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, 1998 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
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 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, 1998 were
$1,427,257.
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 30, 1998, was approximately $1,677,334.
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
30, 1998, the registrant had 19,184,751 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 12, 1999 is 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. . . .. . . . .. 13
Item 7. Financial Statements . . . . . . . . . . . . .. . . .. 15
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 . . . . . . . . . . . . . . . . . . . . . .. 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 Pall
Rochem (formally known as Rochem Separation Systems "RSS"), a subsidiary of Pall
Corporation. 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 global industry with an estimated $20 billion
market in the U.S. alone. 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 equipment exceeds three billion dollars (according
to Future Technology Surveys, Inc. (1995)) 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.
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 than previously possible with other membrane systems. In
membrane separation applications (molecular filtration), the Disc Tube design is
also capable of removing a higher percentage of the clean water 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
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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, 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. Wastewaters and process waters are desalted or
concentrated by driving relatively pure water through membranes. Contaminants or
recoverable compounds are excluded, or rejected, by the membranes and the
purified water is recovered separately.
NANOFILTRATION. Wastewaters and process waters are selectively desalted by
utilizing membranes with more open pore sizes as compared to reverse osmosis
membranes. In this process, problematic pollutants or valuable components can be
separated from the lower molecular weight compounds that are innocuous or
incidental.
ULTRAFILTRATION. Utilizing an even more open membrane than nanofiltration,
low molecular weight species can be separated from larger components or
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 64% 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.
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
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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 also utilizes distributor
representatives to expand geographical and market coverage. 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 Pall Rochem 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 Pall Rochem 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
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-products.
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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.
PATENTS, TRADEMARKS AND DISTRIBUTOR AGREEMENT
In October 1993, the Company entered into a distributor agreement with RSS
(now known as Pall Rochem) 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 Pall
Rochem at an increased discount.
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
Pall Rochem 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 would not be found to infringe upon the
claims of other existing patents.
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RESEARCH AND DEVELOPMENT
Historically, research and development associated with the Disc Tube
technology has been conducted primarily by Pall Rochem and to a much lesser
extent by the Company. To date, through the fiscal year ended September 30, 1998
the Company has had access to findings resulting from Pall Rochem's 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 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
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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, 1998, 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 $140,546
Building rental expense for the Company for the years ended September 30,
1998 and 1997 was approximately $57,200 and $22,050 (net of approximately
$45,000 and $54,700 of sublease revenues), respectively. The Company had
sub-leased, to a related party, until June 1998, approximately 1,650 square feet
of its office space and 20,000 square feet of its warehouse for $3,190 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 30,1998 there were approximately 224 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
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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
FISCAL YEAR 1998 HIGH LOW
---------------- ----- -----
First Quarter $0.34 $0.13
Second Quarter $0.36 $0.16
Third Quarter $0.41 $0.31
Fourth Quarter $0.38 $0.26
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.
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. At September 30, 1998,
no warrants have been exercised.
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
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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 which vested on December 31, 1996; (ii) a warrant to purchase a total
of 250,000 shares at $0.001 per share which vested during 1997; (iii) a warrant
to purchase 250,000 shares at $0.10 per share, which vested in 1998; 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. During January 1997, Mr. Neuman
exercised his warrant to purchase 250,000 shares.
In September, 1998, the Company issued a stock purchase warrant with a
value of $34,000 in connection with issuance of debt. The warrant entitles
Rochem Group, SA to purchase an aggregate of 1,250,000 shares of common stock at
an exercise price of $.35. No warrants have been exercised to date.
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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, 1998 ("FISCAL 1998") COMPARED WITH TWELVE
MONTHS ENDED SEPTEMBER 30, 1997 ("FISCAL 1997")
REVENUES. Revenues were $1,427,257 in Fiscal 1998 as compared to
$1,427,202 in Fiscal 1997. Revenues derived from service contracts totaled
$909,591 in Fiscal 1998 as compared to $815,158 in Fiscal 1997. Revenues from
product sales were $411,983 in Fiscal 1998 as compared to product sales of
$580,356 in Fiscal 1997. Revenues from product demonstrations were $105,683 in
Fiscal 1998 as compared to product demonstrations of $31,688 in Fiscal 1997.
