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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission File No. 0-19260
RENTECH, INC.
(Name of small business issuer in its charter)
Colorado 84-0957421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
1331 17th Street, Suite 720
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (303) 298-8008
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
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 there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B 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. [ ]
The issuer's revenues for its most recent fiscal year ended
September 30, 1997 were $1,189,536.
The aggregate market value of voting stock held by nonaffiliates
of the issuer as of November 25, 1997 was $23,453,169 based upon
the average closing bid and asked prices of such stock on that date.
The number of shares outstanding of the issuer's common stock as
of September 30, 1997 was 29,539,548.
Transitional Small Business Disclosure Format. Yes No X
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PART I
Item 1. Description of Business
General
Rentech, Inc. ("Rentech" or the "Company") was organized as a Colorado
corporation in 1981 to develop and exploit processes for the conversion
of natural gas and other low-value carbon-bearing gases and solids into
valuable liquid hydrocarbons, including premium diesel fuel, naphthas and
waxes. The gas-to-liquids technology developed by the Company ("Rentech
Process Technology" or "Technology") is protected by a series of patents
issued by the U.S. Patent Office. The ability of the Technology to
convert carbon-bearing gases into valuable liquid hydrocarbons has been
validated in two pilot plants operated periodically between 1982 and
1989, in a 235 barrel per day commercial scale facility in 1992 and 1993,
and in a third pilot plant presently being operated in Rentech's test
facility at Pueblo, Colorado. Rentech's gas-to-liquids Technology has
been licensed for use in India in a 360 barrel per day plant that the
licensee is now beginning to construct.
During March 1997, the Company entered into the business of
manufacturing and selling water-based stains, sealers and coatings on a
wholesale basis by purchasing the assets of Okon, Inc. The Company is
continuing the established business of Okon as a wholly-owned subsidiary
under the name Okon, Inc. ("Okon"). Okon sells environmentally clean,
water repellant sealers, coatings and stains for wood, concrete and
masonry. The customers are retailers who sell to the construction
industry and architects. Okon presently provides Rentech's primary
source of revenues.
During July 1997, Rentech agreed with ITN Energy Systems, Inc., a
privately-owned Colorado corporation, to enter into a new business called
ITN Electronic Substrates LLC. Rentech owns 50% of this new entity. The
LLC will manufacture and sell several types of flexible thin-film on
which it has electronically deposited metals with unique properties, such
as copper and molybdenum, that provide conductive paths to which computer
chips may be attached. The new business intends to begin its first
activities and begin production in 1998. The customers are expected to
be contract manufacturers in the computer, aerospace and medical
instrument industries, as well as large end-users which use the flexible
thin-film as substrates or base components for manufacturing their own
products.
The Company's long-term plan is to diversify into three industry
groups centered around its three present lines of business. Rentech
plans to continue licensing its gas-to-liquids Technology in a
petrochemical group; to establish an environmental and industrial
products group, in which Okon would be included; and to develop an
advanced technology group which would include the new business of ITN
Electronic Substrates LLC.
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The Company is continuing its original business of licensing its
gas-to-liquids Technology, including sale of its proprietary catalyst
used in the conversion process. Licences are granted in exchange for
license fees and royalties on the production of liquid hydrocarbons from
conversion plants that use the Technology and are constructed and owned
by licensees. Rentech will provide its engineering design and technical
services under contract to its licensees, for their use in constructing
their plants, together with engineering services and startup operational
support services on a fee basis for licensed plants. In addition,
Rentech may reserve the right to contract for the engineering and supply
the synthesis gas conversion reactor modules that are essential to use of
its Technology in conversion plants. Rentech is not now receiving
significant revenues from its gas-to-liquids Technology. Rentech has
licensed its Technology for use in a plant now under construction by its
Indian licensee at Arunachal Pradesh, India.
On March 31, 1997, the Company entered into an agreement with Texaco
Group, Inc. to negotiate with Texaco to establish a business relationship
to accelerate the development and licensing of Rentech's Process
Technology and to commercially exploit the Technology on a worldwide
basis. The negotiations are continuing on a positive basis. There can
be no assurance, however, that an agreement for a business relationship
will be reached.
Gas-to-Liquids Technology --- Petrochemicals
Rentech was originally established to develop and exploit its
Technology for the conversion of low-value carbon bearing solids or gases
into valuable liquid hydrocarbons, including premium diesel fuel,
naphthas and waxes. The technical feasibility of the Company's
Technology, that is, ability of the Company's conversion process to
convert carbon-bearing gases into valuable liquid hydrocarbons was
established in the Company's first pilot plant which operated
periodically between 1982 and 1985, and again in its second pilot plant
operated during 1989. The Rentech Technology is based upon the
Fischer-Tropsch conversion process that was originally developed in
Germany during the 1930s to create synthetic fuels. When petroleum
imports became readily available after World War II,
Fischer-Tropsch research was abandoned. The Arab oil embargo of 1973
created fuel shortages, and that crisis renewed interest in
Fischer-Tropsch processes. Research was conducted at the Naval Weapons
Center in China Lake, California and later at the Solar Energy Research
Institute in Golden, Colorado. Based in part on those efforts, Rentech
developed its own gas-to-liquids conversion process as well as a catalyst
that is essential to use of its Technology.
Economic use of the Rentech gas-to-liquids Technology depends upon
inexpensive sources of carbon-bearing gas or solids that can be
efficiently converted into feedstock gases. That normally will require
location of conversion plants near the fuel sources.
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The Rentech Technology uses as feedstock natural gas from gas wells
that are not producing or that flare gas, or synthesis gas, a mixture of
hydrogen and carbon monoxide gases, produced by gasification of coal and
other carbonaceous materials. These sources of fuel are in abundant
supply worldwide. Other sources of feedstock include methane, a gas
collected from coal beds, as well as industrial off gases. The
Technology can provide a means of utilizing gas resources that are
currently unmarketable due to their remote locations or because of the
presence of diluents such as carbon dioxide or nitrogen.
The principal products of the Rentech gas-to-liquids process are
clean-burning and premium-grade diesel fuel, naphthas useful as a
feedstock for chemical processing and for refining into varnishes and
mineral spirits, and waxes useful in hot-melt adhesives, inks and
coatings, and a variety of other wax-based products.
The Company's original business is licensing the Rentech
gas-to-liquids Technology, including sale of its patented catalyst, in
exchange for license fees and royalties on the production of liquid
hydrocarbons from conversion plants that use the Technology and are
constructed and owned by licensees. Rentech also provides engineering
design and technical services under contract with its licensees for their
use in constructing their plants, and it provides engineering services
and startup operational support services on a fee basis for licensed
plants. In addition, Rentech may reserve the right to contract for the
engineering and supply of the synthesis gas conversion reactor modules
that are essential to use of its Technology in conversion plants.
The Company has not in the past year and does not in the future
intend to incur any costs for constructing plants that it would own,
except that it may make investments to participate in minority ownership
of future plants constructed by licensees. See "Description of
Business - Present Licenses and Contracts for the Gas-to-Liquids
Conversion Technology."
Rentech is undertaking a study, with technical support from ITN
Energy Systems, Inc., to evaluate use of the hydrogen produced as a
byproduct of its gas-to-liquids Technology as a fuel source for operation
of fuel cells. Fuel cells produce electricity by reacting hydrogen and
oxygen together electrochemically, rather than by combustion. The result
of the fuel cell process is electricity and water; there are no harmful
emissions such as the carbon monoxide, oxides of nitrogen and other
greenhouse gases produced by internal combustion engines. Fuel cells
cannot now be operated economically. Because of the growing demand for
pollution-free energy sources, significant efforts are being made by
third parties to rapidly commercialize fuel cell technology for use in
stationary power generators and in electric motor vehicles. One of the
major difficulties for the emerging field of fuel cell technology is a
supply of hydrogen, which is normally expensive. The hydrogen produced
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as a result of Rentech's gas-to-liquids Technology is already available
at plants using that Technology. If that hydrogen can be used in a
stationary power fuel cell system associated with a petroleum refining
unit that implements Rentech's gas-to-liquids Technology, the results
could be both economically and environmentally beneficial.
Environmental and Industrial Products (Okon, Inc.)
The Company in March 1997 entered into the business of manufacturing
and selling water-based stains, sealers and coatings on a wholesale basis
by purchasing the assets of Okon. The coatings produced and sold by the
Okon division are biodegradable and environmentally clean. Its formulas
used for manufacturing its products are proprietary. The customers are
primarily the construction industry and architects who use the coatings
on wood, concrete and masonry. Okon presently provides the Company's
primary source of revenues.
Okon has been engaged for over 25 years in the business of
manufacturing and marketing biodegradable and environmentally clean
water-based wood stains, concrete stains, block pluggers and other water
repellent sealers. Okon markets and sells its products nationwide
through a variety of channels. These include distribution through paint
dealers, industrial applications, retailers, excluding discount retailers
and mass merchandisers, and architects and building contractors. The
Company has no direct sales force, distributors or independent sales
representatives. The brand names of the various products are recognized
throughout the industry.
Okon manufactures and markets primarily standard products, but does
prepare special products for large orders. Sales are generally made
pursuant to purchase orders, which are occasionally revised to reflect
changes in the customer's requirements or to establish special orders.
Product deliveries are scheduled upon the Company's receipt of purchase
orders, and orders are typically filled within one to two days. The
Company had no significant backlog of orders as of September 30, 1997.
Generally the purchase orders allow customers to reschedule delivery
dates and cancel purchase orders without significant penalties. Orders
are occasionally rescheduled, revised or canceled. For these reasons,
the Company believes that its backlog, while useful for scheduling
production, is not necessarily a reliable indicator of future revenues.
Historically, sales of coatings have been seasoned in nature. The
heaviest concentration of sales have occurred in the spring and summer
months. Production schedules are timed to reflect these seasonal
variations.
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Okon's sales of products to certain customers, individually, may
constitute a significant portion of its revenues. One of these customers
accounted for 34% of the total net sales for fiscal 1997. As of
September 30, 1997, two customers account for 40% of Okon's accounts
receivable. Okon, however, sells to over 2,000 customers, and the loss
of any single customer would not have a material adverse effect upon the
overall business of the Okon division.
The coatings industry in which Okon conducts its business is highly
competitive and has historically been subject to intense price
competition. Other competitive factors include V.O.C. content, product
quality, product innovation, and distribution. The competitors number
between 800 to 900 other coatings manufacturers located throughout the
United States. Many competitors are small companies which provide
intense competition within regional and local markets, especially with
respect to lower priced coatings and custom made specialty products
required on a short-time delivery basis. Other competitors are large
diversified corporations, with assets substantially greater than those of
the Company, which compete on a nationwide basis. The position of Okon
in the industry is very small. The Company believes that Okon can
compete satisfactorily however, especially on the basis of the V.O.C.
content of its products.
Most of Okon's competitors in the coatings industry use and dispose
of substances regulated under extensive environmental protection laws. A
pervasive system of federal, state and local laws and regulations
prohibit or limit the discharge of hazardous materials into the
environment. In the coatings industry, the regulation of Volatile
Organic Compounds (V.O.C.) by the U.S. Environmental Protection Agency,
and increasingly by the states, is an important factor in success.
Okon's products are water-based and biodegradable, which
significantly reduces the risks of environmental problems. Management
believes that Okon is in compliance with EPA and state regulations
regarding environmental protection.
The chemistry of Okon's products exceed current Environmental
Protection Agency standards for Volatile Organic Compounds (V.O.C.), and
Rentech's management therefore considers the products to be
environmentally friendly. The Company believes that the business is
well-positioned to take advantage of a nationwide movement by state and
federal agencies to further regulate and restrict the V.O.C. contents of
paints, stains and sealers. The majority of wood stains, concrete stains
and block pluggers currently on the market contain V.O.C. levels that are
increasingly considered unacceptable in several regions of the United
States. State and federal government agencies have proposed further
restrictions to limit the levels of V.O.C. contained in products. The
restrictions have effectively prohibited the sale and use of high V.O.C.
products in certain states such as California.
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The environmental advantages of the Okon products complement
Rentech's original business philosophy of producing environmentally
cleaner fuels and products from its gas-to-liquids conversion technology.
The Company's long-term plan is to establish an environmental and
industrial products group that includes Okon.
Advanced Technologies (ITN Electronic Substrates LLC)
As a step toward its long-term goal of establishing an advanced
technology group, Rentech agreed in July 1997 with ITN Energy Systems,
Inc. to enter into a new business called ITN Electronic Substrates LLC.
Rentech owns 50% of the LLC, and ITN Energy Systems, Inc., a privately
owned Colorado corporation, owns 50%. Rentech is manager of the LLC for
financial, marketing, and operational matters, and the other member of
the LLC is manager for technical matters.
ITN Electronic Substrates LLC's business will be based upon advanced
technology to be contributed to it by ITN Energy Systems, Inc. The LLC
will use the Technology to manufacture and sell flexible thin-film on
which it has electronically deposited metals with unique properties, such
as copper and molybdenum, that provide conductive paths to which computer
chips may be attached. The Company expects that the LLC will start work
during the fiscal quarter ending December 31, 1997, on retrofitting its
thin-film manufacturing machines that will be used to produce its thin-film
products. The Company expects the LLC to begin production in 1998.
The managers have contacted potential customers for its products, but as
yet the new LLC has no contracts for purchases of its products. The
customers are expected to be contract manufacturers in the computer,
aerospace and medical instrument industries, as well as large end-users
which would use the substrates to manufacture their own products.
Rentech has another agreement with ITN Energy Systems, Inc.
contemplating co-ownership by them of additional limited liability
companies that would commercially exploit other advanced technologies
developed by ITN Energy Systems, Inc. In October 1996 the two companies
formed ITN/ES LLC under Colorado law for these purposes. The potential
technologies of ITN/ES LLC include advanced processes for ceramic
deposition on materials to improve their capacity to withstand heat and
wear, and use of shape memory alloys that are highly advanced metals
which, by the proper application of heat, cold or electrical impulse can
perform a mechanical function with precision for long periods of time.
Rentech's ownership interest in ITN/ES LLC and all of its
technologies is to be 10%, subject to contribution of $200,000 in cash
and 1,200,000 shares of Rentech restricted Common Stock. Rentech is to
register its shares issued to the LLC within 120 days after issuance, and
if it has not, is required to issue an additional 400,000 shares to
ITN/ES LLC as additional consideration.
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The agreement relating to ITN/ES LLC between ITN Energy Systems,
Inc. and Rentech recognizes that commercialization of the technologies
already in existence as well as those that may be developed in the future
by ITN/ES LLC may require establishment of additional business entities.
Rentech by mutual agreement, may provide additional capital to increase
its ownership interest in the various technologies in which it invests
with ITN Energy Systems, Inc.
General Arrangements for Licensing the Gas-to-Liquids Technology
The Company's objective for its gas-to-liquids Technology is to
license the Technology for use in plants to be constructed and financed
by licensees. Rentech intends to use the information obtained from
conducting the demonstration run in the Synhytech plant to encourage
additional licensees and potential licensees to construct their own
plants using Rentech's Technology. Rentech expects that other
prospective licensees will await completion of the Arunachal Pradesh
plant in India and its successful operation before they commit to enter
into licenses of the Technology or begin design work for constructing
their own plants to use the Rentech Technology.
Rentech's Technology is innovative, has been presented at energy
industry conferences, and has become generally known throughout the
energy industry. Interested businesses that are potential licensees have
initiated contacts with the Company. The Company has also had
negotiations with potential licensees who were introduced through its
present licensees.
Rentech's licensees are responsible for financing, constructing and
operating their own process plants that use the Rentech Technology and
catalyst, including payment for the gas conversion reactors that are
constructed for Rentech to the special design specifications required for
each plant. It is the licensee's obligation to obtain the feedstock
material, either carbon-burning solids or gases, to be used at the
licensee's plant. Upon production of liquid hydrocarbons, each licensee
is responsible for marketing its own products.
Conversion plants that use the Rentech Technology may be designed to
produce from several hundred up to one hundred thousand or more barrels
per day of product. The smaller plants are expected to be assembled from
component systems that are trucked into remote locations where
inexpensive sources of feedstock gas may be available. Plants with the
largest production capabilities would have to be constructed directly at
the sites where they are to be operated. The cost of constructing
conversion plants will vary depending upon their production capacity,
available infrastructure for electrical power, water supplies, roads, gas
pipelines and the like, location and other factors such as costs of
financing and whether the feedstock is a gas or carbon-bearing solids
that must first be converted to gas.
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To date, Rentech's licensees and prospective licensees are foreign
and expect to locate their plants outside the United States. Many
foreign nations, such as India, have substantial needs for diesel fuel
that are not being met at this time. The designs of plants for use of
the Rentech Technology are complex. Business dealings in foreign
countries, the ability of licensees to obtain financing for construction
of plants, and the complexity of design are factors that may result in
delays in the schedules for financing, design, construction and start up
of operations of a plant following the initial decision to proceed with
construction.
Synhytech Plant
In 1985, Fuel Resources Development Company (Fuelco), a
wholly-owned subsidiary of Public Service Company of Colorado (PSCo),
evaluated Rentech's Technology. In 1986 Rentech granted Fuelco the right
to obtain an option to license the Technology, and Fuelco continued its
evaluation. Fuelco subsequently assisted with construction and operation
of the second pilot plant in 1989. Successful operation of that plant
confirmed the technical feasibility of the Technology, that is, the
ability of the Technology to convert carbon-bearing gases, and solids
converted into such gases, that are fed to a conversion plant, into
valuable liquid hydrocarbons such as diesel fuel, naphthas, and waxes.
