U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended September 30, 1997
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 OTC 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. [X]
Issuer's revenues for the fiscal year ended September 30, 1997 were
$1,427,202.
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 5, 1997, was approximately $3,460,787.
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
5, 1997, the registrant had 19,084,751 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, 1998 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. . .10
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . .11
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . .12
Item 7. Financial Statements . . . . . . . . . . . . . . . . . .14
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . .15
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons. . . . . . . . . . . . . . . . . . . . . . . . .16
Item 10. Executive Compensation . . . . . . . . . . . . . . . . .16
Item 11. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . .16
Item 12. Certain Relationships and Related Transactions . . . . .16
Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . . . .16
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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-product materials for reuse or disposal.
Business and environmental requirements are causing 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-product materials 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 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.
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WASTEWATER TREATMENT INDUSTRY
Wastewater treatment is a multi-billion dollar global industry. The use of
membrane separation equipment continues to increase as part of this industry
within 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-product materials 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-product materials for reuse or disposal. The Company's water
processing system involves the use of an innovative membrane separation system
that 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. It can also 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 or process streams.
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
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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 used in traditional spiral wound
reverse osmosis systems.
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-product materials 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 59% 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 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.
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SALES AND MARKETING
The Company believes that the value of the Disc Tube system lies in its
ability to cost- effectively and reliably treat a wide variety of wastewaters
with the recovery of relatively pure water and the concentration of products and
by-product materials 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 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 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 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 that 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 produces large quantities
of water from oil and gas drilling and production operations. 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'
("Borden") facility in Geismar, Louisiana 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 systems 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 trade names 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, accordingly, there can be no assurance that any particular
aspect of the Company's technology
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would not be found to infringe upon the claims of other existing patents.
RESEARCH AND DEVELOPMENT
Historically, research and development associated with the Disc Tube
technology has been conducted primarily by Rochem AG and RSS and to a much
lesser extent by the Company. To date, through the fiscal year ended September
30, 1997 the Company has had 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.
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 wastewater streams
containing light hydrocarbons, including benzene. The Company believes the Disc
Tube technology will provide an economical solution that 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 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
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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, 1997, 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,
1997. The Company leases office space under an operating lease that expires in
March 2000. Future minimum rental payments under this lease are $204,750.
Minimum payments have not been reduced by sublease rentals aggregating
approximately $16,000 over the next year, under non-cancelable sublease with a
related party. Building rental expense for the Company for the years ended
September 30, 1997 and 1996 was approximately $22,050 (net of approximately
$54,700 of sublease revenues) and $23,050 (net of approximately $53,700 of
sublease revenues), respectively. The Company is currently sub-leasing, to a
related party, until February 1998, approximately 1,650 square feet of its
office space and 20,000 square feet of its warehouse for $3,190 per month. A
second tenant, also a related party, sub-leased until April 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
Nothing pending.
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 5, 1997, 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, markdowns or commissions and may not necessarily represent
actual transactions.
BID PRICES
----------------------
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
FISCAL YEAR 1997 HIGH LOW
---------------- ---- ---
First Quarter $0.19 $0.06
Second Quarter $0.19 $0.09
Third Quarter $0.25 $0.19
Fourth Quarter $0.25 $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
This section contains forward-looking statements that are based on current
Company expectations and are subject to a number of factors that could cause
actual results to differ materially. Such factors include, but are not limited
to market demand, competitive pricing considerations, regulatory approval and
market acceptance of new technologies.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED SEPTEMBER 30, 1997 ("FISCAL 1997") COMPARED WITH TWELVE
MONTHS ENDED SEPTEMBER 30, 1996 ("FISCAL 1996")
REVENUES. Revenues were $1,427,202 in Fiscal 1997 as compared to
$1,247,320 in Fiscal 1996 representing an increase of 14% which is due to the
increase in product sales. Revenues derived from service contracts totaled
$846,846 in Fiscal 1997 as compared to $1,052,320 in Fiscal 1996. Revenues from
product sales were $580,356 in Fiscal 1997 as compared to product sales of
$195,000 in Fiscal 1996. This trend reflects the Company's strategy to increase
exposure of the Company's technology to customers through product sales and
rental contracts. Service revenues were lower than expected due to lower than
expected demand from existing customers. Management's strategy is to expand
service revenues as the customer base for product sales grows.
