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, 2000 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 INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
15001 WALDEN ROAD, SUITE 128
MONTGOMERY, TEXAS 77356
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (936) 582-1222
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, 2000 WERE
$81,778.
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 JANUARY 12, 2001 WAS APPROXIMATELY $227,182. 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 JANUARY 12, 2001 THE
REGISTRANT HAD 13,345,037 SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE,
ISSUED AND OUTSTANDING.
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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...................................6
Item 3. Legal Proceedings.........................................6
Item 4. Submission of Matters to a Vote of Security Holders.......6
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters ......................................7
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............7
Item 7. Financial Statements......................................9
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................9
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons...................................................9
Item 10. Executive Compensation...................................10
Item 11. Security Ownership of Certain Beneficial Owners
and Management...........................................11
Item 12. Certain Relationships and Related Transactions...........12
Item 13. Exhibits and Reports on Form 8-K.........................12
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains forward-looking statements,
particularly in the "Business" and "Management's Discussion and Analysis"
sections. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause our actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, changes in the regulation
of the Internet industry at either the federal and state levels, competitive
pressures in the Internet industry and our response thereto, our ability to
obtain capital in favorable terms and conditions, and general conditions in this
economy.
GENERAL
Rochem Environmental, Inc., a Utah corporation, 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, we utilize patented technology in the field
of reverse osmosis and nanofiltration. The patented technology involves the use
of a Disc Tube(TM) form of membrane separation modules. This technology may be
referred to herein as the "Disc Tube" system. We also utilize patented
ultrafiltration technology, herein referred to as the "FM Module" system, from
Rochem UF. We believe 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. We utilize these products on a
non-exclusive basis.
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 Disc Tube 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.
We were incorporated in Utah in October 1984 and until July 1993 were an
inactive corporation. Effective July 20, 1993, Rochem, 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.
RECENT DEVELOPMENTS
On November 8, 2000, we agreed to terminate the distributor agreement
dated September 1, 1993, with Pall Corporation. Pall Corporation agreed to
return 8,589,714 shares of our common stock to us, which comprised their entire
stake in Rochem. Pall also forgave $480,137 owed to it pursuant to a promissory
note dated July 17, 2000. In connection with this transaction, we agreed that,
for the five years following the date of the agreement, we would not directly or
indirectly engage in any business related to the sale of reverse osmosis
filtration equipment within the marine market without the written consent of
Pall.
On November 9, 2000, we agreed to assign to Rochem Group, SA All rights,
title and interest in and to all marine activities relate to all gray water and
black water projects that have been granted to us by Rochem Group, SA. In
connection with this assignment, Rochem Group, SA forgave the $500,000
promissory note dated September 1, 1998 that we owed to it. Rochem Group
maintained its right to exercise warrants to purchase 1,250,000 shares of our
common stock at $.25 per share that were granted to Rochem Group in connection
with the promissory note. Rochem Group also forgave their payment on our behalf
of $250,000 in installation and operational costs for the two cruise ships. In
connection with this transaction, we agreed to change our name as soon as
practicable. We also agreed that for the five years following this agreement we
would not directly or indirectly engage in any business competitive with Rochem
Group in the United States in the Grey and Black Water Marine business without
their express written permission.
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In December 2000, we agreed to issue 2,500,000 shares of our restricted
common stock to certain accredited investors in exchange for the cancellation of
$250,000 in debt owed to them by as follows: Global Environmental, LLC received
1,500,000 shares of restricted common stock and forgave a $150,000 debt, James
Ward received 400,000 shares of restricted common stock and forgave a $40,000
debt, and Lefco Environmental Technology, Inc. received 600,000 shares of
restricted common stock and forgave a $60,000 debt.
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 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 wastewaters,
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
We can provide a single-source solution to our 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. Our
principal products and services include capital equipment and treatment
services.
CAPITAL EQUIPMENT. We can sell both pre-engineered and customized
treatment systems for membrane separation applications. We can manufacture or
supply systems and components that utilize, but are not limited, to each of the
following processes:
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REVERSE OSMOSIS. Wastewaters and process waters are desalted or
concentrated recoverable compounds are excluded, or rejected, by the membranes
and the purified water is recovered separately.
NANOFILTRATION. Utilizing membranes with more open pore sizes as compared
to reverse osmosis membranes selectively desalts wastewaters and process waters.
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. We can provide the service of the treatment of wastewaters at
industrial and commercial customer sites.
SALES AND MARKETING
We believe 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.