In 1990 Fuelco began construction of the first full-scale conversion
plant, located near Pueblo, Colorado. This plant, called the Synhytech
plant, cost Fuelco approximately $25 million to construct, maintain and
operate, and was specifically designed and constructed to use methane gas
from an adjacent landfill as its feedstock. The plant was designed and
built by a contractor for Fuelco to produce 235 barrels of liquid
hydrocarbons per day. Fuelco commenced start up operations of the
Synhytech Plant and first produced liquid hydrocarbons in January 1992.
Rentech's Technology, including its synthesis reactors and catalyst,
performed as expected. Fuelco was unable, however, to produce enough
methane from the landfill to operate the plant. Contrary to the results
that Fuelco expected based upon previous test drilling into the landfill,
most of the methane produced by decomposition of the landfill apparently
escaped into the atmosphere rather than entering the gas gathering
pipeline that Fuelco had installed in the landfill for delivery of the
landfill gas to the Synhytech plant. Further, the composition of the gas
was considerably different than the gas Fuelco had determined would be
produced. Consequently, the gas that was produced was collected in
inadequate volumes was not a suitable feedstock for the Synhytech plant
because it did not contain the combination of carbon-bearing materials
that Fuelco projected and for which the plant was specifically designed.
The deficiencies in Fuelco's ability to collect its projected volume of
landfill gas and in the composition of the landfill gas that it did
collect have no relation to the technical feasibility of the Rentech
Technology, which cannot be applied without an adequate volume of gas
that is the same as that which a plant is designed to use.
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Fuelco constructed a pipeline to bring an expensive and limited
supply of natural gas to the plant as an alternative feedstock on a
temporary basis. Fuelco operated the plant with a mixture of the
pipeline natural gas and the landfill gas. Because this temporary gas
supply was not intended to be a permanent supply due to the high cost of
the natural gas, because it was delivered under too low a pressure to
meet the plant's design requirements, and because the natural gas supply
was subject to cutoff in favor of prior users during periods of high
demand for gas, Fuelco shut down operations of the plant in May 1992 to
seek a better feedstock source and to repair mechanical problems in the
conventional systems of the plant. In mid-1992, before Fuelco could
solve these problems, PSCo, as part of its decision to return to its core
business of producing and selling electricity, decided to divest several
subsidiary businesses, including its real estate development business and
Fuelco and its Synhytech operations. After extensive negotiations based
upon the potential of claims by Rentech against PSCo and Fuelco, they
transferred all interests in the Synhytech plant to Rentech in May
1993, together with associated equipment and assets, including $650,000
in cash and all the machinery, equipment and other assets assembled by
Fuelco in Boulder, Colorado to manufacture Rentech's proprietary
catalyst. The primary motivation for PSCo to enter into the transfer
agreement was Rentech's agreement to release its claims that PSCo and
Fuelco failed to perform under its license agreement with Rentech to
construct and operate a commercial size plant. The transfer required no
cash or stock from Rentech, but instead was based on termination of the
relationship between the companies and release of Rentech's claims
against Fuelco and PSCo. Rentech assumed equipment sublease obligations
for computers, vehicles and equipment associated with the Synhytech plant
and agreed to remove the plant and clean up the site upon its final
decision to discontinue operations of the plant. Fuelco's 20% interest
in Rentech's future revenues from royalties and license fees reverted to
Rentech. PSCo retained its equity interest in the Company as a
shareholder.
In February 1993, Rentech took possession of the Synhytech plant and
the related assets acquired from Fuelco and Public Service Company of
Colorado. Before acquiring the Synhytech plant, Rentech had entered into
negotiations with prospective licensees that had indicated a substantial
interest in acquiring licenses if the Company could provide data from
actual operations of a full-size plant. In order to provide verifiable
statistics and evidence for prospective licensees, and to evaluate the
plant and its components for resale to one or more prospective licensees,
Rentech decided to operate the plant for a short period of time. Rentech
therefore converted the plant during 1993 for use of natural gas rather
than landfill gas; corrected or resized several items of equipment and
other associated hardware; and modified several aspects of the
engineering design used by Fuelco for the conventional systems of the
plant. Rentech's costs to convert the plant, including operations during
the demonstration run and assumption of all obligations for equipment
leases, gas supply contracts and utilities, were approximately $3.3
million.
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In accordance with the Company's plan to provide operating data on
its Technology in a full-size, commercial scale plant and to evaluate the
plant and its components for resale, Rentech operated the modified
Synhytech plant successfully in a continuous state for three weeks during
July and August 1993. As planned, the plant was then shut down pending a
decision by Rentech's management regarding its sale or other disposition.
During the demonstration phase, the plant operated at design
specifications, produced the expected range of hydrocarbon products, and
achieved the design conversion ratios anticipated for Rentech's
proprietary catalyst used in the conversion process. The technical data
collected and initial product test results show the process is feasible
for commercial exploitation. The operations produced liquid hydrocarbon
products, samples of which are available to prospective licensees for
their evaluation of uses, markets and pricing of the products. Valuable
engineering and operational data bearing on the efficiency and economics
of the Technology were collected and will also be used by licensees in
the design of their own plants. Based on these results and the
observations of them made by several prospective licensees, Rentech was
able to obtain arrangements for use of its Technology in the Henan Plant
in China, now deemed terminated for accounting purposes, and a
preliminary design contract for the Arunachal Pradesh plant under
construction in India. See "Description of Business--Present Licenses
and Contracts for the Gas-to-Liquids Technology." Rentech expects to
recover the related costs of the demonstration run in the Synhytech Plant
over the term of present and expected future license agreements.
In 1993, the Synhytech plant fulfilled Rentech's purpose of
demonstrating use of its Technology on a commercial scale that allowed
collection of data for use by licensees in their plants. However,
Fuelco's inability to obtain its projected quantities and adequate
quality of landfill gas feedstock from the landfill adversely impacted
the economic viability of the plant, thus preventing it from ever being
operated at a profit at the Pueblo site. The Company's present business
plan for its Technology remains focused on licensing its Technology to
licensees for plants they construct to use Rentech's gas conversion
process. Accordingly, in 1995, Rentech sold the Synhytech plant as a
whole, except for the buildings used for support activities, to its
licensee for the India plant. The plant was dismantled in 1996 and the
component parts were shipped to India to be used in the plant under
design for use of the Rentech Technology in Arunachal Pradesh, India.
Present Licenses and Contracts for the Gas-to-Liquids Conversion
Technology
Several licenses for use of its gas-to-liquids Technology have been
granted by Rentech, as described in this section. A license authorizes a
third party to construct a conversion plant utilizing the Rentech
Technology. The license agreements are granted in exchange for license
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fees, engineering design fees, and production royalties based either upon
a percentage of gross proceeds from the sale of liquid hydrocarbons or
other products produced through use of the Rentech Technology or based
upon some other measure of product value. Licenses may grant either
exclusive or non-exclusive rights to use the Technology in identified
countries or other geographic areas. The license fees and terms are
individually negotiated and vary among licensees.
In September 1992 Rentech granted the exclusive right to ITN, Inc.,
a Colorado corporation, to market the Rentech Technology in the country
of India to potential owners of Rentech process plants. ITN, Inc. is
owned by Dr. Mohan S. Misra, who also owns ITN Energy Systems, Inc., a
co-owner with Rentech of new limited liability companies that expect to
enter into business in advanced technologies. See "Description of
Business--Advanced Technologies." If ITN identifies parties who obtain a
license from Rentech and build a plant or plants in India using the
Rentech Technology, ITN is entitled to 20% of Rentech's royalty, license
fee or other revenues from such plants as compensation to ITN. ITN
continues to assist with marketing the Rentech Technology in India.
Through the efforts of ITN, Rentech has granted a license for the
design and construction of a process plant in India using Rentech's
Technology. The plant is to be a 360 barrel per day plant, using flared
gas in the state of Arunachal Pradesh in northeastern India. The owners
are Donyi-Polo Petrochemicals, Ltd., the state government of Arunachal
Pradesh, and Oil India, Ltd., a government of India enterprise. Gas
feedstock that is presently flared from oil wells has been allocated to
this project by the state government of Arunachal Pradesh. Between
August 1994 and February 1995, Rentech completed a $300,000 preliminary
contract for the basic design of the plant that it entered into in 1994
with the plant owners. In 1995, Donyi-Polo Petrochemicals, which
acquired the license from Rentech, purchased Rentech's Synhytech plant
near Pueblo, Colorado for relocation to Arunachal Pradesh, to reassemble
it and reuse it there. Rentech has received $240,000 as payments due
toward its license fee. The Synhytech plant, which will provide the
majority of base components of the India plant, was relocated to the
Arunachal Pradesh site in India in late 1996. In addition to the
$250,000 contract for engineering services awarded to Rentech, Donyi-Polo
Petrochemicals has contracted with Humphries & Glasgow, Bombay, India,
for the prime engineering contract and has entered into a contract for
the design and fabrication of the required wax distillation equipment.
The final engineering design is expected to be completed by Humphries &
Glasgow and construction is expected to commence before the end of 1997.
Completion of the plant is not expected until the first part of 1999.
The license agreement provides for royalty payments for seven years after
commencement of construction of production from the plant. The licensee
is to construct and operate its own catalyst manufacturing plant, using
the Company's patents, for the production of catalyst.
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PAGE 13
Rentech has been requested by Oil and Natural Gas Commission, the
state oil company of India, to prepare quotations for the design of two
gas conversion facilities in India that would use the Rentech Technology.
The plans under consideration would be sized to produce 2,800 and 10,000
barrels per day of production of products from use of the Rentech
Technology. No decisions have been made to proceed with these plants,
and Rentech does not expect engineering design contracts, license fees or
revenues from them in the foreseeable future.
Several licenses have been allowed by the licensees to expire
without construction of a plant. In other cases, the licensees are
seeking financing or adequate supplies of feedstock. Some licensees are
waiting to learn the results of operation of the Arunachal Pradesh plant
in India or another commercial size plant using the Rentech Technology.
Markets and Marketing of Products Produced by the Gas-to-Liquids
Conversion Technology
The market for diesel fuel is well established, extends worldwide,
is large, and is expected to increase. Industry estimates are that 80
million gallons per day of diesel fuel were produced domestically in the
United States during 1995. Recent total distillate fuel oil consumption
in the United States was approximately 123 million gallons per day, and
over 700 million gallons per day worldwide.
Laboratory tests made to determine the fuel properties of the diesel
fuel produced by use of Rentech's Technology have been made by
independent testing agencies. While not exhaustive or definitive from a
scientific point of view, these tests indicate that it is a
high-grade diesel fuel that provides environmental advantages over
regularly available diesel fuel. Compared to commercial No. 2 diesel
fuel, the Rentech diesel fuel has four fuel properties that make it less
polluting. These are an absence of sulphur, zero percent aromatics by
volume, higher cetane number, and a lower 90% distillation temperature.
During the tests, Rentech's diesel fuel demonstrated significant
reductions in harmful exhaust gas emissions. Based on the test reports,
Rentech's management believes that its diesel fuel has improved
combustion characteristics as measured by its higher cetane value.
A series of federal statutes known as the Clean Air Act Amendments
of 1990 and the Energy Policy Act of 1992 and related executive orders
have established benchmarks for reductions in harmful exhaust emissions
within the United States. The U.S. Environmental Protection Agency has
required reductions in diesel fuel sulphur to 0.05% weight maximum. The
state of California, which has more motor vehicles than any other state,
and several other state and local governments, have also adopted
legislation establishing allowable levels of exhaust emissions for
vehicles and businesses. The California limits include 0.05% sulphur
weight maximum and lowering aromatics content to a maximum of 10% by
<PAGE>
PAGE 14
volume. The legislative goals of the various legislative and regulatory
requirements are to reduce harmful engine exhaust emissions by reducing
fuel aromatics by volume, lowering the 90% distillation temperature, and
reducing the sulphur levels of diesel fuels. Initial studies as to the
requirements of California and other jurisdictions have shown that
emissions of hydrocarbons, carbon monoxide, oxides of nitrogen, and
particulate matter seem to be reduced by a reduction in fuel aromatics.
Higher cetane numbers were found to reduce hydrocarbon and carbon
monoxide emissions. Lowering the sulphur content of diesel fuel helped
reduce particulate matter emissions.
Based on the fuel characteristics tests previously described in this
section, Rentech's diesel fuel would seem to have many of the qualities
that the emerging legislation requires. Before Rentech's diesel fuel
could be said to be a practical solution to the air emission problems,
however, long-term engine wear tests are necessary. Studies conducted
during the last few years by several companies on commonly available
diesel fuels that have low aromatics and low sulphur content show that
such fuels may cause premature mechanical failure of some engine parts,
particularly fuel injection pumps. However, low sulphur fuel produced
from low sulphur crude oil has been used for many years without any
noticeable increase in engine failures. Industry studies indicate that
increased risk of premature failure of certain classes of fuel injection
pumps may be caused by the severe hydrotreating step used by other
companies that is necessary to reduce both the aromatic content as well
as the sulphur content of commonly available diesel fuel. The Company's
Technology used to produce its aromatic and sulphur free diesel fuel from
synthesis gas does not require the severe hydrotreating step.
Some fuel industry researchers have suggested the use of additives
to diesel fuels that meet the new regulatory standards as a means of
reducing fuel system wear. Additives would increase the cost of such
fuels, including Rentech's diesel fuel, if that proved necessary, but
preliminary work and studies by others indicate the cost of additives
would not be so material as to substantially impact present costs.
Rentech's management believes that its diesel fuel can best be used for
blending with readily available diesel fuel to reduce the visible and
invisible contaminants in exhaust gases produced by combustion engines.
Unlike alternative fuels such as methanol and compressed natural
gas, Rentech's diesel fuel does not require any engine or vehicle
modification for use. Fuel mileage may be slightly decreased, although
minor engine adjustments are expected to increase the fuel mileage to the
level provided by regularly available diesel fuel.
Rentech has no arrangements by which vehicle manufacturers have
approved the use of its fuel and no arrangements for the sale of its
products. It is not aware of any reason why its fuel would not be
readily saleable and would not command a premium price compared to
current diesel fuel prices.
<PAGE>
PAGE 15
Rentech's Technology also produces naphthas, which are liquid
hydrocarbon products that are lighter than diesel fuel. Naphthas are
used extensively in manufacturing processes for products as diverse as
paint, printing ink, polish, adhesives, perfumes, glues and fats.
Naphthas produced at conversion plants using the Rentech Technology are
expected to be in demand due to their lower toxicity and lower aromatic
content than other naphthas. Rentech's management is aware of at least
one major urban area that limits the amounts of aromatics in naphthas due
to environmental concerns. The U.S. market for one type of naphtha that
can be produced using the Rentech Technology is estimated at 60,000
barrels per day.
The wax products produced by the Rentech Technology are expected to
be the most valuable products on a unit basis because the existing market
prices for waxes are higher for each barrel of wax than for naphthas or
diesel fuel. Rentech has contacted at least three potential buyers for
large quantities of its wax, and determined that they are interested in
the quality and quantity of the wax that would be available after
production begins. There are at this time no contracts with purchasers
of the wax.
If required, the conversion process in plants using the Rentech
Technology can be easily modified to produce a light crude oil for sale
to refineries. Rentech's Technology produces a high-grade crude oil,
already partially refined, that management believes could be
inexpensively refined in existing refineries into gasoline and other
petroleum products for which the markets are well developed and
extensive.
Competition for the Gas-to-Liquids Technology
Rentech and its licensees are subject to substantial competition,
especially for the products of its Technology. Competition in the diesel
fuel market is largely a function of price. Thus, the Company's future
success will depend upon whether or not its Technology will enable
production of the liquid hydrocarbons at a cost that will allow them to
be profitably sold. Downward movements in the price of diesel fuel,
naphtha or waxes could have an adverse impact upon operations of the
Company.
Several major oil companies are involved in large-scale synthetic
fuel development, such as The Royal Dutch Shell Oil Company, Exxon
Corporation, and Statoil, the national oil company of Norway. The
largest user of similar technology is South African Synthetic Oil, Ltd.
(SASOL), a South African company that is engaged in coal gasification to
produce synthesis gas that is converted by Fischer-Tropsch reactions into
synthetic fuel.
<PAGE>
PAGE 16
Rentech's management believes that its patents protect several
unique features of its Technology and catalyst that give it competitive
advantages in costs and end products over those of its competitors. See
"Description of Business--Patents Relating to the Gas-to-Liquids
Technology." However, most companies that do or may compete with Rentech
are well established and have substantially greater financial, marketing,
personnel and other resources than does the Company. No assurance can be
given that Rentech will be able successfully to compete on a price basis
with either synthetic or natural fuels.
Catalyst Production for the Gas-to-Liquids Technology
Use of the Company's Technology requires use of its proprietary
catalyst. After several plants are in operation and the volume of
catalyst that is required justifies the capital cost of a catalyst
manufacturing facility, Rentech plans to manufacture its proprietary
catalyst and provide it to its licensees for cost plus a reasonable
profit. Until Rentech develops its own manufacturing capability, the
catalyst is to be produced by an independent catalyst manufacturer under
license from Rentech.
Feedstock Supplies for the Gas-to-Liquids Technology
The Company's licensees of its Technology are responsible for
obtaining their own supplies of carbon-bearing, low-cost feedstock,
usually in substantial quantities. Economic use of the Rentech
Technology depends upon inexpensive sources of feedstock. Management
believes such feedstock will be readily available to its licensees from
inexpensive sources such as natural gas wells that are not producing or
that flare gas or that produce gas that is not suitable for commercial
sale.
A potential feedstock that is of growing importance is the heavy high
sulphur residual fuels at refineries ("refinery bottoms "). Within the
next ten years a large surplus of high sulphur residue is predicted which
cannot be absorbed by the market. Conversion of such fuels to synthesis
gas by conventional gasification technologies is an attractive option.