This trend reflects the Company's strategy to increase exposure of the Company's
technology to customers through product demonstrations that are expected to lead
to sales and rental contracts. Product sales revenues were lower than expected
due to delays in projects where the Company has received preliminary commitments
for the purchase of equipment from customers. Management's strategy is to expand
service revenues as the customer base for product sales grows.
During Fiscal 1998 and 1997, 78% and 82%, respectively, of the Company's
revenues were derived from two customers (a refinery and a gold mine). The
Company currently has a four-year contract to perform water treatment services
at the refinery until April 2000. Loss of either of these customers would have a
material adverse impact on the Company's financial position and results of
operation.
GROSS PROFIT. Cost of sales increased in Fiscal 1998 to $945,598 as
compared to $798,199 in Fiscal 1997. This increase in cost of sales is primarily
related to a product sale of two Disc Tube systems that had previously been used
as rental equipment by the customer that purchased the systems. This increase in
cost of sales led to a decrease in gross profit to $481,659 in Fiscal 1998 from
$629,003 in Fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) totaled $1,283,219 for Fiscal 1998, compared with
a total of $1,285,202 in Fiscal 1997. Non cash related expenses comprised of
depreciation and amortization of $462,906 for Fiscal 1998 compared to
depreciation and amortization of $483,290 and compensation expense of $31,250 in
Fiscal 1997.
NET LOSS. The net loss increased to $816,761 for Fiscal 1998, compared to
a net loss of $682,841 in Fiscal 1997. The losses included various non-cash
expenses of $636,092 in Fiscal 1998 and $683,829 in Fiscal 1997. These non-cash
expenses are primarily comprised of amortization of the distributor license,
depreciation of property and equipment and compensation expense related to stock
warrants. The Company's focus for Fiscal 1999 is to increase revenues
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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, 1998, the Company had a working capital surplus of
$49,256 and a current ratio of 1.1 to 1.0 as compared to net working capital
deficit of $391,794 and a current ratio of 0.4 to 1.0 on September 30, 1997.
This increase in working capital is primarily due to the restructuring of debt
whereby the Company entered into a loan agreement for $500,000 with Rochem Group
SA. Current assets increased to $503,775 in Fiscal 1998 from $231,655 in Fiscal
1997. Inventory increased to $177,253 in Fiscal 1998 from $77,003 in Fiscal
1997. Property and equipment decreased to $826,734 in Fiscal 1998 from
$1,232,209 in Fiscal 1997.
Net cash used in operating activities in Fiscal 1998 was $51,216. In
Fiscal 1997 net cash provided by operating activities was $81,483.
Net cash used for the purchase of capital equipment during Fiscal 1998 was
$106,033 as compared to $220,282 during Fiscal 1997.
During Fiscal 1998, financing activities provided net cash of $268,418.
These financing activities were primarily used to pay off debt. These financing
activities were funded by Rochem Group SA. In Fiscal 1997, financing activities
provided net cash of $102,758 that was used primarily to fund the purchase of
additional rental service equipment for which the Company had extended contracts
with customers.
In September 1998, the Company obtained a $500,000 loan from Rochem Group
SA, an affiliate of Fluid Separation Systems. The loan, which bears an interest
rate of 10.5% per annum, with interest payable upon maturity, matures on
December 31, 1999. As part of the loan agreement, the Company agreed to issue a
stock purchase warrant entitling Rochem Group, SA to purchase an aggregate of
1,250,000 shares of the Company's common stock. In the event the loan is paid in
full at December 31, 1998, the exercise price for the Warrant shall be $0.35 per
share for the term of the Warrant. If no principal payment has been made on the
principal balance by December 31, 1998, the exercise price for the Warrant shall
be $0.25 per share. If a partial payment of the principal balance has been made,
the exercise price shall be $0.35 in proportion to the principal made and $0.25
in the proportion to the remaining principal balance. The proceeds of this
transaction were used to repay loans to Fluid Separation Systems totaling
$150,000 in principal. Specifically, these loans were $25,000 in December 1995,
$50,000 in February 1996, $25,000 in July 1996 and $50,000 in January 1997.
