new standard will have on the financial
statements.
35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ROCHEM ENVIRONMENTAL, INC.
By: _____________________________
Dated: January 15, 1997 Erick Neuman
President, Chief Executive Officer,
Chief Financial Officer; Principal
Accounting Officer; and Secretary
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
- ------------------------
William E. Bracken Director January 15, 1997
- ------------------------
David A. LaMonica Director January 15, 1997
- ------------------------
Philip LeFevre Director January 15, 1997
36
<PAGE>
EXHIBIT INDEX
(a) The following exhibits are incorporated by reference thereto:
Exhibit
Number Identification Of Exhibit
------ -------------------------
2.1(1) - Reorganization Agreement
3.1(2) - Amended and Restated Articles of Incorporation
3.2(5) - Bylaws
4.1(5) - Common Stock Specimen
4.2(4) - Certificate of Designation of Preferences, Rights
and Limitations of Series A Preferred Stock
4.3(4) - Certificate of Designation of Preferences, Rights
and Limitations of Series B Preferred Stock
10.1(2) - Distributor Agreement
10.2(4) - Asset Purchase Agreement
10.3(2) - Term Sheet
10.4(6) - Facilities Lease Agreement
10.5(6) - Termination Agreement Between Company and GH
Venture Group
10.6(6) - Agreement Between Company and Lefco Environmental
Technology, Inc.
10.7(6) - Agreement Between Company and Rochem Separation
Systems, Inc.
10.8(6) - Agreement Between Company and Rochem AG
16.1(3) - Letter regarding change in certifying accountant
16.2(3) - Letter regarding change in certifying accountant
- --------------
(1) Previously filed as an exhibit on Form 8-K dated July 20, 1993.
(2) Previously filed as an exhibit on Form 8-K dated September 30, 1993.
(3) Previously filed as an exhibit on Form 8-K dated November 5, 1993.
(4) Previously filed as an exhibit on Form 8-K dated November 19, 1993.
(5) Previously filed as an exhibit on Form 8-A dated January 13, 1994.
(6) Previously filed as an exhibit on Form 10-KSB for the fiscal year
ended September 30, 1995.
37
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 151,079
<SECURITIES> 0
<RECEIVABLES> 7,141
<ALLOWANCES> 0
<INVENTORY> 197,576
<CURRENT-ASSETS> 226,077
<PP&E> 2,003,793
<DEPRECIATION> 813,555
<TOTAL-ASSETS> 6,170,862
<CURRENT-LIABILITIES> 458,618
<BONDS> 0
0
0
<COMMON> 18,078,587
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,170,862
<SALES> 1,247,320
<TOTAL-REVENUES> 1,247,320
<CGS> 973,566
<TOTAL-COSTS> 973,566
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,899
<INCOME-PRETAX> (1,056,956)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,056,956)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>