COMPETITION
The principal methods of competition in the markets in which we compete
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, most of our competitors have significantly
greater resources than we do. The wastewater treatment industry is currently
fragmented and highly competitive. Many companies compete to varying degrees
with us in our markets. We know of no reliable statistics that provide a basis
from which to estimate our 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 our services. 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.
We expect 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
cannot be assessed at this time.
CUSTOMER BASE
Our potential 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 potential 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. Our 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 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. Our technology can be used to
purify contaminated wastewaters as well as for the recovery/separation of
reusable products and by- products. Depending on the application, all of the
membrane separation systems that we offer can be effective. Our technology is
used to accomplish the separation of contaminants and purification of water in
harsh environments and from problematic streams.
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Our systems can be used to remove organic compounds and soluble metals from
contaminated groundwater and surface waters.
PATENTS, TRADEMARKS AND DISTRIBUTOR AGREEMENT
We do not presently own any patents or operate under any license or
distribution agreements.
ENVIRONMENTAL REGULATION
Demand for our products is affected in part by federal, state and local
environmental laws and regulations requiring our 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 we offer.
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. We
believe 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. We believe 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. We believe the Disc Tube and FM Module to be excellent and cost
competitive technologies in these applications.
For most of its history, the Environmental Protection Agency and the
associated state agencies have concentrated only a small portion of their
attention on the pollution generated from oil and gas operations. In the last
few years, these regulators have begun to tighten the specifications on water
permitted to be discharged. This has become a major source of concern,
particularly for the offshore operations. The 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 our business, the cost for us to adhere to governmental regulations
is minimal.
EMPLOYEES
As of December 2000, we had one paid employee.
ITEM 2. DESCRIPTION OF PROPERTY
In September 2000, we relocated to 15001 Walden Road, #128, Montgomery,
Texas, 77356. This lease is renewable annually. Monthly rental costs are $1,100.
Philip LeFevre, our CEO, owns the building.
ITEM 3. LEGAL PROCEEDINGS
None.
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
Our common stock began active trading on September 23, 1993 and is quoted
on the OTC Electronic Bulletin Board under the symbol "RCEM". On January 15,
2001 there were approximately 206 stockholders of record of our common stock.
The following table sets forth the high and low bid prices for our common
stock, on the OTC Electronic Bulletin Board, for the quarter presented. The
market for our common stock is highly volatile and sporadic. The bid prices
represent inter-dealer quotations, without adjustments for retail mark-ups,
markdowns or commissions and may not necessarily represent actual transactions.
BID PRICES
-----------------------
FISCAL YEAR 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
FISCAL YEAR 2000 HIGH LOW
---------------- ----- -----
First Quarter $1.00 $0.25
Second Quarter $0.375 $0.21
Third Quarter $0.28 $0.156
Fourth Quarter $0.25 $0.125
Any payment of cash dividends in the future will be dependent upon the
amount of funds legally available, our earnings, financial condition, capital
requirements and other factors that the Board of Directors may deem relevant. We
do not anticipate paying cash dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED SEPTEMBER 30, 2000 ("FISCAL 2000") COMPARED WITH TWELVE
MONTHS ENDED SEPTEMBER 30, 1999 ("FISCAL 1999")
REVENUES. Revenues were $81,778 in Fiscal 2000 as compared to $1,142,076
in Fiscal 1999, a decrease of $1,060,298 or 93%. This decrease is primarily
associated with the loss of the Chevron contract and work in progress for the
sale of grey water units to the cruise ship industry that were subsequently
transferred back to Rochem Group UF in association with the forgiveness of
$750,000. Revenues derived from service contracts totaled $26,714 in Fiscal 2000
as compared to $654,186 in Fiscal 1999, a decrease of $627,472 or 96%. The
decrease in service revenue is a result of lower than anticipated revenues from
customers for which we performed service work for several years. Revenues from
product sales were $50,064 in Fiscal 2000 as compared to product sales of
$833,390 in Fiscal 1999 a decrease of $738,326 or 89%. The decrease in product
sales revenues is a result of lack of sales efforts due to the servicing of a
single contract. Revenues from product demonstrations were $5,000 in Fiscal 2000
as compared to product demonstrations of $99,206 in Fiscal 1999, a decrease of
$94,206 or 95%. This decrease is primarily attributed to our ongoing financial
problems.
During Fiscal 2000, 83% of our revenues were derived from four customers.
During Fiscal 1999, 90% of our revenues were derived from three customers. We
currently purchase key components of licensed technology through 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. Any sales of reverse osmosis filtration equipment that we
have in the marine market are with the written permission of Pall Corporation.
If that permission is denied it could adversely affect operating results. Any
marine activities that we conduct related to grey and black water projects are
with the express written permission of Rochem Group. If that permission is
denied it could adversely affect operating results.
