U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
AMENDMENT NO. 2
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended September 30, 1999 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, 1999 were
$1,587,282.
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 27, was approximately $2,106,227. 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 20, 1999 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 17, 2000 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...................................19
Item 11. Security Ownership of Certain Beneficial Owners
and Management...........................................21
Item 12. Certain Relationships and Related Transactions...........22
Item 13. Exhibits and Reports on Form 8-K.........................23
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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, reverse osmosis and nanofiltration, 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. The Company also utilizes patented
ultrafiltration technology, herein referred to as the "FM Module" system, from
Rochem UF. Management believes these processes are superior to other
technologies in their 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 and FM Module technologies are a robust form of membrane
separation which management considers to be far superior to traditional designs.
The unique advances incorporated into the Disc Tube and FM Module allow them 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 and FM Module technologies are relatively new to the
U.S. wastewater industry, the technology has over ten years of operating history
in Europe and other
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parts of the world where the availability and protection of high quality water
resources have been addressed. During this period, Disc Tube and FM Module
systems have been in operation handling industrial waste waters, landfill
leachate and municipal waste water treatment 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 41% 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 and FM Module systems
lies in their 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 and FM Module systems will provide
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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 and
FM Module systems have 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 and FM Module systems 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 and FM
Module technologies, 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
and FM Module systems and to publicize the successful application of the system
within different industries.
MANUFACTURING
The Company acquires major component equipment from Pall Rochem and Rochem
UF 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 and FM
Module technologies. 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 and
FM Module systems 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 and FM Module systems,
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.
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.
MARINE AND CRUISE LINE INDUSTRY. The cruise line and marine industry has
several streams that are applicable to the Company's technology. The cruise
lines generate gray waters from laundry, showers and kitchen operations.
Discharge of these wastewaters is coming under increased scrutiny by
environmental regulators. Rochem's technology allows the cruise operators to
recover water that can be discharged or reused on the cruise vessel.
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.
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,
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accordingly, there can be no assurance that any particular aspect of the
Company's technology would not be found to infringe upon the claims of other
existing patents.
RESEARCH AND DEVELOPMENT
Historically, research and development associated with the Disc Tube and
FM Module technologies has been conducted primarily by Pall Rochem, Rochem UF
and to a much lesser extent by the Company. To date, through the fiscal year
ended September 30, 1999 the Company has had access to findings resulting from
Pall Rochem's and Rochem UF'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 and FM Module technologies 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 and FM Module technologies 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 and FM Module technologies 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 and FM Module to be excellent
and cost competitive technologies in these applications.
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For most of its history, the Environmental Protection Agency and the
associated state agencies have concentrated only a small portion of their
attention on the pollution generated from oil and gas operations. In the last
few years, these regulators have begun to tighten the specifications on water
permitted to be discharged. This has become a major source of concern,
particularly for the offshore operations. The FM Module 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, 1999, the Company had nine employees, five of whom
were involved in field operations and testing, three devoted full time to sales
activities and one 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 $43,500.
Building rental expense for the Company for the years ended September 30,
1999 and 1998 was approximately $85,750 and $37,750 (net of approximately $0 and
$45,000 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 20,1999 there were approximately 220 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 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
FISCAL YEAR 1999 HIGH LOW
---------------- ----- -----
First Quarter $0.31 $0.19
Second Quarter $0.28 $0.23
Third Quarter $0.58 $0.22
Fourth Quarter $0.70 $0.40
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 November, 1993, the Company entered into warrant agreements with two of
its employees which grant the sale of 125,000 shares of common stock at an
exercise price of $.01 per share and 125,000 shares of common stock at an
exercise price of $1 per share. Warrants for 100,000 shares of stock for $.01
per share were exercised in November, 1998. All of the remaining warrants
expired 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.