During Fiscal 1997 and 1996, 82% and 75%, respectively, of the Company's
revenues were derived from two customers. This increase is due primarily to the
sale and rental of equipment to a new customer in Fiscal 1997. Approximately
$31,689 of service contract revenues in Fiscal 1997 were attributable to pilot
testing revenues as compared to approximately $17,000 in Fiscal 1996.
GROSS PROFIT. Cost of sales decreased in Fiscal 1997 to $798,199 as
compared to $973,566 in Fiscal 1996. This decrease in cost of sales with the
increase in revenues is related to improved margins on product sales and cost
reductions on service related activities. This reduction in cost of sales led to
a 130% increase in gross profit to $629,003 in Fiscal 1997 from $273,754 in
Fiscal 1996. This represents an improvement in gross profit as a percent of
revenue to 44% in Fiscal 1997 from 22% in Fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) were reduced by 3% and totaled $1,285,202 for
Fiscal 1997, compared with a total of $1,321,811 in Fiscal 1996. Non cash
related expenses comprised of depreciation and amortization of $483,290 and
compensation expense of $31,250 for Fiscal 1997 compared to depreciation and
amortization of $503,942 and compensation expense of $18,750 in Fiscal 1996.
Cash expenses related to SG&A decreased to $770,662 in Fiscal 1997 from $799,119
in Fiscal 1996.
NET LOSS. The net loss decreased by 35% to $682,841 for Fiscal 1997,
compared to a net loss of $1,056,956 in Fiscal 1996. The losses included various
non-cash expenses of $683,829 in Fiscal 1997 and $896,648 in Fiscal 1996. These
non-cash expenses are primarily comprised of amortization of the distributor
license, depreciation of property and equipment and compensation
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expense related to stock warrants. The Company's focus for Fiscal 1998 is to
increase revenues while continuing to restrain operating costs in order to
continue to generate operating cash flows for ongoing activities and
investments.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had a working capital deficit of
$391,794 and a quick ratio of 0.4 to 1.0 as compared to net working capital
deficit of $232,541 and a quick ratio of 0.5 to 1.0 on September 30, 1996. This
increase in working capital deficit is primarily due to the increase in current
liabilities for capital expenditures to acquire rental service equipment and is
related to an increase in loans payable to banks and accounts payable to related
parties. Current assets increased to $231,655 in Fiscal 1997 from $226,077 in
Fiscal 1996. Inventory decreased to $77,003 in Fiscal 1997 from $197,576 in
Fiscal 1996. This reduction in inventory was due to the transfer of equipment
from inventory to rental service equipment for which the Company had a contract.
With the capital expenditures and addition from inventory, the property and
equipment increased to $1,232,209 in Fiscal 1997, net of $251,222 in
depreciation, from $1,190,238 in Fiscal 1996.
Net cash provided by operating activities in Fiscal 1997 was $81,483. In
contrast, in Fiscal 1996 operating activities used $284,819. This increase in
net cash provided by operating activities is primarily due to the Company's
improvement of approximately $355,000 in gross profit.
Net cash used for the purchase of capital equipment during Fiscal 1997 was
$220,282 as compared to $0 during Fiscal 1996. This additional rental service
equipment was acquired to support contract work which is expected to continue
through Fiscal 1998. In Fiscal 1996, the sale of a leachate treatment system
provided $195,000. This unit had previously been used by the Company as testing
equipment that had generated additional revenue in reporting periods prior to
Fiscal 1996.
During Fiscal 1997, financing activities provided net cash of $102,758.
These financing activities were primarily used to fund the purchase of
additional rental service equipment for which the Company has extended contracts
with customers. In Fiscal 1996, financing activities provided net cash of
$161,979 that was used primarily to fund working capital needs and to repay a
loan. In Fiscal 1997, these financing activities were funded by two banking
institutions and Fluid Separation Systems, an affiliate of Rochem AG.
In January 1997, the Company obtained a $50,000 loan from Fluid Separation
Systems for working capital needs. This loan bears interest at 10% due at
maturity and is due in July 1998. In May 1997, the Company obtained a $120,000
loan from Citizens Bank and Trust to partially fund the construction of
equipment for which the Company has a rental contract. This loan was for six
months and was fully repaid in November 1997.
In Fiscal 1996, the Company had 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 loaned the Company
$25,000 in
13
<PAGE>
December 1995, $50,000 in February 1996 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
has granted extensions 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
1998, July 1998 and December 1998, 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 in September 1997. This loan was repaid in September 1997 through the
Company obtaining a loan for the final payment of $43,249 from Woodforest
National Bank. This loan requires monthly installments of principal and interest
of $3,794 and matures September 1998.