GROSS PROFIT. Cost of sales decreased in Fiscal 2000 to $105,330 as
compared to $1,142,076 in Fiscal 1999, a decrease of $1,036,746 or 91%. This
decrease was attributed to a reduction in sales efforts. We
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had a gross loss of $23,552 in Fiscal 2000 as compared to gross profits of
$445,206 in Fiscal 1999. This gross loss is primarily related to a decrease in
service revenue as a percentage of total sales.
EXPENSES. Selling, general and administrative expenses totaled $1,023,823
for Fiscal 2000, compared with a total of $874,607 in Fiscal 1999, an increase
of 149,216 or 15%. This resulted primarily from an increase in personnel related
cost and project based consulting. In the fourth quarter of Fiscal 1999, we
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 $203,672 for Fiscal 2000
decreased compared to $345,374 in Fiscal 1999, a decrease of $141,702 or 41%.
Interest expense increased to $88,075 in Fiscal 2000 compared to $81,948 in
Fiscal 1999, an increase of $6,127 or 7%. The increase in interest expense in
Fiscal 2000 is primarily due to a higher debt load.
NET LOSS. The net loss decreased to $1,339,122 for Fiscal 2000, compared
to a net loss of $4,344,781 in Fiscal 1999. Our focus for Fiscal 2001 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, 2000, we had a working capital deficiency of
$1,899,124 as compared to a working capital deficiency of $894,259 at September
30, 1999.
Net cash used in operating activities in Fiscal 2000 was $240,396. In
Fiscal 1999 net cash provided by operating activities was $107,700. The increase
in net cash used in operating activities of $348,096 was primarily the result of
the current year loss.
During Fiscal 2000, financing activities provided $25,642 primarily from
loans. During Fiscal 1999, financing activities provided net cash of $22,192.
These financing activities were primarily used to pay off debt and fund losses
from operations.
On November 8, 2000, we agreed to terminate the distributor agreement
dated September 1, 1993, with Pall Corporation. Pall Corporation agreed to
return 8,589,714 shares of our common stock to us, which comprised their entire
stake in Rochem. Pall also forgave $480,137 owed to it pursuant to a promissory
note dated July 17, 2000. In connection with this transaction, we agreed that,
for the five years following the date of the agreement, we would not directly or
indirectly engage in any business related to the sale of reverse osmosis
filtration equipment within the marine market without the written consent of
Pall.
On November 9, 2000, we agreed to assign to Rochem Group, SA All rights,
title and interest in and to all marine activities relate to all gray water and
black water projects that have been granted to us by Rochem Group, SA. In
connection with this assignment, Rochem Group, SA forgave the $500,000
promissory note dated September 1, 1998 that we owed to it. Rochem Group
maintained its right to exercise warrants to purchase 1,250,000 shares of our
common stock at $.25 per share that were granted to Rochem Group in connection
with the promissory note. Rochem Group also forgave their payment on our behalf
of $250,000 in installation and operational costs for the two cruise ships. In
connection with this transaction, we agreed to change our name as soon as
practicable. We also agreed that for the five years following this agreement we
would not directly or indirectly engage in any business competitive with Rochem
Group in the marine grey and black water market without their express written
permission.
In December 2000, we agreed to issue 2,500,000 shares of our restricted
common stock to certain accredited investors in exchange for the cancellation of
$250,000 in debt owed to them by as follows: Global Environmental, LLC received
1,500,000 shares of restricted common stock and forgave a $150,000 debt, James
Ward received 400,000 shares of restricted common stock and forgave a $40,000
debt, and Lefco Environmental Technology, Inc. received 600,000 shares of
restricted common stock and forgave a $60,000 debt.
As noted above, we had a working capital deficiency of $1,899,124 for the
year ending September 30, 2000. As a result of liquidity issues, the Report of
Independent Accountants includes an explanatory paragraph concerning our ability
to continue as a going concern.
In 2000, our inability to generate sufficient income to service debt and
pay for ongoing operations forced a restructuring most of which took place after
the close of the September fiscal accounting period. Many of these changes are
reflected in the auditor's footnote #15 to the financial statements with a pro
forma balance sheet giving effect to the subsequent events. As a result of this
restructuring, we no longer own an exclusive license for the Disc Tube
Technology from Pall Corporation and have agreed not to compete with Pall
Corporation or the Rochem Group in the marine gray and black water industry for
5 years. If we are able to stabilize our financial position, we intend to
approach Pall Corporation or the Rochem Group for new licenses. However, there
can be no assurance that we will stabilize our financial position or that Pall
Corporation or Rochem Group will grant us new licenses. In the interim we have
conducted tests at a Houston wastewater treatment facility to remove
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metals and other contaminants from a wastewater stream. We are optimistic that
if a long-term contract can be agreed and financing obtained that we will be
able to operate profitably in the near future.