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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. 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 $.25. 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, 1999 ("FISCAL 1999") COMPARED WITH TWELVE
MONTHS ENDED SEPTEMBER 30, 1998 ("FISCAL 1998")
REVENUES. Revenues were $1,587,282 in Fiscal 1999 as compared to
$1,427,257 in Fiscal 1998. Revenues derived from service contracts totaled
$654,186 in Fiscal 1999 as compared to $909,591 in Fiscal 1998. The decrease in
service revenue is a result of lower than anticipated revenues from customers
that the Company has performed service work for several years. Revenues from
product sales were $833,890 in Fiscal 1999 as compared to product sales of
$411,983 in Fiscal 1999. The increase in product sales revenues is a result of
the Company's efforts to focus sales efforts on product sales to establish a
customer base of operating systems in North America. Revenues from product
demonstrations were $99,206 in Fiscal 1999 as compared to product demonstrations
of $105,683 in Fiscal 1998. This trend of continued significant revenues from
product demonstrations reflects the Company's strategy to increase exposure of
the Company's technology to customers through paid demonstrations that are
expected to lead to sales and rental contracts. Management's strategy is to
expand service revenues as the customer base for product sales grows.
During Fiscal 1999, 90% of the Company's revenues were derived from three
customers. During Fiscal 1998, 78% of the Company's revenues were derived from
two customers. The Company has performed water treatment services at a refinery
until July 1999. Due to a change in maintenance procedures, the Company's
services are no longer required at the refinery. During Fiscal 1999 and 1998,
34% and 54%, respectively, of the Company's revenue was derived from this
customer. The loss of this service revenue is expected to affect operations in
the short term. In November 1999, the Company was awarded contracts to supply
two systems for gray water treatment from a major cruise line company. These
sales represent approximately $2,000,000 in sales. The cruise line has a
12-month option to purchase three more systems at the same price.
GROSS PROFIT. Cost of sales increased in Fiscal 1999 to $1,142,076 as
compared to $945,598 in Fiscal 1998. This increase in cost of sales led to a
decrease in gross profit to $445,206 in Fiscal 1999 from $481,659 in Fiscal
1998. This decrease in gross profit is primarily related to a decrease in
service revenue as a percentage of total sales.
EXPENSES. Selling, general and administrative expenses totaled $874,607
for Fiscal 1999, compared with a total of $820,313 in Fiscal 1998. This resulted
primarily from an increase in personnel related cost and project based
consulting. In the fourth quarter of Fiscal 1999, the Company recognized an
asset impairment of $3,488,058 related to the write down of the remaining value
of the Distributor Agreement from Pall Rochem. Non cash related expenses
comprised of depreciation and amortization of $345,374 for Fiscal 1999 decreased
compared to $462,906 in Fiscal 1998. Interest expense increased to $81,948 in
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Fiscal 1999 compared to $15,201 in Fiscal 1998. The increase in interest expense
in Fiscal 1999 is primarily due to the interest expense associated with the
$500,000 loan obtained from Rochem Group SA in September of 1998.
NET LOSS. The net loss increased to $4,344,781 for Fiscal 1999, compared
to a net loss of $816,761 in Fiscal 1998. The losses included various non-cash
expenses of $4,031,604 in Fiscal 1999 and $636,092 in Fiscal 1998. These
non-cash expenses are primarily comprised of amortization of the distributor
license, depreciation of property and equipment and asset impairment. The
Company's focus for Fiscal 2000 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, 1999, the Company had a working capital deficiency of
$894,259 and a current ratio of 0.3 to 1.0 as compared to net working capital
surplus of $49,256 and a current ratio of 1.1 to 1.0 on September 30, 1998. This
decrease in working capital is primarily due to the loan for $500,000 with
Rochem Group SA becoming due in one year. Current assets decreased to $307,974
in Fiscal 1999 from $503,775 in Fiscal 1998. Inventory decreased to $72,471 in
Fiscal 1999 from $177,253 in Fiscal 1998.
Net cash provided by operating activities in Fiscal 1999 was $107,700. In
Fiscal 1998 net cash used in operating activities was $51,216.
Net cash used for the purchase of capital equipment during Fiscal 1999 was
$156,681 as compared to $106,033 during Fiscal 1998.
During Fiscal 1999, financing activities provided $22,192 primarily from
bank notes. 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 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 (imputed at 14.7%), with interest payable upon maturity
has an original maturity date of 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 payment has been made on the principal balance by December 31, 1998, the
exercise price for the Warrant is $0.25 per share. 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. As
the Company does not have the funds to pay the principal and interest, the
Company has obtained an extension of the maturity date to January 31, 1999 from
Rochem Group SA to restructure the debt.