The synthesis gas, a mixture of hydrogen and carbon monoxide, with its
low hydrogen-to-carbon monoxide ratio, is an excellent feedstock source
for conversion into liquid hydrocarbons by the application of the
Company's Technology. The hydrocarbon products, as well as other
byproducts such as the excess steam and hydrogen produced by the process,
can all be utilized at the refinery. The diesel fuel fraction is an
excellent blending stock to upgrade non-specification fuels or to improve
the quality of the commercial diesel currently being produced in
refineries by lowering the aromatic and sulphur content and increasing
the cetane index. Rentech has patented the blending of its Fischer-Tropsch
diesel fuel with commercial diesel to reduce harmful emissions.
<PAGE>
PAGE 17
Additional sources of feedstock include methane gas collected from
coal beds and industrial off gases. Carbon-bearing solids such as coal,
biomass and other carbonaceous materials that, like natural gas and
refinery residues must first be converted to synthesis gas, can provide
another feedstock source.
Patents Relating to the Gas-to-Liquids Technology
Rentech has been granted eight United States patents related to
certain process applications, products produced, and materials used in
its gas conversion process. The patents are directed to technology in
the field of conversion of gaseous hydrocarbons to liquid hydrocarbons
through use of Fischer-Tropsch processes in slurry bed reactors.
Additional patent applications have been filed.
The present patents include a method for cracking a Fischer-Tropsch
wax, a method of making and promoting a promoted iron catalyst for use in
slurry Fischer-Tropsch synthesis reactors, a synthetic oxygenated diesel
fuel produced by Fischer-Tropsch synthesis, an oxygenated diesel fuel to
be used as an additive, the overall gas-to-liquids conversion process,
and Rentech's oxygenated, sulphur and aromatic-free diesel fuel for use
as an additive. The latter patent solidifies Rentech's previous patent
relating to use of its diesel fuel as an additive, which increases the
oxygen content in diesel fuel while maintaining diesel fuel specification
limits for viscosity.
Two of the patents include key elements of the process that enables
Rentech's iron-based catalyst to compete with cobalt-based catalysts used
by others with gas conversion processes. These patents protect process
steps that improve Rentech's carbon conversion efficiency by over 30%.
Because Rentech's iron-based catalyst is significantly less expensive
than cobalt catalysts, the improvement in conversion efficiency makes
Rentech's process cost-competitive. Additionally, cobalt catalysts used
by others, due to the toxicity of the catalysts, are less environmentally
friendly because they create a waste hazard for their users. By
comparison, Rentech's iron-based catalyst can be disposed of in a
landfill with no environmental regulation or concerns. These factors
make the Rentech process more cost-effective and environmentally safe for
converting gases containing hydrocarbons to liquids while allowing
Rentech's end products to be competitively priced with products from
crude oil or other products made from Fischer-Tropsch processes.
The issuance of patents to the Company does not assure it that
competitors or licensees will not engage in infringement of such patents,
especially outside the United States where rights to technology are
generally not as well protected as in the United States. There are no
assurances that the Company's patents will not be challenged, invalidated
or circumvented, that the rights granted by the patents will provide
competitive advantages to the Company, or that the Company's efforts to
protect its intellectual property rights will be successful.
<PAGE>
PAGE 18
Governmental Regulations Pertaining to the Gas-to-Liquids Technology
Conversion plants using the Rentech Technology and plants
manufacturing Rentech's proprietary catalyst are subject to federal,
state and local laws, rules and regulations relating to occupational
health and safety as well as those regulating protection of the
environment. Compliance with such requirements is not expected to
require significant capital expenditures by Rentech and is the
responsibility of the licensees that own and operate the plants.
Research and Development Pertaining to the Gas-to-Liquids Technology
The Company had no expenses for research and development during the
twelve-month period ended September 30, 1997, and none during the
9-month fiscal period ended September 30, 1996.
Employees
At present, the Company has fifteen full-time employees, eight of
whom are employed by Okon.
Item 2. Description of Property
Synhytech Plant Buildings
Two industrial buildings formerly used to support operations
of the Synhytech plant are located in Pueblo, Colorado, on land leased
from Public Service Company of Colorado and its subsidiary, Fuel
Resources Development Company, that is owned by the City of Pueblo.
Rentech expects to either sell or lease the buildings on site,
depending upon reaching agreement with the City of Pueblo for the city
to sell the land on which they are located to buyers of the buildings,
or if no agreement is reached, to sell the buildings for disassembly,
relocation and reuse off the site. If the buildings are sold to be
relocated, the buyer will be required to remove the buildings.
Office Lease
The executive offices of the Company are located in Denver,
Colorado and consist of approximately 2,977 square feet of office
space. The lease expires in November 1999 and includes an option to
extend for another five-year term. The rent is approximately $39,000
per year.
<PAGE>
PAGE 19
Okon Facility
Okon rents an industrial building located in Lakewood,
Colorado, where it conducts its operations. The building contains
approximately 12,000 square feet of office and warehouse space. The
lease expires March 14, 1999 and includes an option to extend for a
five-year term. In addition, provided that Okon is not in default
under the lease, Okon has the option to purchase the facility at any
time during the lease term. The rent is $24,000 a year.
Item 3. Legal Proceedings
There are no material legal proceedings pending against the
Company or its properties.
Item 4. Submission of Matters to a Vote of Securities Holders
The Company's annual meeting of shareholders was held on June 12,
1997. At the meeting, Erich W. Tiepel was elected to a term ending in
2000 as a member of the board of directors. The terms of Ronald C.
Butz, Mark S. Bohn, and Dennis L. Yakobson as directors continue after
the meeting.
The following tabulation shows the votes cast at the meeting on
each matter voted upon, including election of directors.
<TABLE>
<CAPTION>
Withheld/ Not
For Against Voted
<S> <C> <C> <C>
Election of Directors:
Erich W. Tiepel 10,861,635 469,699 0
</TABLE>
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters
The common stock of the Company trades on the NASDAQ SmallCap
Market under the symbol RNTK. The following table sets forth the high
and low bid prices for the Company's common stock, as reported on
NASDAQ, for the quarters presented. The quotations reflect
inter-dealer prices, without adjustment for retail mark-ups, mark-downs
or commissions and may not necessarily represent the actual
transactions.
<PAGE>
PAGE 20
<TABLE>
<CAPTION>
Price Ranges
For the Quarterly Periods Indicated
1997 1996 1995
-------------- -------------- ---------------
Low High Low High Low High
--- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
Jan. Mar. 1/8 15/32 3/16 11/16 1-1/8 2
Apr.-Jun. 1/8 1/2 1/4 21/32 29/32 1-1/4
Jul.-Sep. 7/32 31/32 7/32 1/2 5/8 1-1/4
Oct-Dec. 1/16 11/32 7/16 15/16
</TABLE>
Based solely upon the number of record holders, the approximate
number of shareholders of the common stock of the Company as of
September 30, 1997 was 337. The number of beneficial owners is
estimated by management at not less than 1,400.
No dividends have been declared during the 12-month fiscal year
ended September 30, 1997 and the 9-month fiscal period ended September
30, 1996, with respect to the common stock.
The Nasdaq Stock Market has increased its financial requirements
as of January 1998 for companies whose stocks are listed on Nasdaq.
Among several changes, one makes stocks trading at less than $1
ineligible for listing, and another increases the total assets
requirement to $3 million. At present Rentech meets all of the new
requirements, but there are no assurances that the Company will
continue to meet the listing requirements. If it does not, the common
stock would be dropped from Nasdaq's SmallCap Market after a grace
period. The effect of delisting would have a material adverse effect
upon ability of shareholders to sell their stock and upon the value of
the stock.
The following table shows information concerning all sales of the
Company's unregistered securities made by the Company during the past
three years.
<PAGE>
PAGE 21
<TABLE>
<CAPTION>
No. Total Exemptions
Date of Security Securities Offering Total Class of From
Sale Sold Sold Price Commissions Purchasers Registration
- ------- -------- ---------- -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jul. 17, 1996 Common Stock 578,126 $ 115,625 0 Accredited Rule 506 and
and Warrants Officers and Section 4(6)
to Purchase Directors
826,126
shares of
Common Stock
Aug. 1, 1996 Common Stock 3,993,426 $ 787,000 $104,761 Accredited Rules 505, 506,
and Warrants Investors Section 4(6)
to Purchase
3,993,426
shares of
Common Stock
Sep. 13, 1996 Common Stock 295,274 $ 97,537 0 Accredited Rules 505, 506,
and Warrants Investors Section 4(6)
to Purchase
138,724
shares of
Common Stock
Sep. 30, 1996 Common Stock 151,422 $ 37,245 0 Accredited Rules 505, 506
and Warrants Investors Section 4(6)
to Purchase
33,724
shares of
Common Stock
Jan. 29, 1997 Common Stock 1,479,000 $ 73,950 0 Accredited Rules 505, 506,
Investor Section 4(6)
Sep. 5, 1997 Common Stock 1,000,000 $ 200,000 0 Accredited Rules 505, 506,
Investor and Section 4(6)
Oct. 17, 1997 Promissory 26 $ 620,500 63,050 Accredited Rules 505, 506,
Notes Investors Section 4(6)
Convertible
into Common
Stock(1)
<FN>
<F1> Notes in the original principal balance of $620,500 are convertible into shares of Common Stock at $.33 per
share until April 16, 1998. If not converted by the note holders by then, and if the Company does not pay the note in
cash at that time, the note holders may convert their notes into Common Stock at 70% of the average closing bid price
for the 5 trading days prior to conversion, not to exceed $33 a share. The placement agent was
Neidiger/Tucker/Bruner, Inc., Denver, Colorado. In addition to the placement fees paid in cash, the placement agent
received a warrant, exercisable for 5 years, to purchase the Company's convertible promissory note in the amount of
$58,500. The note is convertible, for 180 days from exercise of the warrant, at the same price and conversion terms
as the other notes issued in the private placement.
</TABLE>
<PAGE>
PAGE 22
Item 6. Management's Discussion and Analysis or Plan of Operation
Results of Operations
For the year ended September 30, 1997 and the nine month period ended
September 30, 1996, the Company had net losses of $1,375,686 and $392,478,
respectively. The increase of approximately 350% in loss for the twelve
month period in 1997 compared to the nine month period in 1996 is due to a
decrease in contract revenues and license fees of $295,176, increase in
interest expense of approximately $289,000 from the addition of $1,250,500
in debt and extraordinary gain in 1996 of $200,434. Increases in 1997 costs
over 1996 are attributable in general to the longer fiscal period in 1997
and in particular to public relations costs, and approximately $100,000 in
hiring costs of a chief financial officer. Profit contributed by Okon from
its acquisition in March 1997 partially offset the increases in costs due to
the longer fiscal period.
During the year ended September 30, 1997, the Company did not
recognize any contract revenues related to the Arunachal Pradesh plant under
construction in India. Contract revenues of $55,176 were recognized during
the nine months ended September 30, 1996.
During the year ended September 30, 1997, no revenue was recognized
for license fees compared to $240,000 for license fees from Donyi Polo
Petrochemicals Ltd., an Indian corporation, for grant of a license to use
the Company's gas conversion technology in the plant under construction by
Donyi Polo at Arunachal Pradesh, India. Donyi Polo purchased the Company's
Synhytech plant located at Pueblo, Colorado during 1995, dismantled it and
shipped the component parts and systems to India in 1996 for reassembly and
use as the basis of the Arunachal Pradesh plant.
During the year ended September 30, 1997, the Company recognized
$1,189,536 for sales of water-based paints, sealers and coatings for a six
and one-half month period commencing March 16, 1997 as compared to no income
for the nine month period ended September 30, 1996. This increase reflects
the purchase of Okon in March 1997.
During the year ended September 30, 1997, no costs were incurred for
cost of contracts compared to $29,463 incurred in the nine months ended
September 30, 1996.
During the year ended September 30, 1997, costs of sales related to
the water-based paints, sealers and coatings was $481,796 as compared to no
costs for the nine months ended September 30, 1996. This increase reflects
the purchase of Okon in March 1997.
The gross profit of $707,739 for the year ended September 30, 1997 is
primarily a result of sales of water-based paints, sealers and coatings for
a six and one-half month period since the acquisition of Okon. The gross
profit of $265,713 for the nine months ended September 30, 1996 is a result
of the license fees and engineering design and consulting contract for the
Indian plant.
During the year ended September 30, 1997, general and administrative
expenses increased by 133% over the nine month period ended September 30,
1996. The increase is caused by approximately $366,000 in expenses
<PAGE>
PAGE 23
associated with Okon which were not included in the prior period, increased
costs related to public relations, approximately $100,000 in expense from
the hiring of a chief financial officer during 1997, and by the longer
fiscal period in 1997 during which costs were incurred.
Depreciation and amortization increased 37% during the year ended
September 30, 1997 compared to the nine months ended September 30, 1996
primarily due to the longer period during which equipment was depreciated
and licensed technology was amortized and due to depreciation of Okon's
equipment and amortization of goodwill acquired when Okon was purchased in
March 1997.
Loss from operations for the year ended September 30, 1997 increased
by $523,984 to a loss of $1,077,783 compared to a loss of $553,799 for the
nine months ended September 30, 1996. The increased loss is primarily due
to a decrease in revenue from contracts and license fees, increases in
general and administrative expenses and depreciation and amortization,
combined with the cost impact of a longer operating period. This increase
is partially offset by an operating profit contributed by Okon, which was
acquired in March 1997.
Gain of $3,140 on sale of fixed assets for the nine months ended
September 30, 1996 reflects sale of an individual component of the Synhytech
plant that was not purchased for relocation to India. During the nine
months ended September 30, 1996, the Company recognized a write-down of
$100,000 on the Synhytech plant held for sale. During the nine months ended
September 30, 1996 the Company had $71,813 in other income from refund of a
property tax paid in a prior period. Interest expense increased by
approximately $293,000 during the twelve months ended September 30, 1997
compared to the nine month period ended September 30, 1996 due to the
addition of $1,250,500 in debt. Interest expense in the prior year is due
to $798,750 in convertible notes that were converted into the Company's
common stock during September 1996.
Liquidity and Capital Resources
The Company has a working capital deficit of $675,630 and has
incurred losses since its inception that raise substantial doubt about its
ability to continue as a going concern. At September 30, 1997 the Company
had a working capital deficit of $675,630 as compared to working capital of
$456,560 at September 30, 1996. The decrease in working capital is
primarily due to the addition of $1,250,500 in debt that comes due within
one year, partially offset by the working capital of Okon. $560,500 of the
$1,250,500 in current portion of long-term debt is convertible into the
Company's common stock at the Company's option if not converted by the
noteholders by April 16, 1998 and if the Company does not pay the debt in
cash at that time.
The cash realized by the Company during the fiscal year ended
September 30, 1997 and the cash generated from Okon's operations are
expected to be adequate to fund the Company's operations at the current
level through the first half of the 1998 fiscal year. In order to realize
revenues from the Company's interests in ITN Electronic Substrates LLC,
which intends to manufacture and sell flexible thin-film, and from ITN/ES
<PAGE>
PAGE 24
LLC, which intends to manufacture and sell a heat pump, the Company requires
additional working capital. The Company expects to make one or more private
placements of its securities that would be convertible into common stock at
a discount from the market price.
The net proceeds of the private placement would also be applied to pay
off the Company's indebtedness. There are no assurances that additional
capital will be raised or that the businesses that the Company intends to
develop will generate operating income to the Company in time or in amounts
adequate to enable the Company to continue its operations as a going
concern.
The Company expects to realize income during the next 18 months from
its license granted for the plant at Arunachal Pradesh in India. The
Company expects to receive license fees in the amount of $240,000, and
additional fees for engineering services are expected although not yet under
contract. Income from royalties associated with the India plant are not
expected until after the completion of construction and startup and
operation of the plant. Construction is not expected to be completed until
the first part of 1999.
The Company is discussing other proposals made by several energy
companies, including Texaco Group, Inc., for exploitation of the Company's
gas-to-liquids Technology through licenses or other business ventures. No
assurances can be made that these discussions will result in either business
ventures or revenues to the Company.
The Company has made no commitments for material capital
expenditures, either in the short or long term. Management does not
presently expect to make such commitments in the near future.
The Company has deferred tax assets with a 100% valuation allowance
at September 30, 1997 and 1996. Management is not able to determine if it
is more likely than not that the deferred tax assets will be realized.
Analysis of Cash Flow
The Company had net losses from operations of $1,375,686 during the
year ended September 30, 1997, and $392,478 during the nine months ended
September 30, 1996. During the year ended September 30, 1997, non-cash
expenses included depreciation, which was 41% more, and amortization, which
was 37% more, than during the nine month period in 1996, primarily due to
the longer period during which equipment was depreciated and licensed
technology was amortized, as well as depreciation of Okon's equipment and
amortization of goodwill acquired when Okon was purchased in March 1997 and
interest expense which was paid by issue of options to purchase common stock
at market value. Also during the year ended September 30, 1997, the Company
incurred $274,539 in noncash interest expense associated with its
convertible notes payable and issued stock options for services valued at
$45,028. The Company recorded a $100,000 write-down of the Synhytech plant
held for sale and a gain of $3,140 on sale of assets due to sale of the
Synhytech plant and issued shares to discharge $152,152 for services during
the nine month period ended September 30, 1996.