Our current working capital is less than $10,000, which cannot fund
operations for very long. We are currently in negotiations for a contract that
we believe may generate sufficient cash flows to continue to fund operations and
meet working capital needs during Fiscal 2001, also management is negotiating a
$200,000 line of credit which if obtained will fund operations for most of
Fiscal 2001. Because the timing of these projects cannot be controlled, we are
evaluating and exploring other financing alternatives. Additional funding will
be required, and we are considering alternatives to do so through a combination
of efforts or methods, including, 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 combination. There can be no assurances that any of these alternatives
will be available to us on favorable terms if at all. Lack of funding could
restrict our ability to operate, and if severe enough may shorten the period in
which the current working capital may be expected to satisfy our requirements,
force curtailed operations, or cause us to sell assets. The financial statements
included herein have been prepared assuming we will be able to continue as a
going concern. We had a working capital deficit of $1,899,124, and experienced
significant losses in fiscal 2000, which raise doubts about our ability to
generate sufficient cash flow to meet our obligations on a timely basis, to
obtain additional financing or capital and ultimately attain profitable
operations.
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
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our directors and executive officers:
NAME POSITION
Philip LeFevre Chairman of the Board of Directors, Chief
Executive Officer, Secretary and President
William Bracken Director and Vice-President
Jim Ward Director
Our bylaws 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 our stockholders at their
annual meeting. 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.
William E. Bracken, (age 63). 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 51). Mr. LeFevre has served as chairman, chief
executive officer, and president of the company since October 13, 2000, and 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.
9
<PAGE>
Jim Ward, (age 49). Mr. Ward has served as a director of the company since
October 2000. Mr. Ward owns Excalibur Construction among a number of other
companies. He has been a member of the Houston Contractors Association since
1995, serving as Secretary & Treasurer in 1997. Vice President in 1998, and
President in 1999. In 2000, he served as President of The Houston Contractors
Political Action Committee. Mr. Ward is also a member of the Greater Houston
Builders Association, The American General Contractors Association, and The
American Society of Military Engineers.
EXECUTIVE OFFICERS
The following table lists our present officers as of the date hereof and
the capacities in which they serve.
NAME OF INDIVIDUAL CAPACITY
------------------ --------
*Philip LeFevre CEO, President, Secretary,
Treasurer and Chairman of
the Board
William E. Bracken Vice President
Biographical information with respect to Mr. LeFevre 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,
2000. Filing requirements were made timely.
* Mr. LeFevre has not received any compensation from the company to date.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation with respect to the chief
executive officer. No other executive officer received total annual salary and
bonus for the fiscal year ended September 30, 2000 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 2000 $115,000(1)
Chief Executive Officer 1999 $115,000(1) -
1998 $115,000(1) 312,500(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 which Mr. Neuman subsequently exercised, 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 expired on December 31, 2000.
We did not grant any options and warrants to any executive officers in
Fiscal 2000.
The following table provides information regarding option and warrant
exercises in fiscal 2000 by the named executive officer and the value of such
officer's unexercised warrant at September 30, 2000:
10
<PAGE>
AGGREGATED WARRANT/OPTIONS EXERCISES IN FISCAL YEAR 2000 AND FY-END
WARRANT/OPTIONS VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/
SHARES OPTIONS/WARRANTS AT WARRANTS AT
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(1) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
-- -- -- -- -- -- --
</TABLE>
----------------------
Mr. Neuman declined to exercise options to purchase 250,000 shares at $0.1
per share and 250,000 shares at $0.25 per share. These options have now expired.
EMPLOYMENT AGREEMENTS
In November 1999, we 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 was automatically
extended for an additional year because it was not terminated on June 30, 2000.
We are currently in the process of negotiating a new contract with Mr. Bracken.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of January 12, 2001, the number and
percentage of outstanding shares of our common stock owned by (i) each person
know to us to beneficially own more than 5% of our outstanding common stock,
(ii) each director, (iii) each named executive officer, and (iv) all executive
officers and directors as a group.