14
<PAGE>
In September 1996, the Company exercised a $50,000 credit facility with
Lefco Environmental Technologies, Inc. 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.
In December 1999, the Company received a notice from Pall Corporation that
it intends to pursue the termination of the Distributor Agreement if the Company
does not pay its indebtedness in full by December 30, 1999. If this occurs, the
Company would pursue a non-exclusive license to protect the business that the
Company has successfully developed and would work to broaden the non-exclusive
license to other markets where the Company believes opportunities exist. In the
event the Distributor Agreement from the Pall Corporation is terminated, the
gray water business that the Company has successfully developed will not be
affected as it does not utilize Pall's Disc Tube technology but instead uses the
FM module provided by the Rochem Group. Pall Corporation has agreed not to
pursue any action with respect to this notice until after January 31, 2000.
As noted above, the Company had a working capital deficiency of $894,259
for the year ending September 30, 1999. As a result of liquidity issues, the
Report of Independent Accountants includes an explanatory paragraph concerning
the Company's ability to continue as a 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 2000.
In November 1999, a major cruise line company awarded Rochem
Environmental, Inc. contracts for approximately $2,000,000 to supply two systems
for gray water treatment on two of its ships. The cruise line has a 12-month
option to purchase three more systems at the same price.
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 2000. 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 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
15
<PAGE>
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 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
The Company's directors and executive officers:
NAME POSITION
Erick Neuman Chairman of the Board of Directors, Chief
Executive Officer, Secretary and President
William Bracken Director and Vice-President
Philip LeFevre Director
William Palmer Director
The Bylaws of the Company provide that the number of directors will be
determined by the Board of Directors, but shall consist of not less than three
or more than nine directors. The directors are elected annually by the
stockholders of the Company at each annual meeting of the stockholders of the
Company. Any director elected to fill a vacancy or newly created directorship
resulting from an increase in the authorized number of directors shall hold
office until his successor is elected and duly qualified. Any vacancy on the
Board, howsoever resulting, may be filled by a majority of the directors then in
office, even if less than a quorum, or by a sole remaining director. Any
director elected to fill a vacancy shall hold office until his successor is
elected and duly qualified. The current Board of Directors and their biographies
are listed below.
Erick J. Neuman, (age 38). Since January 1996, Mr. Neuman has served as
president and chief executive officer of the Company. Mr. Neuman was elected to
the Board in March 1996. Mr. Neuman served as director, Technology and Technical
of Waste Management Italy, a subsidiary of WMX Technologies, Inc., from
September 1992 to December 1995. Prior thereto, Mr. Neuman held various
positions with Chemical Waste Management, Inc. from 1985 to 1992 and IIT
Research Institute from 1979 to 1985. Mr. Neuman received a Bachelor of Science
degree in Chemical Engineering from Illinois Institute of Technology.
William E. Bracken, (age 62). Mr. Bracken has served as director and vice
president of the Company since December 1992. Mr. Bracken served as operations
manager of EnClean's Environmental Group from January 1989 to December 1992. Mr.
Bracken served as a sales engineer with HydroKem from September 1985 to January
1989. Prior thereto, Mr. Bracken held a variety of positions in the
petrochemical industry from June 1956 to September 1985.
Philip LeFevre, (age 50). Mr. LeFevre has served as director of the
Company since March 1995. Mr. LeFevre is currently serving as president of Lefco
Environmental Technology, and has held this position since January 1991. Prior
thereto, Mr. LeFevre served as president of Lefco Corporation from 1979 to
December 1990 and directed various businesses such as concrete pumping services,
construction services and real estate development.
17
<PAGE>
William Palmer, (age 50). Mr. Palmer has served as a director of the
Company since March 1999. Mr. Palmer is currently serving as Vice President of
Pall Corporation for the Industrial Process markets served by Pall, globally.
Mr. Palmer has held several key sales, marketing and management roles within
Pall over his 25 years of service. Previously, he was an independent
financial/engineering consultant. Mr. Palmers holds a BSME degree from Worcester
Polytechnic Institute and an MBA from Duke University.
EXECUTIVE OFFICERS
The following table lists the present officers of the Company as of the
date hereof and the capacities in which they serve.