<PAGE>
PAGE 25
Changes in operating assets and liabilities are primarily due to
accounts receivable, inventories, prepaid expenses and accrued liabilities
acquired with the operations of Okon. Property tax refund receivable
recorded during the nine months ended September 30, 1996 was received during
the year ended September 30, 1997. The total net cash used in
operations increased by 53% to $753,324 in the year ended September 30, 1997
compared to an increase of $493,234 during the nine months ended September
30, 1996. The increase reflects increased cash costs for general and
administrative expenses partially offset by cash contribution from Okon
since its acquisition in March 1997 and increased due to the longer fiscal
period.
Investing activities during the year ended September 30, 1997 included
purchase of $65,815 in equipment compared to no purchases in the prior
period. The Company used $1,075,739 in cash to acquire the assets of Okon
during the year ended September 30, 1997. There were no acquisitions in the
nine months ended September 30, 1996. There was a reduction in restricted
cash of $25,000 during the 1997 period compared to no reduction in
restricted cash during the 1996 period. Other assets increased by $23,901
during the 1997 period compared to a decrease of $2,433 in the 1996 period,
primarily due to preliminary investments in future joint ventures.
Financing activities during the year ended September 30, 1997 produced
$1,378,899 from the issuance of common stock compared to $50,000 during the
nine months ended September 30, 1996. During the year ended September 30,
1997, the Company received net proceeds of $1,249,011 from the issuance of
$1,500,000 in redeemable and convertible preferred stock. Preferred stock
that was not converted was redeemed during the year for $1,474,684. During
the year, the Company received $390,000 ($90,000 from a related party) as
proceeds of notes payable. Convertible notes payable in the amount of
$560,500 generated $481,554 after payment of $78,946 in debt issue costs.
During the nine month period, the Company received $798,750 as proceeds from
non-subordinated notes payable, offset by offering costs of $104,761, and
made payments of $61,750 on a note payable. The net cash provided by
financing activities was $2,074,780, an increase of 304% compared to cash
provided by financing activities during the 1996 period.
Cash increased during the year ended September 30, 1997 by $181,001
compared to an increase of $194,578 during the nine months ended September
30, 1996. These changes increased the ending cash balance to $391,487 at
September 30, 1997 from $210,486 at September 30, 1996.
The Financial Accounting Standards Board ("FASB") recently issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS 128") and Statement of Financial Accounting Standards No. 129
"Disclosure of Information About an Entity's Capital Structure ("SFAS 129").
SFAS 128 provides a different method of calculating earnings per share than
is currently used in accordance with Accounting Board Opinion ("ABP") No.
15, "Earnings Per Share." SFAS 128 provides for the calculation of "Basic"
and "Diluted" earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common stock
holders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. SFAS 129 establishes standards for disclosing
<PAGE>
PAGE 26
information about an entity's capital structure. SFAS 128 and SFAS 129 are
effective for financial statements issued for periods ending after December
15, 1997. Their implementation is not expected to have a material adverse
effect on the consolidated financial statements.
In June 1997, FASB issued Statement of Financial Accounting Standard
No. 130 "Reporting Comprehensive Income ("SFAS 130") and Statement of
Financial Accounting Standard No. 131 "Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 130 establishes
standard for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires that
all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that displays with the same prominence as other financial
statements. SFAS 131 supersedes Statement of Financial Accounting Standard
No. 14 "Financial Reporting for Segments of a Business Enterprise." SFAS
131 establishes standards of the way the public companies report information
about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards
for disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
SFAS 130 and SFAS 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Because of the recent
issuance of these standards, management has been unable to fully evaluate
the impact, if any, the standards may have on future financial statement
disclosures. Results of operations and financial position, however, will be
unaffected by the implementation of these standards.
Item 7. Financial Statements
The financial statements identified in Item 13 are filed as part of
this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Auditors on Accounting and
Financial Disclosure
The Company has not had a change of its independent auditors during
its two most recent fiscal years or subsequent interim period, except that
on January 1, 1996, the Company's auditors, Mitchell - Finley and Company,
P.C. combined their practice into BDO Seidman, LLP. Thereafter BDO
Seidman, LLP became the Company's independent auditors for the next two
fiscal periods ended September 30, 1996 and 1997. The Company has not
reported disagreement with its auditors on any matter of accounting
principles or practices or financial statement disclosure.
<PAGE>
PAGE 27
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;'
Compliance with Section 16(a) of the Exchange Act
The following table sets forth certain information concerning
directors and executive officers of the Company:
<TABLE>
<CAPTION>
Term of Service Term as
as an Officer Director
Name Positions Held or Director Expires
- -------------- -------------- --------------- --------
<S> <C> <C> <C>
Charles B. Benham Vice President - Research 1981 to date --
and Development
Mark S. Bohn(1)(3) Director 1981 to date 1998
Ronald C. Butz(2) Vice President, Chief Operating 1984 to date 1998
Officer, Secretary and Director
James P. Samuels Vice President - Finance, 1996 to date --
Chief Financial Officer
Erich W. Tiepel(1)(3) Director 1983 to date 1997
Dennis L. Yakobson(4) President, Chief Executive Officer, 1981 to date 1999
Director, and Chairman of the
Board
- --------------------
<FN>
<F1> Member of audit committee.
<F2> Director since 1984 and officer since 1989.
<F3> Member of stock option committee.
<F4> President since 1983.
</FN>
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon the Company's review of Securities and Exchange
Commission Forms 3 and 4 and amendments to those forms submitted to it
during the most recent fiscal year, the Company has identified the following
person who was at any time during the fiscal year a director, officer, or
beneficial owner of more than 10% of any class of equity securities that
failed to file such forms on a timely basis with the SEC, as required by
Section 16(a) of the Securities Exchange Act, during the most recent fiscal
year or prior fiscal years: James P. Samuels failed to timely file one
Form 4 due by September 10, 1997 to report one transaction, the acquisition
of a promissory note convertible into common stock acquired on August 15,
1997. The required report was filed on October 10, 1997.
No arrangements exist between directors, officers or other persons
which resulted in the selection or election of any of them. There are no
family relationships among the executive officers and directors. All
directors are elected for three-year terms expiring at the annual meeting
of shareholders or until their successors are elected and qualified.
Officers serve at the pleasure of the board of directors, but have
employment contracts, as subsequently described.
<PAGE>
PAGE 28
Business Experience of Directors and Continuing Officers
The principal occupations of each executive officer, significant
employee and director of the Company for at least the past five years are
as follows:
Charles B. Benham, Vice President - Research and Development--
Dr. Benham, age 61, received a Bachelor of Science degree in
Mechanical Engineering from the University of Colorado in 1958, and a
Master of Science degree in Engineering in 1964 and a Ph.D. degree in
1970, both from the University of California at Los Angeles. He worked at
the Naval Weapons Center, China Lake, California, from 1958 through 1977
performing research and development on thermal and chemical processes for
converting municipal solid wastes to liquid hydrocarbon fuels,
thermochemical analyses of solid-fueled and ramjet engines, combustor
modeling, rocket motor thrust vector control, rocket motor thrust
augmentation, catalyst behavior in carbon monoxide oxidation, and in
liquid hydrocarbon fuels for ramjet applications. From 1977 to 1981, he
worked at the Solar Energy Research Institute in Golden, Colorado, on
thermal and chemical processes for converting agricultural crop residues
to diesel fuel, on thermochemical transport of solar energy using ammonia
decomposition and steam reforming of methane, and on high temperature
applications of solar energy. Dr. Benham has published several articles
in the fields of liquid fuel production from organic waste, catalyst
pellet behavior and rocket propulsion. He has been an officer of the
Company since its inception in 1981 and served as a director from
inception until 1996. Dr. Benham devotes his full time to the business of
the Company.
Mark S. Bohn, Director--
Dr. Bohn, age 47, received a Bachelors degree in Mechanical
Engineering from Georgia Institute of Technology, Atlanta, Georgia, in
1972, and a Master of Science degree in Mechanical Engineering in 1973 and
a Ph.D. in Mechanical Engineering in 1976, both from the California
Institute of Technology, Pasadena, California. He was employed from 1976
through 1978 at the General Motors Research Laboratories in Warren,
Michigan, on research in bluff body aerodynamics, wind tunnel
experimentation, flow visualization, and the fluid mechanics of engine
intake ports. Since 1978 he has been employed by Midwest Research
Institute at the National Renewable Energy Laboratory in Golden, Colorado,
working on conversion of organic materials to liquid hydrocarbon fuels,
high temperature applications of solar energy, power cycles for ocean
thermal energy conversion, direct contact heat transfer and building heat
transfer. Dr. Bohn is a registered Professional Engineer in Colorado and
a member of the American Society of Mechanical Engineers. He has
published several articles on liquid fuel production, organic waste, heat
transfer, power cycles, aerodynamics, optics, acoustics, solar thermal
energy, and co-authored the textbook Principles of Heat Transfer, (West
Educational Publishing). He has been an officer and director of the
Company since its inception in 1981.
<PAGE>
PAGE 29
Ronald C. Butz, Vice President, Chief Operating Officer, Secretary
and Director--
Mr. Butz, age 60, received a Bachelor of Science degree in Civil
Engineering from Cornell University in 1961 and a Juris Doctor degree from
the University of Denver in 1965. From 1966 to 1982, Mr. Butz was a
practicing attorney in Denver, Colorado with the firm of Grant, McHendrie,
Haines and Crouse, P.C. In 1982, Mr. Butz became a shareholder, vice
president and chief operating officer of World Agricultural Systems, Ltd.,
a privately-held Colorado corporation specializing in the international
marketing of commodity storage systems. He resigned these offices in
December 1983. In 1984, Mr. Butz became president of Capital Growth,
Inc., a privately-held Colorado corporation providing investment services
and venture capital consulting. In 1984, he also became a director of the
Company. In October 1989, Mr. Butz was appointed a vice president of the
Company, and in June 1990, he was appointed secretary of the Company. Mr.
Butz devotes his full time to the business of the Company.
Frank L. Livingston, Vice President and General Manager, Okon, Inc.--
Mr. Livingston, age 55, received a Bachelor of Science Degree in
Chemistry from Colorado State University in 1965. He worked for
Mallinckrodt Chemical Co. from 1965 to 1971. While at Mallinckrodt
Chemical Co., he worked as a process research chemist and formulator prior
to becoming a specialty marketing manager for the industrial chemical
division. From 1971 to 1975 Mr. Livingston was employed by Gates Rubber
Co. in Denver, Colorado as a sales and marketing manager for a specialty
chemical venture start-up business within the company. He also worked as
a research market analyst for the venture group. Projects of the venture
group included specialty chemicals and lead-acid battery technology, as
well as rubber products made by the company for off-shore oil exploration
and production. Mr. Livingston joined Okon, Inc. in 1975 as sales manager
and was promoted to Vice President of Sales in 1984. Mr. Livingston also
became a 24% owner of the company at that time. In addition to his sales
and marketing responsibilities, he was also responsible for manufacturing
and research and development for the company. Mr. Livingston also served
on the Board of Directors. With the sale of Okon, Inc. to Rentech in
1997, Mr. Livingston became Vice President and General Manager for Okon,
Inc. and continues to serve on Okon's board of directors.
James P. Samuels, Vice President - Finance, Chief Financial Officer,
Treasurer--
Mr. Samuels, age 50, has executive experience in general corporate
management, finance, sales and marketing, information technologies, and
consulting for both large companies and development stage businesses. He
received a Bachelor's degree in Business Administration from Lowell
Technological Institute, in 1970, and a Master of Business Administration
degree in 1972 from Suffolk University, Boston, Massachusetts, in 1972.
He completed an executive program in strategic market management through
Harvard University in Switzerland in 1984. From December 1995 through
April 1996, he provided consulting services in finance and securities law
compliance to Telepad Corporation, Herndon Virginia, a company engaged in
systems solutions for field force computing. From 1991 through August
<PAGE>
PAGE 30
1995, he served as chief financial officer, vice president-finance,
treasurer and director of Top Source, Inc., Palm Beach Gardens, Florida, a
development stage company engaged in developing and commercializing
state-of-the-art technologies for the transportation, industrial and
petrochemical markets. During that employment, he also served as
president of a subsidiary of Top Source, Inc. during 1994 and 1995. From
1989 to 1991, he was vice president and general manager of the Automotive
Group of BML Corporation, Mississauga, Ontario, a privately-held company
engaged in auto rentals, car leasing, and automotive insurance. From 1983
through 1989, he was employed by Purolator Products Corporation, a large
manufacturer and distributor of automotive parts. He was president of the
Mississauga, Ontario branch from 1985 to 1989, and director of marketing
from 1984 to 1985, and director of business development and planning
during 1983 for the Rahway, New Jersey, the filter division headquarters
of Purolator Products Corporation. From 1975 to 1983, he was employed by
Bendix Automotive Group, Southfield, Michigan, a manufacturer of
automotive filters, electronics and brakes. He served in various
capacities, including group director for management consulting services on
the corporate staff, director of market research and planning, manager of
financial analysis and planning, and plant controller at its Fram Autolite
division. From 1973 to 1974, he was employed by Bowmar Ali, Inc., Acton,
Massachusetts, in various marketing and financial positions,
and in 1974 he was managing director of its division in Wiesbaden,
Germany.
Erich W. Tiepel, Director--
Dr. Tiepel, age 54, obtained a Bachelor of Science degree in Chemical
Engineering from the University of Cincinnati in 1967, and a Ph.D. in
Chemical Engineering from the University of Florida in 1971. Dr. Tiepel
has twenty-three years of experience in all phases of process design and
development, plant management and operations for chemical processing
plants. In 1981, Dr. Tiepel was a founder of Resource Technologies Group,
Inc. ("RTG"), a high technology consulting organization specializing in
process engineering, water treatment, hazardous waste remediation, and
regulatory affairs. Dr. Tiepel has been president of RTG since its
inception. From 1977 to 1981 he was project manager for Wyoming Mineral
Corporation, a subsidiary of Westinghouse Electric Corp., Lakewood,
Colorado, where his responsibilities included management of the design,
contraction and operation of ground water treatment systems for ground
water cleanup programs. From 1971 to 1976 he was a principal project
engineer for process research for Westinghouse Research Labs. From 1967
to 1971, he was a trainee of the National Science Foundation at the
University of Florida in Gainesville, Florida. Dr. Tiepel has been a
director of the Company since 1983.
Dennis L. Yakobson, President, Chief Executive Officer, Director and
Chairman of the Board--
Mr. Yakobson, age 61, received a Bachelor of Science degree in Civil
Engineering from Cornell University in 1959 and a Masters Degree in
Business Administration from Adelphi University in 1963. From 1960 to
1969 he was employed by Grumman Aerospace Corporation, with the final
position held being that of contract administrator with responsibility for
<PAGE>
PAGE 31
negotiation of prime contracts with governmental agencies. From 1969 to
1971 he was employed by Martin Marietta Corporation, Denver, Colorado in a
similar position and from 1971 through 1975 was employed by Martin
Marietta as marketing engineer in space systems. In 1975 he was employed
by Wyoming Mineral Corporation in Denver as a contract administrator.
Shortly thereafter, he became group leader-land and was responsible for
the direction of all activities in lease administration and for all
in-house landmen. In 1976, he was employed by Power Resources
Corporation, Denver, Colorado, a mineral exploration company, as vice
president-land, secretary, treasurer, and a director. In 1979, he became
a director and the secretary of Nova Petroleum Corporation also in Denver,
Colorado, and in 1981 became its vice president of administration and
finance. He resigned from Nova in November of 1983 to assume the
presidency of the Company. Mr. Yakobson devotes his full time to the
business of the Company. He serves as chairman of the board of directors
of the Company.
Item 10. Executive Compensation
Cash Compensation
The following table shows all cash compensation paid or to be paid by
the Company or any of its subsidiaries, as well as other compensation paid
or accrued during the fiscal years indicated and the nine months ended
September 30, 1996 to the Chief Executive Officer and the four other
highest paid executive officers of the Company as of the end of the
Company's last fiscal year whose salary and bonus for such period in all
capacities in which the executive officer served exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards Payouts
-------------------------------------- ------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted Securities
Name and Annual Stock Underlying LTIP All Other
Principal compen- Award(s) Options/ Payouts Compen-
Position Year Salary($) Bonus($) sation($) ($) SARs(#) ($) sation($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dennis L. Yakobson 1997 $112,184 --- --- --- 462,400 --- ---
Chief Executive 1996 60,937(1) --- --- --- --- --- ---
Officer 1995 102,486 --- --- --- 79,382 --- ---
Ronald C. Butz 1997 $108,296 --- --- --- 450,880 --- ---
Chief Operating 1996 58,825(1) --- --- --- --- --- ---
Officer 1995 98,934 --- --- --- 79,382 --- ---
Charles B. Benham 1997 $108,296 --- --- --- 450,880 --- ---
Vice President - 1996 58,825(1) --- --- --- --- --- ---
Research & 1995 98,934 --- --- --- 79,382 --- ---
Development
James P. Samuels 1997 $ 94,731 --- --- --- 579,500 --- ---
Chief Financial 1996 24,500 --- --- --- ------- --- ---
Officer
- --------------------
<FN>
<F1> For 1996, the period consisted of the nine months ended September 30, 1996.
</FN>
</TABLE>
<PAGE>
PAGE 32
Option/SAR Exercises and Holdings
The following table sets forth information with respect to the named
executives, concerning the exercise of options and/or limited SARs during
the last fiscal year and unexercised options and limited SARs held as of
the end of the fiscal period for the nine months ended September 30,
1996.
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values:
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired at FY-End(#) at FY-End($)
on Value Exercisable/ Exercisable/
Name Exercise(#) Realized ($) Unexercisable Unexercisable
-------------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Dennis L. Yakobson --- --- 462,400(1) $622,525
Ronald C. Butz --- --- 450,880(1) 606,685
Charles C. Benham --- --- 450,880(1) 606,685
James P. Samuels --- --- 530,000(1) 703,250
<FN>
<F1> Exercisable.