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 for a limited period. 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.
As noted above, the Company has had a working capital deficit of $391,794
including $125,000 due and payable within Fiscal 1998 from loan facilities
provided by a related party. As a result of these liquidity issues the Reports
of Independent Accountants include an emphasis of matter paragraph concerning
the Company's ability to continue as a going concern. In Fiscal 1997, the
Company made capital investments to acquire additional and to upgrade existing
rental service equipment for present customers. These investments are expected
to continue to provide additional cash in Fiscal 1998. The Company is currently
in negotiations for several contracts that the Company believes will generate
sufficient cash flows to continue to fund operations and meet working capital
needs during Fiscal 1998. Because the timing of these projects cannot be
controlled, the Company is evaluating and exploring other financing
alternatives. 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, financing rental service
equipment or contracts, 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.
ITEM 7. FINANCIAL STATEMENTS
Financial statements included on pages F-1 to F-19.
14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Coopers & Lybrand L.L.P. has resigned as the Company's independent
certified public accountants effective October 24, 1997.
Weinstein Spira & Company, P.C. has been engaged as the Company's
certified public accountants.
The decision to change accountants was approved by the Company's board of
directors, as the Company does not maintain an audit committee.
There were no disagreements between the Company and Coopers & Lybrand
L.L.P. on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure in connection with the audits of the
fiscal years ended September 30, 1995 and 1996, and any subsequent interim
period proceeding such resignation, nor did the report contain an adverse
opinion or disclaimer of opinion, or was qualified or modified as to audit scope
or accounting principles. The report did contain an explanatory paragraph
concerning the substantial doubt about the Company's ability to continue as a
going concern.
15
<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.
16
<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
16.2(7) - 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.
(7) Previously filed as an exhibit on Form 8-K dated October 24, 1997.
(b) Report on Form 8-K was filed with the Securities and Exchange
Commission on October 24, 1997 to reflect the change in accountants.
17
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
HOUSTON, TEXAS
ANNUAL FINANCIAL REPORT
SEPTEMBER 30, 1997
<PAGE>
ROCHEM ENVIRONMENTAL, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER
Report of Weinstein Spira & Company, P.C. F-1
Report of Coopers & Lybrand L.L.P. F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Rochem Environmental, Inc.
We have audited the accompanying Consolidated Balance Sheet of Rochem
Environmental, Inc. and Subsidiary as of September 30, 1997, and the related
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Rochem
Environmental, Inc. as of September 30, 1997, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficit. These conditions raise substantial doubt
about its ability to continue as a going concern. Management's plans regarding
those matters also are described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
October 23, 1997
F-1
<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 the related consolidated statements of
operations, stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 the
consolidated results of their operations and their cash flows for the year 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 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficit that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Coopers & Lybrand L.L.P.
January 3, 1997
Houston, Texas
F-2
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
-----------------------------------
1997 1996
-----------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 115,038 $ 151,079
Restricted cash 6,465 23,348
Accounts receivable:
Trade 55,787 7,141
Other 15,898
Prepaid expenses 38,467 44,509
----------------- ----------------
Total Current Assets 231,655 226,077
INVENTORY 77,003 197,576
PROPERTY AND EQUIPMENT, net 1,232,209 1,190,238
INTANGIBLE ASSETS, net 4,148,046 4,525,415
OTHER ASSETS 20,439 31,556
----------------- ----------------
$ 5,709,352 $ 6,170,862
================= ================
F-3
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to banks $ 85,625
Notes payable to related parties 125,000 $ 150,000
Accounts payable 189,484 212,775
Accrued expenses 76,163 65,820
Payable to related parties 147,177 30,023
------------ ------------
Total Current Liabilities 623,449 458,618
NOTE PAYABLE TO RELATED PARTY 25,000
------------ ------------
648,449 458,618
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 50,000,000
shares authorized, 19,084,751 and 18,834,751
shares issued and outstanding at September 30,
1997 and 1996, respectively 19,085 18,835
Preferred stock, no par value, 10,000,000 shares
authorized, no shares outstanding
Additional paid-in capital 10,296,430 10,265,180
Accumulated deficit (5,254,612) (4,571,771)
------------ ------------
5,060,903 5,712,244
------------ ------------
$ 5,709,352 $ 6,170,862
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED
SEPTEMBER 30,
----------------------------
1997 1996
------------- -------------
REVENUES
Service $ 846,846 $ 1,052,320
Product sales 580,356 195,000
------------- -------------
1,427,202 1,247,320
Cost of Sales 798,199 973,566
------------- -------------