COMMON STOCK
BENEFICIALLY OUTSTANDING
NAME AND ADDRESS OF -----------------------------
BENEFICIAL OWNER (1) NUMBER PERCENTAGE
------------------- ---------- ----------
Philip LeFevre(2) .................. 3,165,558 23.7%
15001 Walden Rd, #203
Montgomery, TX 77356
William E. Bracken ................. 950,000 7.1%
15001 Walden Rd, #203
Montgomery, TX 77356
James Ward ......................... 2,293,167 17.2%
PO Box 783
Spring, TX 77383
Jim Myerson (3) .................... 2,300,000 17.2%
PO Box 1330
Sun Valley, ID 83353
All officers and directors ......... 6,408,725 48%
as a group (3 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) Includes 614,000 shares of our common stock owned by Lefco Corporation, an
affiliate of Lefco Environmental Technology, Inc. and 561,550 solely owned
by Mr. LeFevre. Mr. LeFevre is an affiliate of Lefco Environmental
Technology, Inc. and Lefco Corporation, and maintains voting control over
the shares issued to these corporations.
(3) Includes 1,500,000 owned by Global Environmental, LLC for which Mr.
Myerson shares voting control with Jack McCall and David Sheridan.
11
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 2000, we relocated to 15001 Walden Road, #128, Montgomery,
Texas, 77356. This lease is renewable annually. Monthly rental costs are $1,100.
Philip LeFevre, our CEO, owns the building.
On November 8, 2000, we agreed to terminate the distributor agreement
dated September 1, 1993, with Pall Corporation. Pall Corporation agreed to
return 8,589,714 shares of our common stock to us, which comprised their entire
stake in Rochem. Pall also forgave $480,137 owed to it pursuant to a promissory
note dated July 17, 2000. In connection with this transaction, we agreed that,
for the five years following the date of the agreement, we would not directly or
indirectly engage in any business related to the sale of reverse osmosis
filtration equipment within the marine market without the written consent of
Pall.
On November 9, 2000, we agreed to assign to Rochem Group, SA All rights,
title and interest in and to all marine activities relate to all gray water and
black water projects that have been granted to us by Rochem Group, SA. In
connection with this assignment, Rochem Group, SA forgave the $500,000
promissory note dated September 1, 1998 that we owed to it. Rochem Group
maintained its right to exercise warrants to purchase 1,250,000 shares of our
common stock at $.25 per share that were granted to Rochem Group in connection
with the promissory note. Rochem Group also forgave their payment on our behalf
of $250,000 in installation and operational costs for the two cruise ships. In
connection with this transaction, we agreed to change our name as soon as
practicable. We also agreed that for the five years following this agreement we
would not directly or indirectly engage in any business competitive with Rochem
Group in the United States in the Marine Grey and Black Water business without
their express written permission.
In December 2000, we agreed to issue 2,500,000 shares of our restricted
common stock to certain accredited investors in exchange for the cancellation of
$250,000 in debt owed to them by as follows: Global Environmental, LLC received
1,500,000 shares of restricted common stock and forgave a $150,000 debt, James
Ward received 400,000 shares of restricted common stock and forgave a $40,000
debt, and Lefco Environmental Technology, Inc. received 600,000 shares of
restricted common stock and forgave a $60,000 debt.
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
10.9(7) - Settlement agreement between the Company and
Rochem Group, SA
10.10(7) - Settlement Agreement between the Company and Pall
Corporation
16.1(3) - Letter regarding change in certifying accountant
16.2(3) - Letter regarding change in certifying accountant
12
<PAGE>
------------------------------------------
(1) Previously filed as an exhibit on Form 8-K dated July 20,
1993.
(2) Previously filed as an exhibit on Form 8-K dated September 30,
1993.
(3) Previously filed as an exhibit on Form 8-K dated November 5,
1993.
(4) Previously filed as an exhibit on Form 8-K dated November 19,
1993.
(5) Previously filed as an exhibit on Form 8-A dated January 13,
1994.
(6) Previously filed as an exhibit on Form 10-KSB for the fiscal
year ended September 30, 1995.
(7) Filed herewith.