NAME OF INDIVIDUAL CAPACITY
------------------ --------
Erick Neuman President and Secretary
William E. Bracken Vice President
Biographical information with respect to Mr. Neuman and Mr. Bracken was
previously described above. There is no family relationship between any
present executive officers and directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act")
requires the Company's directors and executive officers, and persons who own
beneficially more than 10 percent of the Company's Common Stock, to file reports
of ownership and changes of ownership with the Securities and Exchange
Commission. Copies of all filed reports are required to be furnished to the
Company pursuant to Section 16(a)-3 promulgated under the Exchange Act. Based
solely on the reports received by the Company and on written representations
from certain reporting persons, the Company believes that the directors,
executive officers, and greater than ten percent beneficial owners complied with
all applicable filing requirements during the fiscal year ended September 30,
1999. Filing requirements were made timely.
18
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation with respect to the chief
executive officer. No other executive officer of the Company received total
annual salary and bonus for the fiscal year ended September 30, 1999 in excess
of $100,000.
Summary Compensation Table
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES
NAME AND PRINCIPAL FISCAL UNDERLYING
POSITION YEAR SALARY WARRANTS
- -------- ------ ---------- ---------
Erick J. Neuman 1999 $115,000(1) -
Chief Executive Officer 1998 $115,000(1) 312,500(2)
1997 $115,000(1) 437,500(2)
- -------------------------
(1) Mr. Neuman received certain perquisites and other benefits in the above
referenced fiscal year; however, the Company has concluded that the
aggregate amount of such personal benefits and other compensation is less
than 10% of the total of Mr. Neuman's annual salary. No bonus was paid to
Mr. Neuman during the 1999 fiscal year.
(2) Consists of a warrant to purchase a total of 250,000 shares at $0.001 per
share, a warrant to purchase 250,000 shares at $0.10 per share, and a
warrant to purchase 250,000 shares at $0.25 per share. These warrants are
effective January 1, 1996, and expire on December 31, 2000.
The Company did not grant any options and warrants to any executive
officers in Fiscal 1999.
The following table provides information regarding option and warrant
exercises in fiscal 1999 by the named executive officer and the value of such
officer's unexercised warrant at September 30, 1999:
AGGREGATED WARRANT/OPTIONS EXERCISES IN FISCAL YEAR 1999 AND FY-END
WARRANT/OPTIONS VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/
ACQUIRED ON VALUE OPTIONS/WARRANTS AT WARRANTS AT
NAME EXERCISE(1) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Erick Neuman - $0 500,000 250,000 $174,750 $37,500
</TABLE>
19
<PAGE>
EMPLOYMENT AGREEMENTS
In November 1999, the Company entered into a thirteen-month employment
agreement with Mr. Bracken, which automatically extends for additional one-year
terms unless terminated six months prior to the end of such term. Mr. Bracken's
current salary is $90,000. The current term of Mr. Bracken's employment
agreement expires on December 31, 2000. This agreement will automatically extend
for an additional year if not terminated by June 30, 2000.
In January 1996, Mr. Neuman entered into a five-year employment agreement
with the Company that provides for an annual base salary of $115,000. In
addition, 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 and were exercised by Mr. Neuman in January 1997; (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 warrant vests based upon the Company attaining certain financial goals.
Mr. Neuman's warrants expire on December 31, 2000.
20
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The table below sets forth, as of January 25, 2000, the number and
percentage of outstanding shares of Company Common Stock owned by (i) each
person know to the Company to beneficially own more than 5% of its outstanding
Common Stock, (ii) each director, (iii) each named executive officer, and (iv)
all executive officers and directors as a group.
NAME AND ADDRESS OF COMMON STOCK
BENEFICIAL OWNER (1) BENEFICIALLY OUTSTANDING
- ------------------- NUMBER PERCENTAGE
---------- ----------
Pall Corporation ................... 8,589,714 43.6%
2200 Northern Boulevard
East Hills, New York 11548
William Palmer (2) ................. 8,589,714 43.6%
2200 Northern Boulevard
East Hills, New York 11548
William E. Bracken ................. 950,000 4.8%
610 N. Milby Street
Houston, TX 77003
Lefco Environmental Technology, Inc. 2,565,558(3) 13.0%
15001 Walden Rd, #203
Montgomery, TX 77356
Philip LeFevre(4) .................. 2,565,558 13.0%
15001 Walden Rd, #203
Montgomery, TX 77356
Erick J. Neuman (5) ................ 751,400 3.8%
610 N. Milby Street
Houston, TX 77003
James Ward ......................... 1,893,167 9.6%
PO Box 783
Spring, TX 77383
All officers and directors ......... 12,856,672 65.3%
AS A GROUP (4 PERSONS)
(1) Unless otherwise noted, each person has sole voting and investment power
over the shares listed opposite his name, subject to community property
laws where applicable.