GROSS PROFIT 629,003 273,754
------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Depreciation and amortization 483,290 503,942
Other 801,912 817,869
------------- -------------
1,285,202 1,321,811
------------- -------------
(656,199) (1,048,057)
INTEREST EXPENSE, NET (26,642) (8,899)
------------- -------------
NET LOSS $ (682,841) $ (1,056,956)
============= =============
Net Loss Per Share $ (0.04) $ (0.06)
============= =============
Weighted Average Shares Outstanding 19,022,251 18,078,587
============= =============
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
COMMON STOCK Additional
------------------------ Paid-In Accumulated
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
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
Exercise of warrants 250,000 250 250
Compensation cost recorded for
stock warrants 31,250 31,250
Net loss (682,841) (682,841)
------------ --------- ------------ ------------- ------------
BALANCE, SEPTEMBER 30, 1997 19,084,751 $ 19,085 $ 10,296,430 $ (5,254,612) $ 5,060,903
============ ========= ============ ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------------
1997 1996
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(682,841) $(1,056,956)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 652,579 675,950
Compensation element of stock warrants 31,250 18,750
Loss on disposal of equipment 6,948
(Increase) Decrease in:
Accounts receivable (64,544) 13,924
Prepaid expenses 6,042 7,260
Inventory 23,674 6,687
Other assets 11,117 (5,975)
Increase (Decrease) in:
Accounts payable (23,291) 44,750
Accrued expenses 10,343 (10,255)
Accounts payable - related party 117,154 14,098
--------- -----------
Net Cash Provided by (Used in) Operating Activities 81,483 (284,819)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (220,282)
Proceeds from sale of equipment 195,000
--------- -----------
Net Cash Provided by (Used in) Investing Activities (220,282) 195,000
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Restricted cash 16,883 11,979
Proceeds from sale of common stock, net 250 50,000
Proceeds from loans 171,700 150,000
Payment on loans (86,075) (50,000)
--------- -----------
Net Cash Flows Provided by Financing Activities 102,758 161,979
--------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (36,041) 72,160
Cash and Cash Equivalents - Beginning of Year 151,079 78,919
--------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 115,038 $ 151,079
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FOR THE YEAR ENDED
SEPTEMBER 30,
---------------------
1997 1996
--------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 8,132 $ 32,208
========= ========
Net fixed assets reclassed as inventory $ 19,012
=========
Inventory reclassed as fixed assets $ 115,911 $ 81,600
========= ========
Asset additions from related party payables $ 68,200
========
Exchange of common stock for debt $300,000
========
Exchange of common stock for credit facilities $150,000
========
The Company paid no income taxes for the years ended September 30, 1997 and
1996, respectively.
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. (RSS) 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.
At September 30, 1997, Argentaurum SA, an affiliate of Rochem AG and RSS owned
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.
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.
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 the services, the shipment of the related product, or over
the terms of the related lease contract.
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with an original maturity of
three months or less to be cash equivalents.
All of the Company's cash and cash equivalents were deposited in one bank at
September 30, 1997 and 1996. 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.
F-9
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
INVENTORY
Inventory is comprised of parts and related components 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 two 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 5) 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.
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.
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.
F-10
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the 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.
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation. The reclassification had no effect on net
loss.
NOTE 2 - GOING CONCERN
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 1998. The Company had a working capital deficit of
$391,794 and $232,541 at September 30, 1997 and 1996, respectively. 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 1998. Because the timing of these contracts cannot be
controlled, the Company is evaluating and exploring other financing
alternatives.
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.
F-11
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
NOTE 3 - INVENTORY
Inventory at September 30, 1997 and 1996, consisted of the following:
1997 1996
-------- --------
Parts inventory $ 6,809 $ 1,470
Component inventory 70,194 196,106
-------- --------
$ 77,003 $197,576
======== ========
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1997 and 1996, consisted of the
following:
1997 1996
----------- -----------
Testing equipment $ 703,086 $ 691,713
Rental service equipment 1,528,921 1,235,271
Leasehold improvements 24,724 24,724
Other 40,255 52,085
----------- -----------
2,296,986 2,003,793
Less:Accumulated depreciation (1,064,777) (813,555)
----------- -----------
$ 1,232,209 $ 1,190,238
=========== ===========
The Company utilizes testing 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 $278,718 and $201,453 for the years
ended September 30, 1997 and 1996, respectively.