In September 1996, the Company exercised a $50,000 credit facility with
Lefco. The credit facility provided for monthly payments of $1,062, 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. Final payment was made on this
loan in September 1998.
As noted above, the Company had a working capital surplus of $49,256 for
the year ending September 30, 1998. As a result of liquidity issues, the Report
of Independent Accountants includes an emphasis of matter paragraph concerning
the Company's ability to continue as a
14
<PAGE>
going concern. In Fiscal 1998, 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 1999. 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 1999. 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.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company has received
certification from its software and hardware vendors that its internal computer
systems are Y2K compliant. The Company presently believes that the Year 2000
Issue will not pose significant operational problems for its computer systems.
The Company has initiated formal communications with all of its
significant suppliers and large customers, to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. There can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's systems. The Company has
determined it has no exposure to contingencies related to the Year 2000 Issue
for services it has provided.
ITEM 7. FINANCIAL STATEMENTS
Financial statements included on pages F-1 to F-17.
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 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
15
<PAGE>
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.
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) Report on Form 8-K was filed with the Securities and Exchange
Commission on October 24, 1997 to reflect the change in accountants.
18
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
HOUSTON, TEXAS
ANNUAL CONSOLIDATED FINANCIAL REPORT
SEPTEMBER 30, 1998
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER
-----------
Independent Auditors' Report .................................... F-1
Consolidated Balance Sheets ..................................... F-2
Consolidated Statements of Operations ........................... F-4
Consolidated Statements of Stockholders' Equity ................. F-5
Consolidated Statements of Cash Flows ........................... F-6
Notes to Consolidated Financial Statements ...................... F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Rochem Environmental, Inc.
We have audited the accompanying Consolidated Balance Sheets of Rochem
Environmental, Inc. and Subsidiary as of September 30, 1998 and 1997, 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Rochem
Environmental, Inc. as of September 30, 1998 and 1997, 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 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.
This condition raises 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
November 5, 1998
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
-------------------------
1998 1997
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................... $ 226,207 $ 115,038
Restricted cash ................................ 3,614 6,465
Accounts receivable:
Trade ......................................... 136,014 55,787
Other ......................................... 15,898
Inventory ...................................... 100,250
Prepaid expenses ............................... 37,690 38,467
---------- ----------
Total Current Assets ........................ 503,775 231,655
INVENTORY ........................................ 77,003 77,003
PROPERTY AND EQUIPMENT, net ...................... 826,734 1,232,209
DISTRIBUTOR AGREEMENT, net of accumulated
amortization of $1,886,330 and $1,509,194
in 1998 and 1997, respectively ................. 3,770,910 4,148,046
OTHER ASSETS ..................................... 20,239 20,439
---------- ----------
$5,198,661 $5,709,352
========== ==========
F-2
<PAGE>
SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks ....................... $ 1,192 $ 85,625
Notes payable to related parties ............. 125,000
Accounts payable ............................. 193,351 189,484
Accrued expenses ............................. 45,076 76,163
Customer deposits ............................ 88,385
Payable to related parties ................... 126,515 147,177
------------ ------------
Total Current Liabilities ................. 454,519 623,449
NOTE PAYABLE TO RELATED PARTY .................. 466,000 25,000
------------ ------------
920,519 648,449
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 50,000,000
shares authorized, 19,084,751 shares
issued and outstanding ...................... 19,085 19,085
Additional paid-in capital ................... 10,330,430 10,296,430
Accumulated deficit .......................... (6,071,373) (5,254,612)
------------ ------------
4,278,142 5,060,903
------------ ------------
$ 5,198,661 $ 5,709,352
============ ============