(2) Mr. Palmer is an affiliate of Pall Corporation.
(3) Includes 14,000 shares of Company Common Stock owned by Lefco Corporation,
an affiliate of Lefco Environmental Technology, Inc. and 561,550 solely
owned by Mr. LeFevre.
(4) Mr. LeFevre is an affiliate of Lefco Environmental Technology, Inc. and
Lefco Corporation.
(5) Mr. Neuman owns 251,400 shares and warrants to purchase 750,000 shares of
Common Stock, 500,000 of which are currently exercisable.
21
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1998, Pall Corporation purchased 8,589,714 shares of Company
Common Stock from Argentaurum SA. This transaction was part of an asset purchase
whereby Pall Corporation acquired certain assets of Argentaurum SA including the
reverse osmosis and nanofiltration technologies and operations of the Rochem
Group.
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, has an original
maturity date of 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. The exercise
price for the warrant is $0.25 per share. The proceeds of this transaction were
used to repay loans to Fluid Separation Systems totaling $150,000 in principal.
As the Company does not have the funds to pay the principal and interest, the
Company has obtained an extension of the maturity date to January 31, 2000 from
Rochem Group SA to restructure the debt.
In December 1999, the Company received a notice from Pall Corporation that
it intends to pursue the termination of the Distributor Agreement if the Company
does not pay its indebtedness in full by December 30, 1999. If this occurs, the
Company would pursue a non-exclusive license to protect the business that the
Company has successfully developed and would work to broaden the non-exclusive
license to other markets where the Company believes opportunities exist. In the
event the Distributor Agreement from Pall Corporation is terminated, the gray
water business that the Company has successfully developed will not be affected
as it does not utilize Pall's Disc Tube technology but instead uses the FM
module provided by the Rochem Group. Pall Corporation has agreed not to pursue
any action with respect to this notice until after January 31, 2000.
22
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
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.
23
<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 28, 2000 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 28, 2000
/s/ PHILIP LEFEVRE
Philip LeFevre Director January 28, 2000
/s/ WILLIAM PALMER
William Palmer Director January 28, 2000
24
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED 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 (Deficit)..............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, 1999 and 1998, and the
related Consolidated Statements of Operations, Stockholders' Equity (Deficit)
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, 1999 and 1998, 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
December 1, 1999
F-1
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
-------------------------
1999 1998
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................... $ 199,418 $ 226,207
Restricted cash ................................ 3,614
Accounts receivable:
Trade ......................................... 69,986 136,014
Other ......................................... 2,815
Inventory ...................................... 25,006 100,250
Prepaid expenses ............................... 10,749 37,690
---------- ----------
Total Current Assets ........................ 307,974 503,775
INVENTORY ........................................ 47,465 77,003
PROPERTY AND EQUIPMENT, net ...................... 767,166 826,734
DISTRIBUTOR AGREEMENT, net of accumulated
amortization and valuation allowance of
$5,657,240 and $1,886,330 in 1999 and
1998, respectively ............................. 3,770,910
OTHER ASSETS ..................................... 13,989 20,239
---------- ----------
$1,136,594 $5,198,661
========== ==========
F-2
<PAGE>
SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
LIABILITIES
CURRENT LIABILITIES
Notes payable to banks ....................... $ 18,770 $ 1,192
Note payable to related parties .............. 493,204
Accounts payable ............................. 119,834 193,351
Accrued expenses ............................. 69,732 45,076
Customer deposits ............................ 88,385
Payable to related parties ................... 500,693 126,515
------------ ------------
Total Current Liabilities ................. 1,202,233 454,519
NOTE PAYABLE TO RELATED PARTY .................. 466,000
------------ ------------
1,202,233 920,519
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK, $.001 par value, 50,000,000
shares authorized, 19,184,751 and 19,084,751
shares issued and outstanding at September 30,
1999 and 1998, respectively .................. 19,185 19,085
ADDITIONAL PAID-IN CAPITAL ..................... 10,331,330 10,330,430
ACCUMULATED DEFICIT ............................ (10,416,154) (6,071,373)