Depreciation expense was $275,210 and $298,614 for the years ended September 30,
1997 and 1996, respectively.
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.
F-12
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
NOTE 5 - INTANGIBLE ASSETS
Intangible assets at September 30, 1997 and 1996, consisted of the following:
1997 1996
----------- -----------
Distributor agreement $ 5,657,240 $ 5,657,240
Organization costs -- 1,000
----------- -----------
5,657,240 5,658,240
Less: Accumulated amortization (1,509,194) (1,132,825)
----------- -----------
$ 4,148,046 $ 4,525,415
=========== ===========
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 48 contiguous United
States in the Company's distribution territory. Also, the terms of the agreement
were extended to ten 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.
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 United States, and the sales and marketing efforts of the
Company. However, management's estimates of future cash flows are subject to
change, and any reductions in these estimated cash flows could materially reduce
the valuation of the intangible asset.
F-13
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
NOTE 6 - NOTES PAYABLE
Notes payable as of September 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Notes payable to banks
9.5%, secured by equipment, due in monthly
installments of principal and interest of $3,794,
or on demand, matures September 16, 1998 $ 43,249
10.5%, secured by equipment, due in monthly installments of $20,631
including interest, matures November 13, 1997 40,676
Other 1,700
--------
$ 85,625
========
Notes payable to related party
10%, unsecured, principal and interest due July 27,
1998 $ 50,000
10.5%, secured by equipment, due in monthly installments
of principal and interest of $1,062, due September 1997 $ 50,000
Secured by equipment, interest at the prime rate
plus 2%, principal and interest due June 28,
1998 25,000 25,000
10%, unsecured, principal and interest due July 19,
1998 50,000 50,000
10%, unsecured, principal and interest due
December 25, 1998 25,000 25,000
-------- --------
150,000 150,000
Less: Current portion 125,000 150,000
-------- --------
$ 25,000 $ 0
======== ========
</TABLE>
F-14
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
NOTE 7 - FACTORING ARRANGEMENT
The Company has entered into a factoring arrangement with Citizen's Bank (the
Bank) to factor the Company's receivables. Under the factoring arrangement, the
bank purchases the Company's receivables at a discount of 2.05%. 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, the 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 nonpayment of an
invoice. Substantially all of the Company's property and equipment is pledged as
collateral for this agreement. The agreement expires April 1, 1998. For
accounting purposes, the receivables are considered sold at the time cash is
received by the Company from the Bank.
Total proceeds to the Company from the factoring of receivables during the years
ended September 30, 1997 and 1996, were approximately $895,000 and $437,000,
respectively. Of this amount, $6,465 was held in the reserve account and thereby
restricted at September 30, 1997. Approximately $64,400 of receivables factored
during 1997 were unpaid at September 30, 1997. No balance was outstanding on the
related line-of-credit at September 30, 1997 and 1996.
NOTE 8- 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 at an exercise
price of $1 per share. No warrants have been exercised to date. The warrants
expire in November and December, 1998.
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 transactions 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.
F-15
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
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 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.
Compensation expense related to the warrant grants was $31,250 and 18,750 in
1997 and 1996, respectively. During January 1997, Mr. Neuman exercised his
warrant to purchase 250,000 shares.
Had the company elected to apply Financial Accounting Standards Board Statement
No. 123, Accounting for Stock-Based Compensation, using the fair value based
method, there would have been no effect on the Statements of Operations for the
years ended September 30, 1997 and 1996.
The fair value of the options at date of grant was estimated using the
Black-Scholes Model with the following assumptions:
1996
-----------
Risk-free interest rate 5.2%
Expected life 1 - 5 years
Expected dividends None
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
STOCK PRICE STOCK PRICE
OPTIONS PER SHARE OPTIONS PER SHARE
---------- ------------- --------- --------------
<S> <C> <C> <C> <C>
Beginning of period 1,387,000 $ .35 - $1.80 387,000 $.35 - $1.80
Granted 1,000,000 .001 - .25
Exercised (250,000) .001
---------- ------------- --------- --------------
End of period 1,137,000 $.001 - $1.80 1,387,000 $.001 - $1.80
========== ============= ========= ==============
Exercisable at
September 30 574,500 $.001 - $1.80 387,000 $.35 - $1.80
========== ============= ========= ==============
Weighted-average fair value of options granted during the year $ .0575
==============
</TABLE>
Additionally, in January, 1996, the Company exchanged 3,000,000 shares of common
stock for $300,000 in debt, credit facilities of $150,000 and additional
technology marketing rights.