</FN>
</TABLE>
Employment Contracts
The Company employs Messrs. Yakobson, Benham, Butz and Samuels
pursuant to employment contracts that extend through March 31, 1998,
except through December 31, 1999 as to Mr. Samuels. The contracts
provide for annual cost of living adjustments only.
The contracts provide that the individuals will serve as president
and chief executive officer, vice president and chief operating officer,
vice president - research and development, and vice president - finance
and chief financial officer, respectively, together with such duties,
responsibilities and powers as the board of directors may reasonably
specify. If the Company terminates employment early without cause, the
contracts provide for severance pay for the remainder of the term or one
year, which ever is more. The contracts impose obligations of
confidentiality as well as covenants not to compete with the Company for
three years following termination of employment for any reason whatsoever.
<PAGE>
PAGE 33
Option/SAR Repricings
There have been no adjustments or amendments to the exercise price of
stock options or SARs previously awarded to any of the named executive
officers, whether through amendment, cancellation or replacement grants or
any other means during the last fiscal year.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------
(a) (b) (c) (d) (e)
Number of % of Total Market
Securities Options/SARs Price on
Underlying Granted to Exercise or Date of Expira-
Options/SARs Employees in Base Price Grant tion
Name Granted(#) Fiscal Year ($/Sh) ($/Sh) Date
<S> <C> <C> <C> <C> <C>
Dennis L. Yakobson 30,000 7.9% $.1875 $.1875 12/03/01
20,000 14.1% .25 .25 03/06/02
332,400 21.1% .125 .125 05/13/00
10,000 6.7% .25 .25 07/07/02
70,000 16.3% .30 .30 09/10/02
Ronald C. Butz 30,000 7.9% .1875 .1875 12/03/01
20,000 14.1% .25 .25 03/06/02
320,880 20.5% .125 .125 05/13/00
10,000 6.7% .25 .25 07/07/02
70,000 16.3% .30 .30 09/10/02
Charles B. Benham 30,000 7.9% .1875 .1875 12/03/01
20,000 14.1% .25 .25 03/06/02
320,880 20.5% .125 .125 05/13/00
10,000 6.7% .25 .25 07/07/02
70,000 16.3% .30 .30 09/10/02
James P. Samuels 200,000 52.6% .1875 .1875 12/03/01
10,000 7.0% .25 .25 03/06/02
250,000 15.9% .125 .125 05/13/00
10,000 6.7% .25 .25 07/07/02
60,000 14.0% .30 .30 09/10/02
</TABLE>
Profit Sharing Plan
The Company has adopted a profit-sharing plan for the benefit of all
employees. The plan will be administered by a committee appointed by the
board of directors. Awards by the committee to its members will be
subject to approval by the disinterested members of the board of
directors. Awards are discretionary and may not aggregate an amount in
excess of 5% of audited pre-tax earnings before depreciation, amortization
and extraordinary income for the preceding fiscal year. However, bonuses
are payable only if such pre-tax earnings exceed $500,000 for the year.
<PAGE>
PAGE 34
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following tables set forth certain information as of October 31,
1997 with respect to each person who owns of record or is known to the
Company to beneficially own more than 5% of the issued and outstanding
shares of Common Stock and the beneficial ownership of such securities by
each executive officer, director and director nominee and by all executive
officers and directors as a group:
<TABLE>
<CAPTION>
Percent
of Class
Amount and Nature of Based on
Positions and Beneficial Common Beneficial
Name and Address Offices Held Stock Ownership Ownership
- ----------------- ------------------ -------------------- ---------
<S> <C> <C> <C>
Charles B. Benham Vice President - Research 275,440 of record 2.6%
12878 W. 68th Avenue and Development (488,380 indirectly)(1)
Arvada, CO 80004
Mark S. Bohn Director 443,431 of record 2.5%
1614 Tamarac Drive (289,592 indirectly)(1)
Golden, CO 80401
Ronald C. Butz Vice President, Chief 533,583 of record(2) 3.5%
711 Marion Street Operating Officer, Secretary (488,380 indirectly)(1)
Denver, CO 80218 and Director
Frank L. Livingston Vice President and Manager, 40,000 of record *
6000 W. 13th Avenue Okon, Inc. (30,000 indirectly)(1)
Lakewood, CO 80214
James P. Samuels Vice President - Finance, 127,500 of record 2.4%
1331 17th St., Suite 720 Chief Financial Officer (579,500 indirectly(1)(3)
Denver, CO 80202
Erich W. Tiepel Director 123,277 of record 1.3%
2494 Houston Waring Cir. (272,448 indirectly)(1)
Littleton, CO 80120
Dennis L. Yakobson President, Chief Executive 404,354 of record 3.1%
8847 Norwich Street Officer and Director (499,900 indirectly)
Westminster, CO 80030
Mary H. Butz Shareholder 369,432 of record 3.5%
711 Marion Street (642,531 indirectly)(4)
Denver, CO 80218
All Directors and Executive Officers and Directors 1,947,585 of record(2) 15.4%
Officers and a Group (2,648,200 indirectly) (6.6% of record)
(7 persons)
<FN>
<F1> Includes shares of common stock underlying presently exercisable stock
options.
<F2> Includes 369,432 shares of common stock held of record by his spouse as to which shares he denies beneficial
ownership.
<F3> Includes shares of common stock underlying presently exercisable stock options and promissory note
convertible into common stock.
<F4> Includes 164,151 shares of common stock owned of record by her spouse
and 488,380 shares subject to option to purchase by her spouse as to
which shares she denies beneficial ownership.
</FN>
</TABLE>
<PAGE>
PAGE 35
Item 12. Certain Relationships and Related Transactions
Erich W. Tiepel, a director, owns 50 percent of Resource Technologies
Group, Inc. The Company contracted with Resource Technologies Group to
conduct an environmental audit for $3,745, which was discharged during the
9-month period ended September 30, 1996 through issuance of 18,724 in
restricted shares of the Company's common stock and a warrant expiring
September 20, 1997 to purchase the same number of shares of common stock
at $.25 per share. There were no payments in the fiscal year ended
September 30, 1997.
Mark S. Bohn, a director, performed engineering consulting services
for the Company during the nine months ended September 30, 1996 and, lieu
of cash payment, was issued 91,046 shares of restricted stock and warrants
expiring September 20, 1997 for the purchase of $.25 per share of the same
number shares of Common Stock as he was issued in lieu of salary. There
were no payments during the fiscal year ended September 30, 1997.
During the nine months ended September 30, 1996 certain sums that the
Company owed its officers for salaries were discharged by the issuance of
the Company's unregistered common stock issued at $.20 per share. The
number of such shares issued were 160,440 to Charles B. Benham, 91,046 to
Mark S. Bohn, 160,440 to Ronald C. Butz and 166,200 to Dennis L. Yakobson,
respectively. Each of them were also issued warrants expiring September
20, 1997 for the purchase at $.25 per share of the same number of shares
of common stock as they were issued in lieu of salary.
On August 18, 1997, James P. Samuels was one of four individuals who
loaned the Company $390,000 to pay all remaining obligations on the
preferred stock. Mr. Samuels' loan was $90,000. It is evidenced by a
promissory note due February 15, 1998. All notes bear interest at 20% per
annum. If the notes are not paid at the time the principal amount
and accumulated interest are due, then interest will be paid on the total
amount due at an annual rate of 24%. Additionally options to purchase
55,000 shares of common stock at the then-market price of $.25 per share
were granted for each $100,000 of the loan.
Item 13. Exhibits and Reports on Form 8-K
(a) The following financial statements are filed as a part of this
report:
Financial Statements:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Consolidated Summary of Accounting Policies
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed with the Commission
during the quarter ended September 30, 1997.
Form 8-K dated October 1, 1997; Item 5, Other Events.
<PAGE>
PAGE 36
Signatures
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RENTECH, INC.
(signature)
------------------------------------
Date: December 29, 1997 Dennis L. Yakobson, President
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
(signature)
------------------------------------
Date: December 29, 1997 Dennis L. Yakobson, President, Chief
Executive Officer and Director
(signature)
------------------------------------
Date: December 29, 1997 Ronald C. Butz, Chief Operating Officer,
Vice President, Secretary and Director
(signature)
------------------------------------
Date: December 29, 1997 James P. Samuels, Vice President
- Finance, Chief Financial Officer
(signature)
------------------------------------
Date: December 29, 1997 Mark S. Bohn, Director
(signature)
------------------------------------
Date: December 29, 1997 Erich W. Tiepel, Director
<PAGE>
PAGE 37
The following exhibits are filed with this Form 10-KSB or
incorporated herein by the following references:
<TABLE>
<CAPTION>
Exhibit Index
Exhibit Sequential
Number Description Page No.
<S> <C> <C>
EX-3.(i).1 Restated and Amended Articles of Incorporation,
dated January 4, 1991 (incorporated herein by
reference from the exhibits to Amendment No. 2 to
Registrant's Form S-18 Registration Statement
No. 33-37150-D filed with the Securities and
Exchange Commission on or about January 18, 1991).
EX-3.(i).2 Articles of Amendment dated April 5, 1991 to the
Restated and Amended Articles of Incorporation
(incorporated herein by reference from the exhibits
to Registrant's Current Report on Form 8-K dated
August 10, 1993 filed with the Securities and
Exchange Commission).
EX-3(ii) Bylaws as amended, (incorporated herein by reference
from the exhibits to Registrant's Form S-18
Registration Statement No. 33-37150-D filed with
the Securities and Exchange Commission on or about
January 18, 1991).
EX-4.1 Form of Placement Agent Warrant 67
EX-4.2 Form of 10% Convertible Subordinated Promissory Note 77
EX-4.3 Form of Registration Rights Agreement 85
EX-10.1 Profit Sharing Plan (incorporated herein by
reference from the exhibits to Registrant's
Form S-18 Registration Statement No. 33-37150-D
filed with the Securities and Exchange Commission
on or about October 30, 1990).
EX-10.2 1990 Stock Option Plan (incorporated hereby by
reference from the exhibits to the Company's
Registration Statement No. 33-37150-D filed with
the Securities and Exchange Commission on Form
S-18 dated April 12, 1992).
EX-10.3 1994 Stock Option Plan (incorporated herein by
reference from the exhibits to Post-Effective
Amendment No. 5 to Registrant's Form S-18 on
Form SB-2 Registration Statement No. 33-37150-D
filed with the Securities and Exchange
Commission on or about September 19, 1994).
EX-10.4 1996 Stock Option Plan (incorporated herein by
reference from the exhibits to Registrant's
Current Report on Form 8-K dated December 18,
1996 filed with the Securities and Exchange
Commission).
<PAGE>
PAGE 38
EX-10.5 Employment contracts with Charles B. Benham,
Dennis L. Yakobson and Ronald C. Butz dated
November 14, 1994 (incorporated herein by
reference from the exhibits to Registrant's
Current Report on Form 8-K dated November 14,
1994 filed with the Securities and Exchange
Commission).
EX-10.6 Articles of Organization of ITN Electronic
Substrates LLC dated August 4, 1997 (incorporated
by reference from Exhibit No. 10.6 to Registrant's
Form 10-KSB/A Amendment No. One filed with the
Securities and Exchange Commission on October 31,
1997).
EX-10.7 License Agreement to Esquire Gujarat Petrochemicals
Ltd. dated Jun. 25, 1994 (incorporated by reference
from Exhibit No. 10-7 to Registrant's Form 10-KSB/A
Amendment No. One filed with the Securities and
Exchange Commission on October 31, 1997).
EX-23.1 Consent of BDO Seidman, LLP
EX-27 Financial Data Schedule
EX-99.1 Letter of Intent between Rentech, Inc. and ITN
Energy Systems, Inc. dated October 17, 1996
(incorporated herein by reference from the
exhibits to Registrant's Current Report on
Form 8-K/A dated November 7, 1996 filed with
the Securities and Exchange Commission).
</TABLE>
<PAGE>
PAGE 39
Report of Independent Certified Public Accountants
Stockholders and Board of Directors
Rentech, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Rentech,
Inc. and Subsidiary (the "Company") as of September 30, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended September 30, 1997 and for the nine months
ended September 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 financial position of the
Company and its subsidiary as of September 30, 1997 and 1996 and the results
of their operations and their cash flows for the year ended September 30,
1997 and for the nine months ended September 30, 1996, 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 1 to the consolidated financial statements, the Company has a working
capital deficit and has suffered recurring losses from operations that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 1.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
BDO Seidman, L.L.P.
November 26, 1997
Denver, Colorado
<PAGE>
PAGE 40
Rentech, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1997 1996
----------- -----------
<S> <C> <C>
Assets (Note 6)
Current:
Cash $ 391,487 $ 210,486
Restricted cash (Note 8) - 25,000
Accounts receivable, net of
$2,000 allowance for doubtful accounts 150,911 -
Property tax receivable - 71,813
Stock subscription receivable - 50,000
Inventories 107,151 -
Prepaid expenses and other current assets 52,688 23,511
----------- -----------
Total current assets 702,237 380,810
----------- -----------
Property and equipment -
Property and equipment, net of
accumulated depreciation and amorti-
zation of $126,774 and $94,620 (Note 4) 172,863 57,156
----------- -----------
Other:
Licensed technology, net of accumulated
amortization of $944,208 and $715,464
(Note 5) 2,486,940 2,715,684
Goodwill, net of accumulated
amortization of $43,685 (Note 2) 1,166,030 -
Synhytech plant held for sale (Note 5) 99,500 99,500
Accounts receivable, net of $0 allowance
for doubtful accounts 191,206 191,206
Deposits and other 38,428 14,527
----------- ---------
Total other assets 3,982,104 3,020,917
----------- -----------
$ 4,857,204 $ 3,458,883
----------- -----------
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
<PAGE>
PAGE 41
Rentech, Inc. and Subsidiary
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
September 30, 1997 1996
------------ -----------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 130,201 53,948
Accrued liabilities 122,166 68,759
Convertible notes payable (Note 6) 560,500 -
Current portion of long-term debt (Note 6) 475,000 -
Note payable, related party (Note 6) 90,000 -
------------ -----------
Total current liabilities 1,377,867 122,707
------------ -----------
Long-term debt, net of current portion (Note 6) 125,000 -
------------ -----------
Total liabilities 1,502,867 122,707
------------ -----------
Commitments (Note 8)
Stockholders' equity (Note 7)
Preferred stock - $10 par value; 1,000,000
shares authorized; none issued and
outstanding - -
Common stock - $.01 par value; 100,000,000
shares authorized; 29,539,548 and
14,975,116 shares issued and outstanding 295,392 149,748
Additional paid-in capital 12,794,769 10,888,152
Accumulated deficit (9,735,824) (7,701,724)
------------ -----------
Total stockholders' equity 3,354,337 3,336,176
------------ -----------
$ 4,857,204 $ 3,458,883
------------ -----------
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
<PAGE>
PAGE 42
Rentech, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, September 30,
1997 1996
----------- ----------
<S> <C> <C>
Revenues:
Net sales $ 1,189,536 $ -
Contract revenues (Note 3) - 55,176
License fees - 240,000
----------- ----------
Total revenues 1,189,536 295,176
----------- ----------
Cost of revenues
Cost of sales 481,797 -
Cost of contracts - 29,463
----------- ----------
Total cost of revenues 481,797 29,463
----------- ----------
Gross profit 707,739 265,713
Operating expenses:
General and administrative expense 1,480,939 629,079
Depreciation and amortization 304,583 190,433
----------- ----------
Total operating expenses 1,785,522 819,512
----------- ----------
Loss from operations (1,077,783) (553,799)
Other income (expense):
Gain on sale of assets - 3,140
Write-down of Synhytech plant
held for sale (Note 5) - (100,000)
Other income - 71,813
Interest income 5,292 3,593
Interest expense (303,195) (17,659)
----------- ----------
Total other expense (297,903) (39,113)
----------- ----------
Loss before extraordinary item (1,375,686) (592,912)
Extraordinary gain from debt
extinguishment, net of $0 income
tax expense (Note 10) - 200,434
----------- ----------
Net loss (1,375,686) (392,478)
----------- ----------
Dividend requirements on
preferred stock (Note 7) 658,414 -
----------- ----------
Loss applicable to common stock $(2,034,100) $ (392,478)
----------- ----------
Loss per common share:
Loss before extraordinary item $ (.10) $(.06)
Extraordinary gain - .02
----------- ----------
Net loss $ (.10) $ (.04)
----------- ----------
Weighted-average number of
shares outstanding 19,603,265 10,401,922
----------- ----------
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
<PAGE>
PAGE 43
<TABLE>
Rentech, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
For the Year Ended September 30, 1997 and for the Nine Months Ended September 30, 1996
<CAPTION>
Series A
Preferred Stock Common Stock Additional
--------------------- --------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
-------- ----------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 - $ - 9,956,868 99,567 $ 9,994,002 $(7,309,246)
Common stock issued for
conversion of notes
payable net of
offering costs - - 3,993,426 39,934 653,990 -
Common stock issued for
cash - - 100,000 1,000 49,000 -
Common stock issued for
services - - 813,681 8,137 158,988 -
Common stock issued for
settlement of accounts
payable - - 111,141 1,110 32,172 -
Net loss - - - - - (392,478)
-------- ---------- ---------- -------- ----------- -----------
Balances, September 30, 1996 - - 14,975,116 149,748 10,888,152 (7,701,724)
Common stock issued for
cash, net of offering
cost of $24,000 - - 2,479,000 24,790 225,160 -
Common stock issued for
cash on warrants
exercised net of
offering costs
of $7,500 - - 8,833,986 88,340 1,040,609 -
Common stock issued for
interest expense on
convertible notes
payable - - 560,500 5,605 165,040 -
Preferred stock issued
for cash, net of
offering costs
of $250,989 150,000 1,500,000 - - (250,989) -
Common stock issued
for conversion of
preferred stock (37,250) (372,500) 2,690,946 26,909 505,233 (159,642)
Preferred convertible
stock redeemed for cash (112,750) (1,127,500) - - - -
Stock warrants issued for
dividends on preferred
stock - - - - 151,588 (151,588)
Stock options issued for:
Interest expense - - - - 24,948 -
Services - - - - 45,028 -
Dividend paid on preferred
stock redeemed for cash - - - - - (347,184)
Net loss - - - - - (1,375,686)
------- ---------- ---------- -------- ----------- -----------
Balances, September 30, 1997 - $ - 29,539,548 $295,392 $12,794,769 $(9,735,824)
------- ---------- ---------- -------- ----------- -----------
See accompanying report of independent certified public accountants, summary of accounting policies and
notes to consolidated financial statements.