------------ ------------
(65,639) 4,278,142
------------ ------------
$ 1,136,594 $ 5,198,661
============ ============
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,
----------------------------
1999 1998
------------- -------------
REVENUES
Service........................................ $ 654,186 $ 909,591
Product sales.................................. 833,890 411,983
Product demonstrations......................... 99,206 105,683
------------- -------------
1,587,282 1,427,257
Cost of Sales.................................... 1,142,076 945,598
------------- -------------
GROSS PROFIT..................................... 445,206 481,659
------------- -------------
EXPENSES
Selling, general and administrative............ 874,607 820,313
Depreciation and amortization.................. 345,374 462,906
Interest....................................... 81,948 15,201
Asset impairment............................... 3,488,058
------------- -------------
4,789,987 1,298,420
------------- -------------
NET LOSS......................................... $ (4,344,781) $ (816,761)
============= =============
Net Loss Per Share - Basic and Diluted........... $ (0.23) $ (0.04)
============= =============
Weighted Average Shares Outstanding.............. 19,168,085 19,084,751
============= =============
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------- ------------ --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
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
Exercise of
warrants........... 100,000 100 900 1,000
Net loss............. (4,344,781) (4,344,781)
------------- ------------ --------------- -------------- ------------
BALANCE,
SEPTEMBER 30, 1999. 19,184,751 $ 19,185 $ 10,331,330 $ (10,416,154) $ (65,639)
============= ============ =============== ============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................ $ (4,344,781) $ (816,761)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization................ 516,342 624,257
Amortization of note discount................ 27,204
Bad debt expense............................. 11,835
Asset impairment............................. 3,488,058
(Increase) Decrease in:
Accounts receivable............................ 63,213 (76,164)
Inventory...................................... 87,541 164,137
Prepaid expenses............................... 26,941 777
Other assets................................... 6,250 200
Increase (Decrease) in:
Accounts payable............................... (73,517) 3,867
Accrued expenses............................... 24,656 (31,087)
Customer deposits.............................. (88,385) 88,385
Accounts payable - related parties............. 374,178 (20,662)
------------- ------------
Net Cash Provided by (Used in) Operating..... 107,700 (51,216)
------------- ------------
Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................ (156,681) (106,033)
------------- ------------
Net Cash Used in Investing Activities........ (156,681) (106,033)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Restricted cash..................... 3,614 2,851
Proceeds from exercise of warrants.............. 1,000
Proceeds from issuance of warrants.............. 34,000
Proceeds from debt.............................. 22,468 466,000
Payments on debt................................ (4,890) (234,433)
------------- ------------
Net Cash Flows Provided by Financing......... 22,192 268,418
------------- ------------
Activities
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (26,789) 111,169
Cash and Cash Equivalents - Beginning of Year..... 226,207 115,038
------------- ------------
CASH AND CASH EQUIVALENTS - END OF YEAR........... $ 199,418 $ 226,207
============= ============
</TABLE>
F-6
<PAGE>
FOR THE YEAR ENDED
SEPTEMBER 30
---------------------------
1999 1998
------------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest........................................ $ 2,651 $ 36,210
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES
Net fixed assets reclassed as inventory
(inventory reclassed as fixed assets)........... $ (17,241) $ 264,387
============ ============
The Company paid no income taxes for the years ended September 30, 1999 and
1998, respectively.
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
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. In connection therewith, the Company utilizes patented
technology, reverse osmosis and nanofiltration, licensed exclusively to it
through a distributor agreement from Pall Rochem, a subsidiary of Pall
Corporation. The Company also utilizes patented ultrafiltration technology
through a distributor agreement from Rochem UF.
At September 30, 1999, 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, 1999 and 1998. 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, 1999 AND 1998
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. As of July 1, 1999, the Company recognized an
impairment loss on the distributor agreement of $3,488,058, reducing the cost
to $0.