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------
REVENUES
Service ...................................... $ 909,591 $ 815,158
Product sales ................................ 411,983 580,356
Product demonstrations ....................... 105,683 31,688
------------ ------------
1,427,257 1,427,202
Cost of Sales .................................. 945,598 798,199
------------ ------------
GROSS PROFIT ................................... 481,659 629,003
------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Depreciation and amortization ................ 462,906 483,290
Other ........................................ 820,313 801,912
------------ ------------
1,283,219 1,285,202
------------ ------------
(801,560) (656,199)
INTEREST EXPENSE, NET .......................... (15,201) (26,642)
------------ ------------
NET LOSS ....................................... $ (816,761) $ (682,841)
============ ============
Net Loss Per Share ............................. $ (0.04) $ (0.04)
============ ============
Weighted Average Shares Outstanding ............ 19,084,751 19,022,251
============ ============
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
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 options ....... 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
Issuance of warrants ...... 34,000 34,000
Net loss .................. (816,761) (816,761)
----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1998 19,084,751 $ 19,085 $10,330,430 $(6,071,373) $ 4,278,142
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED
SEPTEMBER 30,
-----------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................. $(816,761) $(682,841)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .......... 624,257 652,579
Compensation element of stock options .. 31,250
Bad debt expense ....................... 11,835
(Increase) Decrease in:
Accounts receivable ...................... (76,164) (64,544)
Prepaid expenses ......................... 777 6,042
Inventory ................................ 164,137 23,674
Other assets ............................. 200 11,117
Increase (Decrease) in:
Accounts payable ......................... 3,867 (23,291)
Accrued expenses ......................... (31,087) 10,343
Customer deposits ........................ 88,385
Accounts payable - related parties ....... (20,662) 117,154
--------- ---------
Net Cash Provided by (Used in)
Operating Activities ................. (51,216) 81,483
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ...................... (106,033) (220,282)
--------- ---------
Net Cash Used in Investing Activities .. (106,033) (220,282)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Restricted cash ............... 2,851 16,883
Proceeds from sale of common stock, net ... 250
Proceeds from issuance of warrants ........ 34,000
Proceeds from debt ........................ 466,000 171,700
Payments on debt .......................... (234,433) (86,075)
--------- ---------
Net Cash Flows Provided by Financing
Activities ........................... 268,418 102,758
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 111,169 (36,041)
Cash and Cash Equivalents - Beginning of Year 115,038 151,079
--------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR ..... $ 226,207 $ 115,038
========= =========
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FOR THE YEAR ENDED
SEPTEMBER 30
----------------------
1998 1997
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest ........................................ $ 36,210 $ 8,132
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Net fixed assets reclassed as inventory .......... $264,387 $ 19,012
======== ========
Inventory reclassed as fixed assets .............. $115,911
========
The Company paid no income taxes for the years ended September 30, 1998 and
1997, respectively.
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company issues financial statements on the accrual method of accounting in
accordance with generally accepted accounting principles. Accounting principles
followed by the Company and the methods of applying those principles which
materially affect the determination of financial position, results of operations
and cash flows are summarized below:
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 a subsidiary of Pall Corporation 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, 1998, Pall Corporation owned approximately 45% of the
outstanding stock of the Company.
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, 1998 and 1997. 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-8
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
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.
DISTRIBUTOR AGREEMENT
The distributor agreement is carried at cost and amortized on a straight-line
basis over fifteen years.
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.
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
F-9
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
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.