</TABLE>
<PAGE>
PAGE 44
Rentech, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, September 30,
1997 1996
----------- ---------
<S> <C> <C>
Operating activities:
Net loss $(1,375,686) $(392,478)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 32,154 18,876
Amortization 272,429 171,557
Interest expense 274,539 -
Write-down of Synhytech plant held for sale - 100,000
Gain on sale of assets - (3,140)
Stock issued for services - 152,125
Stock options issued for services 45,028 -
Changes in operating assets and liabilities,
net of business combination:
Accounts receivable (150,911) 38,613
Property tax receivable 71,813 (71,813)
Inventories (23,173) -
Prepaid expenses and other current assets (29,177) (4,239)
Accounts payable 76,253 (533,025)
Accrued liabilities 53,407 30,290
----------- ----------
Net cash used in operating activities (753,324) (493,234)
----------- ----------
Investing activities:
Proceeds from sale of assets $ - $ 3,140
Purchase of property and equipment (65,815) -
Purchase of business (1,075,739) -
Decrease in restricted cash 25,000 -
Increase in other assets (23,901) 2,433
----------- ----------
Net cash provided by (used in)
investing activities (1,140,455) 5,573
----------- ----------
Financing activities:
Proceeds from issuance of common stock,
net of offering costs 1,378,899 50,000
Proceeds from issuance of preferred stock 1,249,011 -
Proceeds from stock subscription receivable 50,000 -
Proceeds from non-subordinated notes payable - 798,750
Payment for offering costs - (104,761)
Cash redemption of and dividends paid
on preferred stock (1,474,684) -
Proceeds from notes payable 300,000 -
Proceeds from note payable, related party 90,000 -
Proceeds from convertible note payable 560,500 -
Payment for debt issue costs (78,946) -
Payments on note payable - (61,750)
----------- ---------
Net cash provided by financing activities 2,074,780 682,239
----------- ---------
Increase in cash 181,001 194,578
Cash, beginning of period 210,486 15,908
----------- ----------
Cash, end of period $ 391,487 $ 210,486
----------- ----------
</TABLE>
See accompanying report of independent certified public accountants,
summary of accounting policies and notes to consolidated financial
statements.
<PAGE>
PAGE 45
Rentech, Inc. and Subsidiary
Summary of Accounting Policies
Basis of Presentation
Rentech, Inc. (the "Company") was incorporated on December 18, 1981 in the
state of Colorado to develop and market processes for conversion of low-value,
carbon-bearing solids or gases into valuable liquid hydrocarbons,
including high-grade diesel fuel, napthas and waxes ("Rentech Technology").
The Company's activities prior to 1994 were primarily directed toward
obtaining financing, licensing its technology to third parties and
completing full-scale plant processing to demonstrate the Company's
technology to prospective licensees. During 1994, the Company entered into
contracts to provide basic engineering design relating to the construction
of plants using the Company's gas conversion technology (see Note 3). In
December 1996, the Company elected to change its year end to September 30.
In March 1997 with the acquisition of Okon, Inc. ("Okon") (see Note 2), the
Company entered into the business of manufacturing and selling water-based
stains, sealers and coatings.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary as of September 30, 1997 and
for the period from March 20, 1997, date of acquisition of Okon, to
September 30, 1997 (see Note 2). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers highly liquid debt instruments purchased with
original maturities of three months or less and money market accounts to be
cash equivalents.
Inventories
Inventories, which consist of water protection sealants, chemicals and
packaging supplies, are recorded at the lower of cost (first-in, first-out)
or market.
Licensed Technology
Licensed technology represents costs incurred by the Company primarily for
the purpose of demonstrating the Company's proprietary technology to
prospective licensees, which it licenses to third parties under various fee
arrangements. These capitalized costs are carried at the lower of
amortized cost or net realizable value and are being amortized over 15
years.
<PAGE>
PAGE 46
Rentech, Inc. and Subsidiary
Summary of Accounting Policies (continued)
Goodwill
Goodwill, which relates to the acquisition at Note 2, is being amortized
over a 15 year period using the straight-line method.
Synhytech Plant Held for Sale
The Synhytech plant held for sale is recorded at the lower of cost or net
realizable value.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization
expense are computed using the straight-line method over the estimated
useful lives of the assets, which range from three to seven years, except
for leasehold improvements which are amortized over the shorter of the
useful life or the remaining lease term. Maintenance and repairs are
expensed as incurred. Major renewals and improvements are capitalized.
When property and equipment is retired or otherwise disposed of, the asset
and accumulated depreciation or amortization are removed from the accounts
and the resulting profit or loss is reflected in operations.
Long-Lived Assets
Long-lived assets, identifiable intangibles, and associated goodwill are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the expected
future cash flow from the use of the assets and its eventual disposition is
less than the carrying amount of the assets, an impairment loss is
recognized and measured using the asset's fair value.
Revenue Recognition
The Company reports its contract revenue on fixed-priced contracts using
the percentage-of-completion method of accounting measured by the
percentage of job costs incurred to date to the latest estimated cost to
complete for each project. Job costs incurred prior to the Company's
entering into a contract are expensed as incurred and excluded from the
percentage-of-completion calculation.
Contract costs include all direct material, labor, travel and other costs
directly related to contracts and indirect costs. Indirect costs include
all other costs indirectly related to contract completion such as indirect
labor, supplies, tools and equipment rental.
Changes in job performance, job conditions, and estimated final
profitability, including final contract settlements that may result in
revisions to costs and earnings are recognized in the period in which the
revisions are determined.
<PAGE>
PAGE 47
Rentech, Inc. and Subsidiary
Summary of Accounting Policies (continued)
License fees are recognized when the revenue earning activities that are to
be provided by the Company have been performed and no future obligation to
perform services exist.
Sales of water-based stains sealers and coatings are recognized when the
goods are shipped to the customers.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"). Temporary differences are
differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in taxable or
deductible amounts in future years.
Net Loss Per Common Share
The net loss per share of common stock is determined using the
weighted-average number of shares outstanding during the period. Options for
common stock and warrants are not considered in the computation of net loss
per share as their inclusion would be antidilutive.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements
in order for them to conform to the 1997 presentation. Such
reclassifications have no impact on the Company's financial position or
results of operation.
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consists primarily of cash and accounts receivable.
The Company's cash is in demand deposit accounts placed with federally
insured financial institutions. Such deposit accounts at times may exceed
federally insured limits. The Company has not experienced any losses on
such accounts.
Concentrations of credit risk with respect to accounts receivable are
higher due to a few customers dispersed across geographic areas. The
Company reviews a customer's credit history before extending credit and
establishes an allowance for doubtful accounts based upon the credit risk
of specific customers, historical trends and other information. Generally,
the Company does not require collateral from its customers.
<PAGE>
PAGE 48
Rentech, Inc. and Subsidiary
Summary of Accounting Policies (continued)
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, the
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.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Accounts Receivable, Accounts Payable and Accrued Liabilities
Fair values of accounts receivables, accounts payable, and accrued
liabilities are assumed to approximate carrying values for these financial
instruments since they are short term in nature and their carrying amounts
approximate fair value or they are receivable or payable on demand.
Convertible Notes Payable, Notes Payable and Long-Term Debt
Substantially all of these notes bear interest at a floating rate of
interest based upon current lending rates of interest.
Stock Option Plan
The Company applied APB Opinion 25, "Accounting for Stock Issued to
Employees", and the related Interpretation in accounting for all stock
option plans. Under APB Opinion 25, no compensation cost has been
recognized for stock options issued to employees as the exercise price of
the Company's stock options granted equals or exceeds the market price of
the underlying common stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
Company to provide pro forma information regarding net income as if
compensation cost for the Company's stock options plans had been determined
in accordance with the fair value based method prescribed in SFAS No. 123.
To provide the required pro forma information, the Company estimates the
fair value of each stock option at the grant date by using the Black-Scholes
option-pricing model.
<PAGE>
PAGE 49
Rentech, Inc. and Subsidiary
Summary of Accounting Policies (continued)
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128")
and Statement of Financial Accounting Standards No. 129 "Disclosure of
Information About an Entity's Capital Structure ("SFAS 129"). SFAS 128
provides a different method of calculating earnings per share than is
currently used in accordance with Accounting Board Opinion ("ABP") No. 15,
"Earnings Per Share." SFAS 128 provides for the calculation of "Basic" and
"Diluted" earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution
of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. SFAS 129 establishes standards for
disclosing information about an entity's capital structure. SFAS 128 and
SFAS 129 are effective for financial statements issued for periods ending
after December 15, 1997. Their implementation is not expected to have a
material effect on the consolidated financial statements.
In June 1997, FASB issued Statement of Financial Accounting Standard No.
130 "Reporting Comprehensive Income ("SFAS 130") and Statement of Financial
Accounting Standard No. 131 "Disclosures about Segments of an Enterprise
and Related Information ("SFAS" 131"). SFAS 130 establishes standard for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires that
all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that displays with the same prominence as other financial
statements. SFAS 131 supersedes Statement of Financial Accounting Standard
No. 14 "Financial Reporting for Segments of a Business Enterprise." SFAS
131 establishes standards of the way the public companies report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic areas
and major customers. SFAS 131 defines operating segments as components of
a company about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance.
SFAS 130 and SFAS 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on future financial statement disclosures. Results
of operations and financial position, however, will be unaffected by the
implementation of these standards.
<PAGE>
PAGE 50
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Going Concern
The Company has a working capital deficit of $675,630 as of September 30,
1997 and has incurred losses since its inception that raise substantial
doubt about its ability to continue as a going concern. In order to
provide operating income, the Company plans to diversify into other fields.
In October 1996, the Company and ITN Energy Systems, Inc., a Colorado
corporation, agreed to form a limited liability company called ITN/ES LLC
to commercially exploit technologies developed and owned by ITN Energy
Systems, Inc. The technologies will be contributed to ITN/ES LLC by ITN
Energy Systems, Inc., which will be the manager of ITN/ES LLC. The
technologies and products to be owned by ITN/ES LLC include production of
thin-film electronic substrates by deposition upon which computer chips can
be mounted; advanced processes for ceramic deposition on materials to
improve their capacity to withstand heat and wear; and utilization of shape
memory alloys that are highly advanced metals which by the proper
application of heat, cold or electrical impulse can perform a mechanical
function with precision for long periods of time. The Company's ownership
interest in ITN/ES LLC and all of its technologies is to be 10%, subject to
the contribution of $200,000 in cash and 1,200,000 shares of Rentech
restricted common stock. The agreement between ITN Energy Systems, Inc. and
the Company recognizes that commercialization of the technologies already
in existence as well as those that may be developed in the future by ITN/ES
LLC may require establishment of additional business entities. The
Company, by mutual agreement, may provide additional capital to increase
its ownership interest up and exceeding 50% of each technology in which it
invests. The Company will be entitled to distribution of revenues from
ITN/ES LLC and the additional business entities in a percentage equal to
its ownership interest.
The Company is seeking sources of finance to provide for additional
acquisitions and near term working capital. The financing alternatives
include private placements of its common stock or other equity interest in
the Company, third-party loans and equity participation, or a combination
of these methods. The Company intends to exercise its right to convert
convertible notes payable totaling $620,500 issued in September and October
1997 into common shares at $.33 per share (see Notes 6 and 14).
Additionally, the Company has commitments from investment banking firms to
raise funds for the purpose of eliminating all existing current and future
debt as well as providing working capital for the start-up of the ITN/ES
venture and the ITN/ES LLC. A portion of the money raised will be used to
further the Rentech Technology commercialization. The Company believes
this is sufficient to eliminate any future working capital requirements.
There are no assurances that any of these events will occur or that the
Company's plan will be successful. The accompanying financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
<PAGE>
PAGE 51
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
2. Business Acquisition
On March 20, 1997, the Company acquired the assets of Okon for $1,050,000
in cash, a $300,000 note due to the seller and $25,739 in acquisition
costs. The acquisition was recorded using the purchase method of
accounting, by which the assets are valued at fair market value at the date
of acquisition. The operating results of this acquisition have been
included in the accompanying consolidated financial statements from the
date of acquisition. The allocation of the purchase price was as follows:
Inventories $ 83,977
Property and equipment 82,047
Goodwill 1,209,715
------------
Total purchase price $ 1,375,739
------------
The following unaudited pro forma information presents the consolidated
results of operations of the Company as if the acquisition of Okon had
occurred at the beginning of each period presented. The unaudited pro
forma financial data does not purport to be indicative of the results which
actually would have been obtained had the purchase been effected on the
dates indicated or of the results which may be obtained in the future.
<TABLE>
<CAPTION>
For the Year For the Nine
Ended Months Ended
September 30, September 30,
1997 1996
---------- ----------
<S> <C> <C>
Revenues $ 1,768,709 $1,585,556
Operating expenses 2,877,575 2,016,833
Other expense 295,190 64,190
----------- ----------
Net loss from continuing operations (1,404,056) (495,467)
Dividend requirements on
preferred stock(1) 760,743 384,639
----------- ----------
Loss applicable to
common stockholders $(2,164,799) $ (880,106)
----------- ----------
Net loss per common share from
continuing operations $ (0.11) $ (0.08)
=========== ==========
<FN>
<F1> The Company used the proceeds from the preferred stock offering to
acquire Okon. Therefore, the Company has recorded dividends on the
preferred stock assuming that the preferred stock was outstanding at the
beginning of each period presented.
</FN>
</TABLE>
<PAGE>
PAGE 52
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
3. Contracts
During June 1994, the Company entered into a contract with a company
incorporated in India to provide basic engineering design and consulting
related to a plant to be constructed in India to use the Company's
technology. The work was completed during March 1995. During February
1996, the Company and Jamike Engineering Pty Ltd, entered into a second
contract with the company incorporated in India to provide additional
engineering design and consulting relating to a plant to be constructed in
India to use the Company's technology for a gross contract price of
approximately $223,000 ($281,600 in Australian dollars). For the nine
months ended September 30, 1996, the Company completed the contract and
recognized contract revenue of $55,176 and incurred direct costs of
$29,463.
4. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
September 30, 1997 1996
------------- --------- --------
<S> <C> <C>
Machinery and equipment $ 143,753 $109,753
Office furniture and
equipment 122,660 42,023
Leasehold improvements 33,224 -
--------- --------
299,637 151,776
Less accumulated
depreciation and
amortization 126,774 94,620
--------- --------
$ 172,863 $ 57,156
========= ========
</TABLE>
5. Synhytech Project and Licensed Technology
During 1992, Fuel Resources Development Company ("Fuelco"), a subsidiary of
Public Service Company of Colorado ("PSCo"), completed construction of a
full-scale conversion plant near Pueblo, Colorado. The facility, called
the Synhytech Project, cost approximately $25 million to construct,
maintain and operate. The purpose of the Synhytech Project was to build a
plant that would use the Rentech Technology to convert landfill gas into
liquid hydrocarbons.
<PAGE>
PAGE 53
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The Company had an option to purchase and own up to a 15 percent interest
in the Synhytech plant but, during 1991, the Company decided not to
exercise its option to acquire the 15 percent interest in the Synhytech
plant.
In April 1993, the Company and PSCo reached agreement on terms for transfer
of the Synhytech plant to the Company, together with the separate catalyst
manufacturing assets that Fuelco had assembled, and the related machinery
and equipment. The primary motivation for PSCo to enter into the transfer
agreement was the Company's agreement to release all its claims that PSCo
and Fuelco had failed to perform under its license agreement with the
Company to construct a commercial sized plant that could be operated on a
continuous basis.
In exchange for the resolution of all such claims, PSCo, Fuelco and
Synhytech, Inc. had agreed, among other things, to transfer the Synhytech
plant, catalyst plant, related equipment, other related assets and $650,000
to the Company. The Company also assumed equipment sublease obligations
for various computer equipment, vehicles and other equipment used with the
Synhytech plant. In addition, the Asset Transfer Agreement provided that
Fuelco's 20 percent interest in the Company's future revenue from royalties
and licenses fees from future Rentech process plants reverted back to the
Company.
As a result of the transfer of assets, the Company recorded a gain of
approximately $1,286,000 on the conveyance of the Synhytech assets from
Fuelco to the Company. The gain was based upon the fair market value of
determinable assets conveyed to the Company, including $650,000 in cash,
less acquisition costs of approximately $205,000. With the technological
feasibility having been previously established, the Company converted and
operated the plant for a three-week period in order to provide prospective
licensees with verifiable statistics and evidence as well as allow
observations and provide data on the use of the technology under operating
conditions in full-size plant (the "demonstration run") and to evaluate the
plant and its components for resale to one or more prospective licensees.
The Company's conversion of the plant commenced during early 1993, and its
demonstration run was successfully completed during the summer of 1993.