13
<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/ PHILIP LEFEVRE
Dated: January 16, 2001 Philip LeFevre
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 16, 2001
/s/ JIM WARD
Jim Ward Director January 16, 2001
14
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
MONTGOMERY, TEXAS
ANNUAL CONSOLIDATED FINANCIAL REPORT
SEPTEMBER 30, 2000
<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, 2000 and 1999, 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, 2000 and 1999, 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 19, 2000
F-1
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents .......................... $ 66,178 $ 199,418
Accounts receivable:
Trade (less allowance for doubtful accounts of
$190,220 in 2000) ............................... 205,000 69,986
Other ............................................. 26,998 2,815
Inventory of parts ................................. 18,579 25,006
Work in process .................................... 1,297,821
Prepaid expenses ................................... 10,749
---------- ----------
Total Current Assets ............................ 1,614,576 307,974
INVENTORY ............................................ 47,465 47,465
PROPERTY AND EQUIPMENT, net .......................... 432,909 767,166
OTHER ASSETS ......................................... 13,989 13,989
---------- ----------
$2,108,939 $1,136,594
========== ==========
F-2
<PAGE>
SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
LIABILITIES
CURRENT LIABILITIES
Notes payable to banks ....................... $ 4,412 $ 18,770
Notes payable to related parties ............. 540,000 493,204
Accounts payable ............................. 198,900 119,834
Accrued expenses ............................. 106,665 69,732
Unearned revenue ............................. 2,000,000
Payable to related parties ................... 663,723 500,693
------------ ------------
Total Current Liabilities ................. 3,513,700 1,202,233
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK, $.001 par value, 50,000,000 shares
authorized, 19,184,751 shares issued and
outstanding at September 30, 2000 and 1999 ... 19,185 19,185
ADDITIONAL PAID-IN CAPITAL ..................... 10,331,330 10,331,330
ACCUMULATED DEFICIT ............................ (11,755,276) (10,416,154)
------------ ------------
(1,404,761) (65,639)
------------ ------------
$ 2,108,939 $ 1,136,594
============ ============
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,
------------------------------
2000 1999
------------ ------------
REVENUES
Service .................................. $ 26,714 $ 654,186
Product sales ............................ 50,064 833,890
Product demonstrations ................... 5,000 99,206
------------ ------------
81,778 1,587,282
Cost of Sales .............................. 105,330 1,142,076
------------ ------------
GROSS PROFIT (LOSS) ........................ (23,552) 445,206
------------ ------------
EXPENSES
Selling, general and administrative ...... 1,023,823 874,607
Depreciation and amortization ............ 203,672 345,374
Interest ................................. 88,075 81,948
Asset impairment ......................... 3,488,058
------------ ------------
1,315,570 4,789,987
------------ ------------
NET LOSS ................................... $ (1,339,122) $ (4,344,781)
============ ============
Net Loss Per Share - Basic and Diluted ..... $ (0.07) $ (0.23)
============ ============
Weighted Average Shares Outstanding ........ 19,184,751 19,168,085
============ ============
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, 2000 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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)
Net loss ........... (1,339,122) (1,339,122)
------------ ------------ ------------ ------------ ------------
BALANCE,
SEPTEMBER 30, 2000 19,184,751 $ 19,185 $ 10,331,330 $(11,755,276) $ (1,404,761)
============ ============ ============ ============ ============
</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,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .......................................................... $(1,339,122) $(4,344,781)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization .................................. 203,672 516,342
Amortization of note discount .................................. 6,796 27,204
Loss on sale of asset .......................................... 46,727
Asset impairment ............................................... 3,488,058
(Increase) Decrease in:
Accounts receivable .............................................. (159,197) 63,213
Inventory ........................................................ (1,289,050) 87,541
Prepaid expenses ................................................. 10,749 26,941
Other assets ..................................................... 6,250
Increase (Decrease) in:
Accounts payable ................................................. 79,066 (73,517)
Accrued expenses ................................................. 36,933 24,656
Unearned revenue ................................................. 2,000,000
Customer deposits ................................................ (88,385)
Accounts payable - related parties ............................... 163,030 374,178
----------- -----------
Net Cash Provided by (Used in) Operating Activities ............ (240,396) 107,700
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .............................................. (2,982) (156,681)
Proceeds from sale ................................................ 84,496
----------- -----------
Net Cash Provided by (Used in) Investing Activities ............ 81,514 (156,681)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Restricted cash ....................................... 3,614
Proceeds from exercise of warrants ................................ 1,000
Proceeds from debt ................................................ 40,000 22,468
Payments on debt .................................................. (14,358) (4,890)
----------- -----------
Net Cash Flows Provided by Financing Activities ................ 25,642 22,192
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........................... (133,240) (26,789)
Cash and Cash Equivalents - Beginning of Year ....................... 199,418 226,207
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR ............................. $ 66,178 $ 199,418
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ..................................................... $ 28,774 $ 2,651
========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Net fixed assets reclassed as inventory (inventory reclassed as
fixed assets) ................................................ $ 2,344 $ (17,241)
========== ==========
</TABLE>
The Company paid no income taxes for the years ended September 30, 2000 and
1999, respectively.
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
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, 2000, Pall Corporation owned approximately 45% of the
outstanding stock of the Company. (See Note 15.)
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 recognized either
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, 2000 and 1999. 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, 2000 AND 1999
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.
WORK IN PROCESS
Work in process consists of contract costs related to waste water projects for
cruise ships.