RECENT ACCOUNTING PRONOUNCEMENTS
The following Financial Accounting Standards Board statements have been issued
but are not effective as of September 30, 1998:
FASB 130 Reporting Comprehensive Income
FASB 131 Disclosures About Segments of an Enterprise and Related
Information
FASB 132 Employer's Disclosures About Pensions and Other Post-Retirement
Benefits
FASB 133 Accounting for Derivative Instruments and Hedging Activities
FASB 134 Accounting for Mortgage-Backed Securities Retained After
the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise
The Company believes there will be no material effect on its financial
position or results of operations as a result of the above-mentioned
pronouncements.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. 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 1999. 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-10
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
NOTE 3 - INVENTORY
Inventory at September 30, 1998 and 1997, consisted of the following:
1998 1997
-------- --------
Parts inventory .......................... $ 16,794 $ 6,809
Component inventory ...................... 160,459 70,194
-------- --------
$177,253 $ 77,003
======== ========
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1998 and 1997, consisted of the
following:
1998 1997
----------- -----------
Testing equipment ........................ $ 708,031 $ 703,086
Rental service equipment ................. 1,074,938 1,528,921
Leasehold improvements ................... 25,059 24,724
Other .................................... 41,687 40,255
----------- -----------
1,849,715 2,296,986
Less: Accumulated depreciation ........ (1,022,981) (1,064,777)
----------- -----------
$ 826,734 $ 1,232,209
=========== ===========
Depreciation expense was $247,120 and $275,210 for the years ended September 30,
1998 and 1997, respectively.
NOTE 5 - DISTRIBUTOR AGREEMENT
The Company has a distributor agreement with a subsidiary of Pall Corporation
for exclusive rights to distribute Pall Corporation's waste water treatment
systems and related equipment and services for all petroleum based waste water
applications in all 48 contiguous United States in the Company's distribution
territory.
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-11
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
NOTE 6 - NOTES PAYABLE
Notes payable as of September 30, 1998 and 1997, are as follows:
1998 1997
-------- --------
Notes payable to banks:
9.5%, secured by equipment, due in monthly
installments of principal and interest of
$3,794, or on demand, matured September 16, 1998 ... $ 43,249
10.5%, secured by equipment, due in monthly
installments of $20,631 including
interest, matured November 13, 1997 ................ 40,676
Other ................................................ $ 1,192 1,700
-------- --------
$ 1,192 $ 85,625
======== ========
Notes payable to related parties:
10.5%, $500,000 face value, interest
imputed at 14.7%, unsecured, principal
and interest due December 31, 1999 ................. $466,000
10%, unsecured, principal and interest paid
September 30, 1998 ................................. $ 50,000
Secured by equipment, interest at the prime
rate plus 2%, principal and interest paid
September 30, 1998 ................................. 25,000
10%, unsecured, principal and interest paid
September 30, 1998 ................................. 50,000
10%, unsecured, principal and interest paid
September 30, 1998 ................................. 25,000
-------- --------
466,000 150,000
Less: Current portion ................................ 125,000
-------- --------
$466,000 $ 25,000
======== ========
F-12
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
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 September, 1999. 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, 1998 and 1997, were approximately $734,000 and $895,000,
respectively. Of this amount, $3,614 was held in the reserve account and thereby
restricted at September 30, 1998. Approximately $36,000 of receivables factored
during 1998 were unpaid at September 30, 1998. No balance was outstanding on the
related line-of-credit at September 30, 1998.
NOTE 8- CAPITAL STOCK TRANSACTIONS
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 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.
F-13
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
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 which vested on December 31, 1996; (ii) a warrant to purchase a
total of 250,000 shares at $0.001 per share which vested during 1997; (iii) a
warrant to purchase 250,000 shares at $0.10 per share, which vested in 1998; 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 warrants granted in 1996 which vested in 1998 and 1997 was $0 and $31,250,
respectively. During January 1997, Mr. Neuman exercised his warrant to purchase
250,000 shares.
In September, 1998, the Company issued a stock purchase warrant with a value of
$34,000 in connection with issuance of debt. The warrant entitles Rochem Group,
SA to purchase an aggregate of 1,250,000 shares of common stock at an exercise
price of $.35. No warrants had been exercised as of September 30, 1998.
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, 1998 and 1997.