There were no problems relating to or in determining the technological
feasibility of the Company's proprietary technology. The cost of the
demonstration run was approximately $3.4 million. The Company expects to
recover the capitalized expenditures from future license and royalty fees.
The plant was then shut down and remained idle. The Company decided to
sell the plant as a whole, except for the buildings, to its Indian licensee
who dismantled the plant and shipped it to India to be used in a new plant
under design for use of the Rentech Technology. During 1995, the Company
sold the plant for $223,620 and recorded a $244,880 loss from the sale. As
of September 30, 1997 and September 30, 1996, the Company has recorded a
balance remaining of $99,500 in the Synhytech plant, which consists of the
remaining buildings. During the nine months ended September 30, 1996, the
Company recorded a $100,000 write-down in the Synhytech plant held for
sale.
<PAGE>
PAGE 54
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
6. Long-Term Debt
During September 1997, the Company issued, for cash, convertible notes
payable in the amount of $520,500 as part of a private offering through
Neidiger/Tucker/Bruner, Inc. that closed in October 1997 (see Note 14).
During September 1997, the Company issued an additional convertible notes
payable for $40,000. Net proceeds from the private offering after paying
commissions and offering costs were $481,554. The convertible notes
payable bear interest at 10% with interest payable at maturity. The
Company is to file a registration statement to register the shares of
common stock acquired upon conversion of the convertible notes payable. If
the registration statement is not declared effective by the Securities and
Exchange Commission within 90 days of the final closing, the interest rate
of the convertible notes payable will be adjusted retroactively to 14% per
annum. The convertible notes payable are not collateralized and are due
April 1998. For each $1 received from the private offering, the Company
issued one shares of its common stock. As of September 30, 1997, the
Company issued 560,500 of the Company's common stock valued at $170,645.
The Company recorded this amount as additional interest expense associated
with these convertible notes payable. The notes are convertible into
shares of the Company's common stock at $.33 per share until April 16,
1998. If not converted by the noteholders by then, and if the Company does
not pay the note in cash at that time, the noteholders may convert their
notes to common stock at 70% of the average closing bid price for the five
trading days prior to conversion not to exceed $.33 per share. The balance
in the convertible notes payable as of September 30, 1997 was $560,000.
On March 20, 1997, the Company entered into a $300,000 note payable with
the sellers of Okon (see Note 2). The $300,000 note payable accrues
interest at 10% with monthly interest only payments due through March 1998.
Commencing March 15, 1998, monthly principal and interest are due through
March 15, 1999. The note is collateralized by all assets of Okon.
During August 1997, the Company issued, for cash, notes payable in the
amount of $390,000. The notes bear interest at an annual interest rate of
20%. These notes are due and payable on December 15, 1997 unless extended
by the Company for an additional 60 days. If the notes are not paid at that
time the principal amount and accumulated interest are due and payable,
then interest will be paid on the total amount due at an annual rate of
24%. As additional compensation, the noteholders were granted stock options
to purchase 214,500 shares of the Company's common stock at a price equal
to the market value on the date of grant (see Note 7). The notes are
collateralized by an assignment of the common stock of the Company's wholly
owned subsidiary, Okon. An officer of the Company holds $90,000 of these
notes payable.
<PAGE>
PAGE 55
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Future maturities of the convertible notes payable, notes payable and
long-term debt are as follows:
Year Ending September 30,
1998 $1,125,500
1999 125,000
----------
$1,250,500
==========
7. Stockholders' Equity
Preferred Stock
During February 1997, the Company amended its articles of incorporation
authorizing the issuance of 150,000 shares of series A preferred stock.
The holders of the series A preferred stock are entitled to receive, when,
and if declared by the Board of Directors and out of funds legally
available for the payment of dividends, dividends at the annual dividend
rate of $1.50 per year on each outstanding share of preferred stock
commencing upon issuance. The dividends are payable quarterly in cash or
at the option of the Company in shares of its free-trading common stock on
the first day of April, July, October and January of each year commencing
July 1, 1997. The dividends shall accrue and become cumulative to the
extent not declared and paid by the Company.
The series A preferred stock are redeemable at the Company's election, in
whole or in part, in cash equal to $12.50 per share plus any accumulated
and unpaid dividends. The Series A preferred stock and any accumulated and
unpaid dividends are convertible at the option of the holder if not
redeemable by the Company into common stock of the Company at the lesser of
70% of the average of the closing bid price per share of the Company's
common stock for the five trading days preceding the date of conversion or
at 70% of the average of the closing bid price per share of the Company's
common stock for the five trading days preceding the date of the stock
subscription.
During March 1997, the Company completed the $1,500,000 sale of 150,000
shares of its series A preferred stock together with warrants to purchase,
at approximately $.28 per share, additional shares of the Company's common
stock. The Company received net proceeds of $1,249,011 after deducting
$250,989 in offering costs. During April and May 1997, the preferred
shareholders elected to convert $372,500 of their 37,250 shares plus
dividends of $159,642 from the discount associated with the conversion
feature of the series A preferred stock into 2,690,946 shares of the
Company's common stock. The remaining shares were redeemed prior to
September 30, 1997 at $12.50 per share plus accumulated dividends of
$65,309 for a total cost of $1,474,684. As required by the terms of the
preferred stock issue 3,423,456 warrants were issued upon the conversion
and redemption of the preferred stock.
<PAGE>
PAGE 56
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Common Stock
During fiscal 1997, the Company sold 2,479,000 shares of its common stock
for cash proceeds of $249,950 after deducting $24,000 in offering costs.
During fiscal 1997, the Company sold 8,833,986 shares of its common stock
upon exercise of 8,833,986 in stock warrants for cash proceeds of
$1,128,949 after deducting $7,500 in offering costs.
Stock Options and Stock Warrants
At September 30, 1997, the Company has four stock option plans, which are
described below.
The Company's board of directors adopted the 1990 Stock Option Plan which
allows for the issuance of incentive stock options, within the meaning of
the Internal Revenue Code, and other options issued pursuant to the plan
that constitute nonstatutory options. Options granted under the 1990 Stock
Option Plan are for shares of the Company's $0.01 par value common stock.
The Company has reserved 742,280 shares for the 1990 Stock Option Plan and
the 1988 Stock Option Plan which has been rolled into the 1990 plan.
During 1994, the Company's board of directors adopted the 1994 Stock Option
Plan which allows for the issuance of incentive stock options, within the
meaning of Internal Revenue Code Section 422. The Company has reserved
300,000 shares of the Company's $0.01 par value common stock for issuance
under the plan.
During 1996, the Company's board of directors adopted the 1996 Stock Option
Plan which allows the issuance of incentive stock options, within the
meaning of the Internal Revenue Code, and other options pursuant to the
plan that constitute nonstatutory options. The Company has reserved
500,000 shares of the Company's $0.01 par value common stock for issuance
under the plan.
During January 1997, options to purchase 250,000 of the Company's $.01 par
value common stock was granted at $.01 as partial compensation for
financial marketing and consulting services. These options expire on
January 29, 1999. An additional 150,000 options were granted at $.01 as
incentive stock options under the Company's 1996 Stock Option Plan. These
options expire on January 29, 1999. An additional 15,000 shares were
granted at $.25 which are exercisable through July 7, 2002 under the
Company's 1990 Stock Option Plan. The Company received services valued at
$24,000 in exchange for these 415,000 options.
In May 1997, options to purchase 100,000 of the Company's $.01 par value
common stock were granted as compensation for public relations consulting
services. These options were granted at $.30 which is in excess of the
common stock's market price at the date of grant. These options may be
exercised at $.30 through May 13, 1998.
On August 15, 1997, options to purchase 214,500 of the Company's $.01 par
value common stock were granted in partial consideration for $24,948 in
interest expense on the notes payable issued during August 1997 (See Note
6). The options may be exercised through August 14, 1999.
<PAGE>
PAGE 57
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
During fiscal 1997, warrants to purchase 3,423,456 shares were issued in
connection with a private offering of the Company's preferred stock. The
Company granted these warrants in partial consideration for $151,588 in
dividends on the preferred stock. The warrants can be exercised at various
prices from $.2686 to $.3564 and expire at various dates from March 7, 1999
to April 7, 1999.
During 1996, the Company issued 4,744,000 warrants to purchase common stock
of the Company at an exercise price of $.25 per share. During January,
February and March, 1997, 251,900 warrants were exercised at $.25 per
share. On May 14, 1997, each warrant holder of record was granted the right
to receive two shares of the Company's common stock for $.125 per share.
Prior to the expiration date of September 20, 1997, 8,582,086 of these
warrants were exercised. Also on May 14,1997, officers and directors, who
had received warrants under the original agreement for compensation due and
unpaid under consulting contracts or employment agreements, assigned their
rights to third parties. To avoid economically penalizing the officers and
directors and to provide the officers and directors with a proprietary
interest in and a greater concern for the interests of the Company's
shareholders, the Company granted 1,568,700 stock options to the officers
and directors at an exercise price of $.125 per share.
The following table summarizes information on stock option activity:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Exercise
Number of Price Price Expiration
Outstanding at Shares Per Share Per Share Dates
- -------------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C>
1990 Stock Option Plan
- ----------------------
January 1, 1996 742,280 $.5052-$3.60 $1.85 1996-1998
Granted - - - -
Expired (270,000) $3.60 $3.60 -
--------- ------------ ----- ---------
Outstanding at
September 30, 1996 472,280 $.5052-$1.88 $.84 1996-1998
Granted 625,000 $.1875-$.28 $.23 2002
Expired (356,292) $.5052 $.51 -
Outstanding at
September 30, 1997 740,988 $.1875-$1.88 $.50 1998-2002
========= ============ ===== ==========
1994 Stock Option Plan
- ----------------------
January 1, 1996 130,000 $1.27 $1.27 2000
Granted 150,000 $0.28 $.28 1997
Expired - - - -
--------- ------------ ----- ---------
<PAGE>
PAGE 58
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Weighted
Average
Exercise Exercise
Number of Price Price Expiration
Outstanding at Shares Per Share Per Share Dates
- -------------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Outstanding at
September 30, 1996 280,000 $.28-$1.27 $.74 1997-2000
Granted 192,000 $.1875-$.30 $.24 2001-2002
Expired and/or
forfeited 180,000 $.28-$1.27 $.45 -
--------- ------------ ----- ---------
Outstanding at
September 30, 1997 292,000 $.1875-$1.27 $.59 2000-2002
========= ============ ===== =========
1996 Stock Option Plan
- ----------------------
Outstanding at
September 30, 1996 - - - -
Granted 450,000 $.01-$.30 $.19 1999-2002
Expired - - - -
--------- ------------ ----- ---------
Outstanding at
September 30, 1997 450,000 $.01-$.30 $.19 1999-2002
========= ============ ===== =========
Other Stock Options
- -------------------
Outstanding at
September 30, 1996 - - - -
Granted 2,133,200 $.01-$.30 $.13 1998-2000
Expired - - - -
--------- ------------ ----- ---------
Outstanding at
September 30, 1997 2,133,200 $.01-$.30 $.13 1998-2000
========= ========= ===== =========
Total stock options
outstanding 3,616,188 $.01-$1.88 $.25 1998-2002
========= ============ ===== =========
<PAGE>
PAGE 59
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Weighted
Average
Exercise Exercise
Number of Price Price Expiration
Outstanding at Shares Per Share Per Share Dates
- -------------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Stock Warrants
- --------------
January 1, 1996 1,032,000 $3.50 $3.50 1997
Granted 9,236,100 $.125-$.25 $.13 1997
Expired - - - -
--------- ------------- ----- ---------
Outstanding at
September 30, 1996 10,268,100 $.125-$3.50 $.47 1997
Granted 3,423,456 $.2686-$.3564 $.29 1999
Exercised (8,833,986) $.125-$.25 $.13 -
Expired and/or
forfeited (1,434,114) $.125-$3.50 $2.55 -
--------- ------------- ----- ---------
Outstanding at
September 30, 1997 3,423,456 $.2686-$.3564 $.29 1999
========= ============= ===== =========
</TABLE>
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees", and related Interpretations accounting for the plans. Under
APB Opinion 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of
grant, no compensation cost is recognized.
FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"), requires the Company to provide pro forma information regarding net
loss and net loss per share as if compensation costs for the Company's
stock option plans and other stock awards had been determined in accordance
with the fair value based method prescribed in SFAS No. 123. The Company
estimates the fair value of each stock award at the grant date by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: dividend yield
of 0 percent for all years; expected volatility of 15 to 32 percent;
risk-free interest rates of 5.40 and 5.52 percent; and expected lives of one
and five years for the Plans and stock awards.
Under the accounting provisions for SFAS No. 123, the Company's net loss
and net loss per share would have been increased by the pro forma amounts
indicated below:
<PAGE>
PAGE 60
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Periods Ended September 30, 1997 1996
--------------------------- ---- ----
<S> <C> <C>
Loss applicable to common stock:
As reported $(2,034,100) $(392,478)
Pro forma $(2,205,906) $(425,884)
Loss per common share:
As reported $ (.10) $ (.04)
Pro forma $ (.11) $ (.04)
</TABLE>
<TABLE>
The following information summarizes stock options outstanding at September 30, 1997.
<CAPTION>
Outstanding Exercisable
- ---------------------------------------------------------- -----------------------
Weighted Average
-----------------------
Remaining Weighted
Range of Number Contractual Exercise Number Average
Exercise Prices Outstanding Life in years Price Exercisable Exercise
- --------------- ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.30-$1.88 215,988 1 $1.15 215,988 $1.15
$.01-$.25 614,500 2 $.09 614,500 $.09
$1.25-$1.27 1,668,700 3 $.19 1,668,700 $.19
$.1875 380,000 4 $.1875 380,000 $.1875
$.25-$.30 737,000 5 $.28 737,000 $.28
- ----------- --------- ------------- ------ --------- ======
$.01-$1.88 3,616,188 3.2 $.25 3,616,188 $.25
========== ========= ============= ====== ========= ======
</TABLE>
The following information summarizes stock warrants outstanding at
September 30, 1997.
<TABLE>
<CAPTION>
Outstanding Exercisable
- ---------------------------------------------------------- -----------------------
Weighted Average
-----------------------
Remaining Weighted
Range of Number Contractual Exercise Number Average
Exercise Prices Outstanding Life in years Price Exercisable Exercise
- --------------- ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.2686-$.3564 3,423,456 1 $.2879 3,423,456 $.2879
============= ========= ====== ====== ========= ======
</TABLE>
<PAGE>
PAGE 61
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
8. Commitments
Employment Agreements
The Company has entered into employment agreements that extend from March
31, 1998 through December 31, 1999 with four of its officers. The
employment agreements set forth annual compensation to the four officers
of between $112,000 and $114,000 each. Compensation is adjusted annually
based on the cost of living index.
Retirement Plans
During 1990, the Company adopted a non-qualified profit sharing plan
administered by a committee appointed by the Company's board of
directors. The profit sharing plan allows for current year bonuses of up
to five percent of audited pre-tax earnings before depreciation,
amortization and extraordinary income, if adjusted earnings for the
preceding year exceeds $500,000. No distributions have been granted
since the inception of the plan. Okon had a pre-existing qualified money
purchase pension and profit sharing plan in place. The Company decided to
continue with this plan for fiscal 1997.
During 1985, Okon adopted a qualified money purchase pension and profit
sharing plan administered by a committee appointed by Okon's board of
directors for participants which include all employees age 18 and over
who have been employed by Okon for two years. The money purchase pension
plan calls for Okon's contribution of 6% of each eligible participant's
recognized compensation up to the integration level for the plan year and
10.3% over the integration level for the plan year. The profit sharing
plan contributions are made at the discretion of Okon for eligible
participants. The combined money purchase pension and profit sharing
contributions cannot exceed 25% of all eligible employees' wages, not to
exceed $30,000 per participant. For the period ended September 30, 1997,
Okon contributed approximately $19,000 to the plans.
Operating Leases
The Company leases office space under a noncancelable lease which expires
during November 1999, and the lease contains a renewal option for an
additional five years. The Company also leases office and warehouse
space for its Okon operation, under a lease which expires during March
1999. The lease contains a renewal option for an additional three years.
In addition, provided that Okon is not in default under the lease, Okon
has the option to purchase the facility at any time during the lease
term. Future minimum lease payments as of September 30, 1997 are as
follows:
<PAGE>
PAGE 62
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years ending September 30, Amount
<S> <C>
1998 $ 62,700
1999 62,700
2000 6,450
--------
Total $131,850
========
</TABLE>
Total lease expense for the year ended September 30, 1997 and for the
nine months ended September 30, 1996 was approximately $53,000 and
$39,000.
As collateral for the Company's office lease, the Company had a $50,000
letter of credit with a bank in favor of the landlord and provided a
$50,000 certificate of deposit as of December 31, 1994 as collateral for
the letter of credit. The letter of credit and related collateral was
reduced by one-half during 1995. The letter of credit matured on November
30, 1996, and the certificate of deposit was returned to the Company.
9. Income Taxes
There was no provision for income taxes required for the year ended
September 30, 1997 and for the nine months ended September 30, 1996 due
to operating losses in those years.
At September 30, 1997, the Company had available net operating loss
carryforwards and capital loss carryforwards of approximately $7,000,000
and $152,000 for tax reporting purposes. The operating loss
carryforwards expire through 2012, and the capital loss carryforward
expires in 1999. These carryforwards are subject to various limitations
imposed by the rules and regulations of the Internal Revenue Service.