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
Through June 30, 1999, the distributor agreement was 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.
(See Note 15.)
DEFERRED REVENUE
Deferred revenue is amounts collected prior to acceptance of waste water
projects for cruise ships.
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.
F-9
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
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 for impairment of long-lived
assets and intangible assets to be held and used whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Management estimates the future cash flows resulting from the use
of the asset and its eventual disposition. If the sum of the expected future
cash flows is less than the carrying value of the asset, an impairment loss is
recognized. The impairment loss is measured as the amount by which the
carrying amount exceeds the fair value of the asset as determined by quoted
market prices when available, or the present value of the expected future cash
flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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, 2000.
In the event additional funding is required, the Company will consider
alternatives to do so through a combination of efforts or methods, 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, 2000 AND 1999
NOTE 3 - INVENTORY
Inventory at September 30, 2000 and 1999, consisted of the following:
2000 1999
------- -------
Parts inventory ............................ $18,579 $25,006
Component inventory ........................ 47,465 47,465
------- -------
$66,044 $72,471
======= =======
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2000 and 1999, consisted of the
following:
2000 1999
----------- -----------
Testing equipment ........................ $ 646,414 $ 646,414
Rental service equipment ................. 1,025,420 1,262,219
Leasehold improvements ................... 47,988
Transportation equipment ................. 7,575 22,234
Other .................................... 20,603 44,082
----------- -----------
1,700,012 2,022,937
Less: Accumulated depreciation ........... (1,267,103) (1,255,771)
----------- -----------
$ 432,909 $ 767,166
=========== ===========
Depreciation expense was $203,672 and $233,490 for the years ended September 30,
2000 and 1999, respectively.
NOTE 5 - DISTRIBUTOR AGREEMENT
The Company had 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.
F-11
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
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 had several proposals outstanding, there were 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).
As described in Note 15, subsequent to September 30, 2000, the Company returned
the distributor agreement to Pall.
NOTE 6 - NOTES PAYABLE
Notes payable as of September 30, 2000 and 1999, are as follows:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
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 ....... $ 2,704 $ 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 ................................................ 1,708 3,236
---------- ----------
$ 4,412 $ 18,770
========== ==========
Notes payable to related parties:
10.5%, $500,000 face value, interest imputed at
14.7%, unsecured, principal and interest due
December 31, 2002 (See Note 15) .................... $ 500,000 $ 493,204
10.0%, $40,000 face value, secured by equipment,
principal and interest due December 31, 2000 ....... 40,000 --
Less: Current portion ................................ (540,000) (493,204)
---------- ----------
$ 0 $ 0
========== ==========
</TABLE>
F-12
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
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 year
ended 1999 were approximately $691,000.
NOTE 8 - CAPITAL STOCK TRANSACTIONS
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 expired July 7, 2000, and no warrants
were exercised.
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.
F-13
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
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, 2000.
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, 2000 and 1999.
The following table summarizes stock option and warrant activity:
<TABLE>
<CAPTION>
2000 1999
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STOCK EXERCISE STOCK EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Beginning of period .......... 2,120,000 $ .21 2,370,000 $ .24
Expired .................... (120,000) $ .35 (150,000) $ .84
Exercised .................. -- -- (100,000) $ .01
---------- ----------
End of period ................ 2,000,000 $ .20 2,120,000 $ .21
========== ==========
Exercisable at
September 30 ............... 1,750,000 $ .19 1,870,000 $ .20
========== ==========
</TABLE>
F-14
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
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, 2000 and 1999:
2000 1999
----------- -----------
Federal income tax benefit at statutory rate $ (455,301) $(1,477,226)
Nondeductible items ........................ 505 902
Change in valuation allowance .............. 455,000 1,476,000
Other ...................................... (204) 324
----------- -----------
$ 0 $ 0
=========== ===========
Significant components of the Company's deferred tax liabilities and assets as
of September 30, 2000 and 1999, are as follows:
2000 1999
----------- -----------
Deferred tax assets:
Net operating loss .................. $ 2,863,000 $ 2,408,000
Distributor agreement ............... 1,154,000 1,154,000
Valuation allowance ................. (4,017,000) (3,562,000)
----------- -----------
Net deferred taxes .................. $ 0 $ 0
=========== ===========
At September 30, 2000 and 1999, the Company had net operating loss carryforwards
available to offset future taxable income of approximately $8,420,000 and
$7,080,000, 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, 2000 AND 1999
NOTE 10 - OPERATING LEASES
The Company leases office space and a vehicle under operating leases which
expire in 2003. Future minimum lease payments as of September 30, 2000 are as
follows:
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------
2001 $ 20,789
2002 7,589
2003 3,794
-------------
$ 32,172
Rental expense for the Company for the years ended September 30, 2000 and 1999,
was approximately $93,600 and $92,500, respectively.