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, 1999 AND 1998
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.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the financial
statements, the Company has incurred operating losses and has a working capital
deficiency as of September 30, 1999. 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 2000.
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.
NOTE 3 - INVENTORY
Inventory at September 30, 1999 and 1998, consisted of the following:
1999 1998
------------ ------------
Parts inventory $ 25,006 $ 16,794
Component inventory 47,465 160,459
------------ ------------
$ 72,471 $ 177,253
============ ============
F-10
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1999 and 1998, consisted of the
following:
1999 1998
------------ ------------
Testing equipment $ 646,414 $ 708,031
Rental service equipment 1,262,219 1,074,938
Leasehold improvements 47,988 25,059
Transportation equipment 22,234
Other 44,082 41,687
------------ ------------
2,022,937 1,849,715
Less: Accumulated depreciation (1,255,771) (1,022,981)
------------ ------------
$ 767,166 $ 826,734
============ ============
Depreciation expense was $233,490 and $247,120 for the years ended September 30,
1999 and 1998, 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.
During 1999, pursuant to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
re-evaluated the recoverability of the distributor agreement with Pall
Corporation. In 1999, the Company lost its contract with a significant customer.
While the Company has several proposals outstanding, there are currently no
supportable future cash flows relating to the technology covered by the
distributor agreement. Therefore, in the fourth quarter of 1999, the Company
determined that the fair value of the distributor agreement was zero, and
adjusted the carrying value of the distributor agreement, resulting in a noncash
impairment loss of approximately $3,488,000 ($.18 per share).
F-11
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
NOTE 6 - NOTES PAYABLE
Notes payable as of September 30, 1999 and 1998, are as follows:
1999 1998
------------ -------------
Notes payable to banks:
Note payable, secured by automobile, due in
monthly installments of $207, including
interest at 11%, due on demand or upon
maturity in November, 2001.................... $ 4,767
Note payable, secured by automobile, due in
monthly installments of $320, including
interest at 7.5%, due on demand or upon
maturity in November, 2002.................... 10,767
Other........................................... 3,236 $ 1,192
------------ -------------
$ 18,770 $ 1,192
============ =============
Notes payable to related parties:
10.5%, $500,000 face value, interest
imputed at 14.7%, unsecured, principal and
interest due January 31, 2000................. $ 493,204 $ 466,000
Less: Current portion........................... (493,204)
$ 0 $ 466,000
============ =============
F-12
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
NOTE 7 - FACTORING ARRANGEMENT
The Company had a factoring arrangement with Citizen's Bank (the Bank) to factor
the Company's receivables. Under the factoring arrangement, the bank purchased
the Company's receivables at a discount of 2.05%. As a result, the Company
received cash for these receivables at the time the invoice was issued to the
customer. Under the terms of the factoring arrangement, the Bank retained 10% of
the total invoice amount in a reserve bank account until the customer paid the
invoice. This account was maintained by the Bank under the Company's name and
had been accounted for as restricted cash. In the event a customer defaulted on
an invoice, the Company was 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 had a $275,000 line-of-credit with the Bank, which could be
initiated only in the event of nonpayment of an invoice. Substantially all of
the Company's property and equipment had been pledged as collateral for this
agreement. For accounting purposes, the receivables were considered sold at the
time cash was received by the Company from the Bank.
The factoring agreement expired in September, 1999, and was not renewed. All
receivables that had been factored have been collected by the bank, and the
property and equipment is no longer pledged as collateral.
Total proceeds to the Company from the factoring of receivables during the years
ended September 30, 1999 and 1998, were approximately $691,000 and $734,000,
respectively.
NOTE 8 - CAPITAL STOCK TRANSACTIONS
In November, 1993, the Company entered into warrant agreements with two of its
employees which grant the sale of 125,000 shares of common stock at an exercise
price of $.01 per share and 125,000 shares of common stock at an exercise price
of $1 per share. Warrants for 100,000 shares of stock for $.01 per share were
exercised in November, 1998. All of the remaining warrants expired 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, 1999 AND 1998
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. 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 $.25. These warrants are exercisable through September 1, 2003. No
warrants had been exercised as of September 30, 1999.
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, 1999 and 1998.