The following table summarizes stock option and warrant activity:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
STOCK PRICE STOCK PRICE
OPTIONS PER SHARE OPTIONS PER SHARE
----------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of period .......... 1,137,000 $.001 - $1.80 1,387,000 $ .35 - $1.80
Expired .................... (17,000) $1.80
Granted .................... 1,250,000 $0.35
Exercised .................. (250,000) $ .001
----------- ------------- --------- --------------
End of period ............... 2,370,000 $.001 - $1.00 1,137,000 $ .001 - $1.80
=========== ============= ========= ==============
Exercisable at
September 30 ............. 2,074,500 $.001 - $1.00 574,500 $ .001 - $1.80
=========== ============= ========= ==============
</TABLE>
F-14
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
NOTE 9 - INCOME TAXES
The following is a reconciliation of federal income taxes computed at the
statutory rate with income taxes recorded in the Consolidated Statements of
Operations for the years ended September 30, 1998 and 1997:
1998 1997
----------- ------------
Federal income tax benefit at statutory rate ... $ (277,699) $ (232,166)
Nondeductible items ............................ 616 649
Change in valuation allowance .................. 277,000 232,000
Other .......................................... 83 (483)
----------- -----------
$ 0 $ 0
=========== ===========
Significant components of the Company's deferred tax liabilities and assets as
of September 30, 1998 and 1997, are as follows:
1998 1997
----------- ------------
Deferred tax assets:
Net operating loss ............................ $ 2,086,000 $ 1,809,000
Valuation allowance ........................... (2,086,000) (1,809,000)
----------- -----------
Net deferred taxes ............................ $ 0 $ 0
=========== ===========
At September 30, 1998 and 1997, the Company had net operating loss carryforwards
available to offset future taxable income of approximately $6,135,000 and
$5,302,000, 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.
F-15
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
NOTE 10 - OPERATING LEASES
The Company leases office space and a vehicle under operating leases which
expire in 2000. Future minimum lease payments as of September 30, 1998 are as
follows:
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------
1999 ............................ $107,556
2000 ............................ 46,190
--------
$153,746
========
Rental expense for the Company for the years ended September 30, 1998 and 1997,
was approximately $57,200 and $22,050 (net of approximately $45,000 and $54,700
of sublease income), respectively.
NOTE 11 - RELATED PARTY TRANSACTIONS
As of September 30, 1998 and 1997, the Company had notes payable to related
parties of $500,000 and $150,000, respectively. Interest expense related to
these notes for the years ended September 30, 1998 and 1997 was approximately
$14,000 and $15,000, respectively.
As of September 30, 1998, the Company has payables to Pall Corporation of
$94,975 and to a shareholder of $31,540.
As of September 30, 1997, the Company had payables to RSS and Fluid Separation
Systems, affiliates of Rochem AG, of $147,177.
During the year ended September 30, 1998, the Company purchased inventory from
Pall Corporation totaling $137,805.
During the year ended September 30, 1998, the Company had sales to Lefco, a
shareholder, totaling $36,857.
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,
1998, the aggregate commitment for future salaries is approximately $258,750
through December 31, 2000.
F-16
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
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, 1998 and 1997, the Company had revenues
from two customers comprising approximately 78% and 82% 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, Pall Corporation. 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.
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 1998 or 1997.
F-17
<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 13, 1999 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 13, 1999
/s/ DAVID A. LAMONICA
David A. LaMonica Director January 13, 1999
/s/ PHILIP LEFEVRE
Philip LeFevre Director January 13, 1999
<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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 229,821
<SECURITIES> 0
<RECEIVABLES> 136,014
<ALLOWANCES> 0
<INVENTORY> 100,250
<CURRENT-ASSETS> 503,775
<PP&E> 1,849,715
<DEPRECIATION> (1,002,981)
<TOTAL-ASSETS> 5,198,661
<CURRENT-LIABILITIES> 454,519
<BONDS> 0
0
0
<COMMON> 19,085
<OTHER-SE> 4,259,057
<TOTAL-LIABILITY-AND-EQUITY> 5,198,661
<SALES> 1,427,257
<TOTAL-REVENUES> 1,427,257
<CGS> 945,598
<TOTAL-COSTS> 2,228,817
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,201
<INCOME-PRETAX> (816,761)
<INCOME-TAX> 0
<INCOME-CONTINUING> (816,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (816,761)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