F-16
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
NOTE 9 - INCOME TAXES
Deferred income taxes under SFAS No. 109 reflect the net tax effect 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, 1997 and 1996, are as follows:
1997 1996
----------- -----------
Deferred tax assets:
Net operating loss $ 1,809,000 $ 1,577,000
Valuation allowance (1,809,000) (1,577,000)
----------- -----------
Net deferred taxes $ 0 $ 0
=========== ===========
At September 30, 1997 and 1996, the Company had net operating loss carryforwards
available to offset future taxable income of approximately $5,302,000 and
$4,639,000, respectively. These amounts expire during the years 2008 through
2012. 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.
NOTE 10 - OPERATING LEASES
The Company leases office space under an operating lease which expires in March,
2000. Future minimum lease payments as of September 30, 1997 are as follows:
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------
1998 $ 82,750
1999 85,750
2000 36,250
--------
$204,750
========
Future minimum payments have not been reduced by 1998 sublease rentals
aggregating approximately $16,000, under noncancelable subleases with related
parties (see Note 11).
Rental expense for the Company for the years ended September 30, 1997 and 1996,
was approximately $22,050 (net of approximately $54,700 of sublease income) and
$23,050 (net of approximately $53,700 of sublease income), respectively.
F-17
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
NOTE 11 - RELATED PARTY TRANSACTIONS
During the year ended September 30, 1996, the Company purchased inventory from
RSS totaling $29,366. The Company leased certain equipment to Lefco for $1,200
and $18,703 for the years ended 1997 and 1996, respectively.
The Company leased certain vehicles from employees. Expenses under these leases
were approximately $30,600 for the year ended September 30, 1996. The Company
also subleases office space to Lefco and Rochem Technical Services, Ltd. (See
Note 10).
As of September 30, 1997 and 1996, the Company had notes payable to a related
party of $150,000. Interest expense related to these notes for the years ended
September 30, 1997 and 1996 was approximately $15,000 and $4,500, respectively.
As of September 30, 1997 and 1996, the Company has payables to RSS and Fluid
Separation Systems, an affiliate of Rochem AG, of $147,177 and $30,023,
respectively.
During the year ended September 30, 1997, the Company had sales to Fluid
Separation Systems totaling $28,814.
NOTE 12- COMMITMENTS AND CONTINGENCIES
The Company has an employment agreement with an employee. As of September 30,
1997, the aggregate commitment for future salaries is approximately $373,750
through December 31, 2000.
NOTE 13 - SIGNIFICANT CUSTOMERS AND SUPPLIERS
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.
During the years ended September 30, 1997 and 1996, the Company had revenues
from two customers comprising approximately 82% and 75% 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.
The Company currently only purchases key components of the licensed technology
from the licensor, 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.
F-18
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
NOTE 14 - SIMPLIFIED EMPLOYEE PENSION PLAN
Effective December 1, 1996, the Company established an employee defined
contribution pension plan for all eligible employees. Employees are permitted to
defer up to 15% of their compensation. The Company may make discretionary
contributions of a percentage of participants' compensation. The Company made no
contributions to the plan during 1997.
F-19
<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: /s/ ERICK J. NEUMAN
Dated: January 12, 1998 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.
/s/ WILLIAM E. BRACKEN
William E. Bracken Director January 12, 1998
/s/ DAVID A. LAMONICA
David A. LaMonica Director January 12, 1998
/s/ PHILIP LEFEVRE
Philip LeFevre Director January 12, 1998
<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
16.3(7) - 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.
(7) Previously filed as an exhibit on Form 8-K dated October 24, 1997.
<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>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 115,038
<SECURITIES> 0
<RECEIVABLES> 71,685
<ALLOWANCES> 0
<INVENTORY> 77,003
<CURRENT-ASSETS> 231,655
<PP&E> 2,296,986
<DEPRECIATION> (1,064,777)
<TOTAL-ASSETS> 5,709,352
<CURRENT-LIABILITIES> 623,449
<BONDS> 0
0
0
<COMMON> 19,022,251
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,709,352
<SALES> 1,427,202
<TOTAL-REVENUES> 1,427,202
<CGS> 798,199
<TOTAL-COSTS> 798,199
<OTHER-EXPENSES> 1,285,202
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,642
<INCOME-PRETAX> (682,841)
<INCOME-TAX> 0
<INCOME-CONTINUING> (682,841)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (682,841)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> 0
</TABLE>