The following table summarizes stock option and warrant activity:
1999 1998
---------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STOCK EXERCISE STOCK EXERCISE
OPTIONS PRICE OPTIONS PRICE
----------- -------- ------------- --------
Beginning of period 2,370,000 $.24 1,137,000 $.25
Expired (150,000) $.84 (17,000) $1.80
Granted 1,250,000 $.25
Exercised (100,000) $.01
----------- -------------
End of period 2,120,000 $.21 2,370,000 $.24
============ =============
Exercisable at
September 30 1,870,000 $.20 2,074,500 $.24
============ =============
F-14
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
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, 1999 and 1998:
1999 1998
------------- -------------
Federal income tax benefit at statutory rate $ (1,477,226) $ (277,699)
Nondeductible items 902 616
Change in valuation allowance 1,476,000 277,000
Other 324 83
------------- -------------
$ 0 $ 0
============= =============
Significant components of the Company's deferred tax liabilities and
assets as of September 30, 1999 and 1998, are as follows:
1999 1998
------------- -------------
Deferred tax assets:
Net operating loss $ 2,408,000 $ 2,086,000
Distributor agreement 1,154,000
Valuation allowance (3,562,000) (2,086,000)
------------- -------------
Net deferred taxes $ 0 $ 0
============= =============
At September 30, 1999 and 1998, the Company had net operating loss carryforwards
available to offset future taxable income of approximately $7,080,000 and
$6,135,000, 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, 1999 AND 1998
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, 1999 are as
follows:
For the Year Ended
September 30,
------------------
2000 $ 46,190
=============
Rental expense for the Company for the years ended September 30, 1999 and 1998,
was approximately $92,500 and $57,200, respectively (net of approximately
$45,000 of sublease income in 1998).
NOTE 11 - RELATED PARTY TRANSACTIONS
As of September 30, 1999 and 1998, the Company had notes payable to related
parties of $493,204 and $466,000, respectively. Interest expense related to
these notes for the years ended September 30, 1999 and 1998 was approximately
$80,000 and $14,000, respectively.
As of September 30, 1999, the Company has payables to Pall Corporation of
$445,626 and to a shareholder of $43,148.
As of September 30, 1998, the Company had payables to Pall Corporation of
$94,975 and to a shareholder of $31,540.
As of September 30, 1999, the Company had payables to RSS and Fluid Separation
Systems, affiliates of Rochem AG, of $11,919.
During the year ended September 30, 1999, the Company purchased inventory from
Pall Corporation totaling $532,012.
During the year ended September 30, 1998, the Company purchased inventory from
Pall Corporation totaling $137,805.
During the year ended September 30, 1999, the Company purchased inventory from
Fluid Separation Systems, an affiliate of Rochem AG, of $11,919.
During the year ended September 30, 1999, the Company had sales to Lefco, a
shareholder, totaling $8,215.
During the year ended September 30, 1998, the Company had sales to Lefco, a
shareholder, totaling $36,857.
F-16
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company has an employment agreement with an employee. As of September 30,
1999, the aggregate commitment for future salaries is approximately $143,750
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 year ended September 30, 1999, the Company had revenues from three
customers comprising approximately 90% of the Company's revenue. During the year
ended September 30, 1998, the Company had revenues from two customers comprising
approximately 78% of the Company's revenue.
The Company currently 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 1999 or 1998.
F-17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 199,418
<SECURITIES> 0
<RECEIVABLES> 72,801
<ALLOWANCES> 0
<INVENTORY> 72,471
<CURRENT-ASSETS> 307,974
<PP&E> 2,022,937
<DEPRECIATION> (1,255,771)
<TOTAL-ASSETS> 1,136,594
<CURRENT-LIABILITIES> 1,202,233
<BONDS> 0
0
0
<COMMON> 19,185
<OTHER-SE> (84,824)
<TOTAL-LIABILITY-AND-EQUITY> 1,136,594
<SALES> 1,587,282
<TOTAL-REVENUES> 1,587,282
<CGS> 1,142,076
<TOTAL-COSTS> 1,142,076
<OTHER-EXPENSES> 1,219,981
<LOSS-PROVISION> 3,488,058
<INTEREST-EXPENSE> 81,948
<INCOME-PRETAX> (4,344,781)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,344,781)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,344,781)
<EPS-BASIC> (.23)
<EPS-DILUTED> (.23)
</TABLE>