NOTE 11 - RELATED PARTY TRANSACTIONS
As of September 30, 2000 and 1999, the Company had notes payable to related
parties of $500,000 and $493,204, respectively. Interest expense related to
these notes for the years ended September 30, 2000 and 1999 was approximately
$85,000 and $80,000, respectively.
As of September 30, 2000 and 1999, the Company had payables to Pall Corporation
of $480,137 and $445,626, respectively, and to a shareholder of $69,177 and
$43,148, respectively. As of September 30, 2000 and 1999, the Company had
payables to RSS and Fluid Separation Systems, affiliates of Rochem AG, of
$14,596 and $11,919, respectively. As of September 30, 2000, the Company had
payables to Rochem Group, SA, an affiliate of Rochem AG, of $100,000.
During the years ended September 30, 2000 and 1999, the Company purchased
inventory from Pall Corporation totaling $24,943 and $532,012, respectively.
During the years ended September 30, 2000 and 1999, the Company purchased
inventory from Fluid Separation Systems, an affiliate of Rochem AG, of $749,641
and $11,919, respectively.
During the years ended September 30, 2000 and 1999, the Company had sales to
Lefco, a shareholder, totaling $13,981 and $8,215, respectively. During the year
ended September 30, 2000, the Company purchased $51,145 of inventory from Lefco.
See Note 15 for subsequent events concerning related parties.
F-16
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company has an employment agreement with an employee. As of September 30,
2000, the aggregate commitment for future salaries is approximately $90,000
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, 2000, the Company had revenues from four
customers comprising approximately 83% of the Company's revenue. During the year
ended September 30, 1999, the Company had revenues from three customers
comprising approximately 90% of the Company's revenue.
NOTE 14 - SIMPLIFIED EMPLOYEE PENSION PLAN
The Company has 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 2000 or 1999.
NOTE 15 - SUBSEQUENT EVENTS
On November 8, 2000, the Company agreed to terminate the distributor agreement
dated September 1, 1993, between Separation Technology Systems, Inc. and Rochem
Separations Systems, of which the Company and Pall Corporation were successors
in interest, respectively. The Pall Corporation agreed to return its 8,589,714
shares of the Company's common stock to the Company. Also, Pall Corporation
forgave the $480,137 promissory note dated July 17, 2000. The Company agreed
that, for five years following the agreement, the Company should not directly or
indirectly engage in any business related to the sale of reverse osmosis
filtration equipment with the marine market without the written consent of the
Pall Corporation.
F-17
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
On November 9, 2000, the Company agreed to assign to Rochem Group, SA all
rights, title and interest in and to all outstanding marine activities related
to all grey water and black water projects that have been granted to the Company
by Rochem Group, SA. With this assignment, Rochem Group, SA forgave the $500,000
promissory note dated September 1, 1998. Rochem Group maintained its right to
exercise warrants to purchase 1,250,000 shares of the Company's common stock at
$ .25 in connection with the promissory note. Such warrants terminate September
1, 2003. The Rochem Group, SA also forgave the Company all responsibility for
returning any of approximately $250,000 paid by Rochem Group, SA against
installation and operational costs for the two cruise ships. The Company will
change its name as soon as it is practicable. For five years following this
agreement, the Company should not directly or indirectly engage in any business
competitive with Rochem Group, SA in the United States without the written
consent of the Rochem Group, SA.
In December, 2000, the Company agreed to issue 2.5 million shares of treasury
stock in exchange for $250,000 of debt owed to Global Environmental, LLC
($150,000); James Ward ($40,000); and Lefco Environmental Technology ($60,000).
Philip Lefevre, Chairman of the Board and CEO of the Company, also owns Lefco
Environmental Technology, Inc.
The pro forma balance sheet at September 30, 2000, assuming the subsequent
events occurred on that date is as follows:
ASSETS
CURRENT ASSETS ........................................... $ 276,755
NON-CURRENT ASSETS ....................................... 494,363
------------
$ 771,118
============
LIABILITIES
CURRENT LIABILITIES ...................................... $ 243,563
------------
STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ............................................. 19,185
ADDITIONAL PAID-IN CAPITAL ............................... 10,331,330
TREASURY STOCK ........................................... (608,971)
ACCUMULATED DEFICIT ...................................... (9,213,989)
------------
Total Stockholders' Equity ............................ 527,555
------------
$ 771,118
============
F-18