There were no tax credits established in the statements of operations
since the Company has a 100 percent valuation allowance for the tax
benefit of net deductible temporary differences and operating loss
carryforwards. Management is not able to determine if it is more likely
than not that the deferred tax assets will be realized. The Company has
deferred tax assets with a 100 percent valuation allowance at September
30, 1997 and September 30, 1996. The tax effect on the components is as
follows:
<PAGE>
PAGE 63
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
September 30, 1997 1996
------------- ---- ----
<S> <C> <C>
Net operating loss carryforwards $ 2,583,000 $ 2,258,000
Capital loss carryforward 56,100 56,100
Compensation expense for common
stock options and common stock
not allowed for income tax purposes 26,000 233,100
Accruals for financial statement
purposes not allowed for income
taxes - cash basis (12,700) (63,200)
Basis difference relating to
licensed technology 209,700 157,600
Basis difference relating to Synhytech
plant held for sale 37,000 37,000
Other - 6,700
------------ ------------
2,899,100 2,685,300
Valuation allowance (2,899,100) (2,685,300)
------------ ------------
$ -0- $ -0-
============ ============
</TABLE>
During the year ended September 30, 1997 and the nine months ended
September 30, 1996, the Company's valuation allowance increased by
$213,800 and $232,700.
10. Extraordinary Gain
For the nine months ended September 30, 1996, the Company recognized a
$200,434 extraordinary gain from extinguishment of accounts payable and
accrued liabilities.
11. Supplemental Data to Statements of Cash Flows
1997 1996
---- ----
Cash payments for interest $ 14,090 $5,974
========= ======
Excluded from the statements of cash flows for the year ended September
30, 1997 and for the nine months ended September 30, 1996 were the
effects of certain noncash investing and financing activities as follows:
<PAGE>
PAGE 64
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Issuance of common stock from conversion
of preferred stock and dividends $ 532,142 $ -
Issuance of stock warrants for dividends
on preferred stock $ 151,588 $ -
Issuance of stock options for interest
expense on notes payable $ 24,948 $ -
Issuance of stock options for services $ 45,028 $ -
Issuance of common stock for interest
expense on convertible notes payable $ 170,645 $ -
Issuance of common stock for settlement
of non-subordinated notes payable $ - $ 787,000
Issuance of common stock for stock
subscription receivable $ - $ 50,000
Issuance of common stock for settlements
of accounts payable and accrued expenses $ - $ 44,967
Issuance of common stock for prepaid expenses $ - $ 15,000
Long-term debt issued in connection with
the business acquisition $ 300,000 $ -
</TABLE>
12. Segment and Geographic Information
The Company operates in the alternative fuels industry and in the paint
industry due to the acquisition of Okon during March 1997 (see Note 2).
The Company develops and markets processes for conversion of low-value,
carbon-bearing solids or gases into valuable liquid hydrocarbons and in the
manufacture and distribution of water-based paints, sealers and coatings.
Prior to the acquisition of Okon, the Company only operated in the
alternative fuels industry which is denoted by geographic area for fiscal
1996. During fiscal 1997, the Company did not generate any revenue from
the alternative fuels industry. Financial information summarized by
industry segment, is as follows for 1997 and 1996.
<PAGE>
PAGE 65
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Alternative Intercompany
September 30, 1997 Fuels Paint Eliminations Consolidated
- ------------------ ----------- ----- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ - $ 1,189,536 $ - $ 1,189,536
Income (loss) from
operations $(1,664,801) $ 289,115 $ - $ (1,375,686)
Depreciation and
amortization $ 252,251 $ 52,332 $ - $ 304,583
Capital expenditures $ 8,544 $ 57,271 $ - $ 65,815
Identifiable assets $ 2,777,789 $ 1,759,476 $ (130,145) $ 4,407,120
Corporate assets $ 1,825,824 $ - $ (1,375,740) $ 450,084
Total assets $ 4,603,613 $ 1,759,476 $ (1,505,885) $ 4,857,204
----------- ------------ ------------ ------------
</TABLE>
For the nine months ended September 30, 1996, all of the Company's revenue
was from India.
13. Significant Customers
During 1996, one customer accounted for 100 percent of total revenues. With
the acquisition of Okon in March 1997, the Company's revenue base was
increased to over 2,000 customers. One of these customers accounted for
34% of the total net sales for fiscal 1997. As of September 30, 1996, one
customer accounted for 100 percent of total accounts receivable. As of
September 30, 1997, one customer accounted for 100% of total accounts
receivable for the alternative fuel segment and two customers account for
40% of the paint segments accounts receivable.<PAGE>
<PAGE>
PAGE 66
Rentech, Inc. and Subsidiary
Notes to Consolidated Financial Statements
14. Related Party Transactions
During the nine months ended September 30, 1996, a director of the Company
performed $18,209 in engineering consulting services for the Company. In
lieu of cash payment, the director was issued 91,946 shares of common stock
and 91,946 warrants expiring September 20, 1997. The warrants are
exercisable at $.25 per share.
During the nine months ended September 30, 1997, the Company contracted
with Resource Technologies Group, Inc. ("RTG"), to conduct an environmental
audit for $3,745. A director of the Company owns 50% of RTG. In lieu of
cash payment, RTG was issued 18,724 shares of common stock and 18,724
warrants expiring September 20, 1997. The warrants are exercisable at $.25
per share.
15. Subsequent Event
During October 1997, the private offering of convertible notes payable
closed. The Company raised an additional $60,000 in cash, and issued
$60,000 in additional notes payable (see Note 6).
<PAGE>
PAGE 67
WARRANT NO.
---
WARRANT TO PURCHASE UNITS
OF
RENTECH, INC.
Warrant to Purchase ________ Units
At An Exercise Price of $10,000 per Unit
(subject to adjustment as set forth herein)
VOID AFTER 3:00 P.M., DENVER, COLORADO, TIME, ____________, 2002
NEITHER THIS WARRANT NOR ANY OF THE SECURITIES ISSUED OR ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
(THE "ACT") OR REGISTERED OR QUALIFIED UNDER ANY OTHER APPLICABLE FEDERAL OR
STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
OR QUALIFICATION FILED IN ACCORDANCE WITH THE ACT OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE ACT.
Rentech, Inc., 1331 Seventeenth Street, Suite 720, Denver, Colorado
80202 (the "Company"), hereby certifies that, for value received,
Neidiger/Tucker/Bruner, Inc., 1675 Larimer, Plaza Level 300, Denver, Colorado
80202 ("NTB"), or any other holder as defined below, is entitled, subject to
the terms and conditions set forth below, to purchase from the Company at any
time before 3:00 p.m., Denver time, on ------------, 2002 (the "Expiration
Date") up to ------- Units (the "Units") at a purchase price of $10,000 per
Unit (the "Exercise Price"). Each Unit shall include one 10% convertible
subordinated promissory note, in substantially the form of Exhibit A attached
hereto and by this reference made a part hereof, in the principal amount of
$10,000 (the "Note") and 10,000 shares of the Company's Common Stock, par
value $.01 per share ("Common Stock").
The number and character of the securities purchasable upon exercise of
the Warrant and the Exercise Price are subject to adjustment as provided
below. The term "Warrant" as used herein shall include this Warrant and any
Warrants issued in substitution for or replacement of this Warrant, or any
Warrants into which this Warrant may be divided or exchanged. The securities
purchasable upon the exercise of this Warrant are hereinafter referred to as
"Warrant Securities." As used herein, "Holder" shall mean NTB and any valid
transferee thereof. As used herein, "Effective Date" shall mean ------------,
1997.
This Warrant may be assigned, transferred, sold, offered for sale, or
exercised by the Holder upon compliance with all the pertinent provisions
hereof.
a. Exercise of Warrant.
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(a) Subject to the other terms and conditions of this Warrant, the
purchase rights evidenced by this Warrant may be exercised in whole or in part
at any time, and from time to time, on or but before 3:00 p.m., Denver time,
on the Expiration Date by the Holder's presentation and surrender of this
Warrant to the Company at its principal office or at the
office of the Company's stock transfer agent, if any, accompanied by a duly
executed Notice of Exercise in the form attached hereto, and by payment of the
aggregate Exercise Price, in certified funds or a bank cashier's check, for
the number of Units specified in the Notice of Exercise. In the event this
Warrant is exercised in part only, as soon as is practicable after the
presentation and surrender of this Warrant to the Company for exercise, the
Company shall execute and deliver to the Holder a new Warrant, containing the
same terms and conditions as this Warrant, evidencing the right of the Holder
to purchase the number of Units as to which this Warrant has not been
exercised.
(b) Upon receipt of this Warrant by the Company as described in
subsection (a) above, the Holder shall be deemed to be the holder of record of
the Warrant Securities issuable upon such exercise, notwithstanding that the
transfer books of the Company may then be closed or that certificates
representing such Warrant Securities may not have been prepared or actually
delivered to the Holder.
2. Exchange, Assignment or Loss of Warrant.
(a) Subject to the provisions of Section 8 hereof, this Warrant is
assignable and exchangeable, without expense, at the option of the Holder,
upon presentation and surrender hereof to the Company for other Warrants of
different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder.
Any such assignment shall be made by surrender of this Warrant to the Company,
with the Assignment Form annexed hereto duly executed and funds sufficient to
pay any transfer tax; whereupon the Company shall, without charge, execute and
deliver a new Warrant in the name of the assignee named in such instrument of
assignment and this Warrant promptly shall be canceled.
(b) This Warrant, alone or with other Warrants containing
substantially the same terms and conditions and owned by the same Holder, is
exchangeable at the option of the Holder but at the Company's sole expense, at
any time prior to its expiration either by its terms or by its exercise in
full upon presentation and surrender to the Company at its principal office
for another Warrant or other Warrants, of different denominations but
containing the same terms and conditions as this Warrant, entitling the Holder
to purchase the same aggregate number of Warrant Securities that were
purchasable pursuant to the Warrant or Warrants presented and surrendered. At
the time of presentation and surrender by the Holder to the Company, the
Holder also shall deliver to the Company a written notice, signed by the
Holder, specifying the denominations in which new Warrants are to be issued to
the Holder.
(c) The Company will execute and deliver to the Holder a new
Warrant containing the same terms and conditions as this Warrant upon receipt
by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction, or mutilation of this Warrant, provided that (i) in the case of
loss, theft, or destruction, the Company receives from the Holder a reasonably
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satisfactory indemnification, and (ii) in the case of mutilation, the Holder
presents and surrenders this Warrant to the Company for cancellation. Any new
Warrant executed and delivered shall constitute an additional contractual
obligation on the part of the Company regardless of whether the Warrant that
was lost, stolen, destroyed or mutilated shall be enforceable by anyone at any
time.
3. Adjustments; Stock Dividends, Reclassification, Reorganization,
Merger and Anti-Dilution Provisions.
(a) If the Company increases or decreases the number of its issued
and outstanding Warrant Securities or changes in any way the rights and
privileges of such Warrant Securities, by means of (i) the payment of a
dividend or the making of any other distribution on such Warrant Securities,
(ii) a forward or reverse split or other subdivision of Warrant Securities,
(iii) a consolidation or combination involving its Warrant Securities, or
(iv) a reclassification or recapitalization involving its Warrant Securities,
then the Exercise Price in effect at the time of such action and the number of
Warrant Securities purchasable pursuant to this Warrant at that time shall be
proportionately adjusted so that the numbers, rights and privileges relating
to the Warrant Securities then purchasable pursuant to this Warrant shall be
increased, decreased or changed in like manner, for the same aggregate
purchase price as set forth in this Warrant, as if the Warrant Securities
purchasable pursuant to this Warrant immediately prior to the event at issue
had been issued, outstanding, fully paid and nonassessable at the time of that
event.
(b) If the Company pays or makes any distribution upon its Notes
payable in securities or other property, excluding money but including
(without limitation) shares of any class of the Company's stock or stock or
other securities convertible into or exchangeable for shares of Common Stock
or any other class of the Company's stock or other interests in the Company or
its assets ("Convertible Securities"), a proportionate part of those
securities or that other property shall be set aside by the Company and
delivered to the Holder in the event that the Holder exercises this Warrant.
The securities and other property then deliverable to the Holder upon exercise
of this Warrant shall be in the same ratio to the total securities and
property set aside for the Holder as the number of Warrant Securities with
respect to which the Warrant is then exercised is to the total Warrant
Securities purchasable pursuant to this Warrant at the time the securities or
property were set aside for the Holder.
(c) If at any time the Company grants to its shareholders rights to
subscribe pro rata for additional securities of the Company, whether Common
Stock, Convertible Securities, debentures, or other classifications, or for
any other securities, property or interests that the Holder would have been
entitled to subscribe for if, immediately prior to such grant, the Holder had
exercised this Warrant, then the Company shall also grant to the Holder the
same subscription rights that the Holder would be entitled to if the Holder
had exercised this Warrant in full immediately prior to such grant.
(d) The Company shall cause effective provision to be made so that
the Holder shall have the right after any event described below, by the
exercise of this Warrant, to purchase for the aggregate Exercise Price
described in this Warrant the kind and amount of shares of securities, and
property and interests, as would be issued or payable with respect to or in
exchange for the number of Warrant Securities of the Company that are then
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purchasable pursuant to this Warrant as if such Warrant Securities had been
issued to the Holder immediately before the occurrence of any of the following
events: (i) the reclassification, capital reorganization, or other similar
change of outstanding securities of the Company, other than as described and
provided for in subsection (a) above; (ii) the merger or consolidation of the
Company with one or more other corporations or other entities, other than a
merger with a subsidiary or affiliate pursuant to which the Company is the
continuing entity and the outstanding shares of Common Stock, including the
Warrant Securities purchasable pursuant to this Warrant, are not converted or
exchanged; or (iii) the spin-off of assets to a subsidiary or an affiliated
entity, or the sale, lease, or exchange of a signification portion of the
Company's assets, in a transaction pursuant to which the Company's
shareholders of record are to receive securities or other interests in another
entity. Any such provision made by the Company for adjustments with respect
to this Warrant shall be as nearly equivalent to the adjustments otherwise
provided for in this Warrant as is reasonably practicable. The foregoing
provisions of this subsection (d) shall similarly apply to successive
reclassifications, capital reorganizations and similar changes of securities
and to successive consolidations, mergers, spin-offs, sales, leases or
exchanges.
(e) If any sale, lease or exchange of all, or substantially all, of
the Company's assets or business or any dissolution, liquidation or winding up
of the Company (a "Termination of Business") shall be proposed, the Company
shall deliver written notice to the Holder or Holders of this Warrant in
accordance with Section 4. If the result of the Termination of Business is
that shareholders of the Company are to receive securities or other interests
of another entity, the provisions of subsection (d) above shall apply.
However, if the result of the Termination of Business is that shareholders of
the Company are to receive money or property other than securities or other
interests in another entity, the Holder or Holders of this Warrant shall be
entitled to exercise this Warrant prior to the consummation of the event at
issue and, with respect to any Warrant Securities so purchased, shall be
entitled to all of the rights of the other Note holders with respect to any
distribution by the Company in connection with the Termination of Business.
In the event no other entity is involved and subsection (d) does not apply,
all purchase rights under this Warrant shall terminate at the close of
business on the date as of which shareholders of record of the Common Stock
shall be entitled to participate in a distribution of the assets of the
Company in connection with the Termination of Business; provided, that in no
event shall that date be less than 30 days after deliver to the Holder or
Holders of this Warrant of the written notice described above and in Section
4. If the termination of purchase rights under this Warrant is to occur as a
result of the event, a statement to that effect shall be included in that
written notice.
(f) The provisions of this Section 3 shall apply to successive
events that may occur from time to time but shall only apply to a particular
event if it occurs prior to the expiration of this Warrant either by its terms
or by its exercise in full.
4. Notice to Holders. If, prior to the expiration of this Warrant
either by its terms or by its exercise in full, any of the following shall
occur:
(i) the Company shall declare a dividend or authorize any
other distribution on its Notes or Common Stock; or
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(ii) the Company shall authorize the granting to the
shareholders of its Common Stock or the holders of its Notes of rights
to subscribe for or purchase any securities or any other similar
rights; or
(iii) any reclassification, reorganization or similar change
of the Common Stock, or any consolidation or merger to which the
Company is a party, or the sale, lease, or exchange of any significant
portion of the assets of the Company; or
(iv) the voluntary or involuntary dissolution, liquidation
or winding up of the Company; or
(v) any purchase, retirement or redemption by the Company of
its Notes or Common Stock; then, and in any such case, the Company shall
deliver to the Holder or Holders written notice thereof at least 30 days prior
to the earliest applicable date specified below with respect to which notice
is to be given, which notice shall state the following:
(i) the date on which a record is to be taken for the
purpose of such dividend, distribution or rights, or, if a
record is not to be taken, the date as of which the
shareholders of Common Stock or Note holders of record to be
entitled to such dividend, distribution or rights are to be
determined;
(ii) the date on which such reclassification,
reorganization, consolidation, merger, sale, transfer,
dissolution, liquidation, winding up or purchase, retirement
or redemption is expected to become effective, and the date,
if any, as of which the Company's shareholders of Common
Stock of record shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger,
sale, transfer, dissolution, liquidation, winding up,
purchase, retirement or redemption; and
(iii) if any matters referred to in the foregoing
clauses (i) and (ii) are to be voted upon by shareholders of
Common Stock, the date as of which those shareholders to be
entitled to vote are to be determined.
5. Officers' Certificate. Whenever the Exercise Price or the aggregate
number of Warrant Securities purchasable pursuant to this Warrant shall be
adjusted as required by the provisions of Section 3 above, the Company shall
promptly file with its Secretary or an Assistant Secretary at its principal
office, an officers' certificate executed by the Company's President and
Secretary or Assistant Secretary, describing the adjustment and setting forth,
in reasonable detail, the facts requiring such adjustment and the basis for
and calculation of such adjustment in accordance with the provisions of this
Warrant. Each such officers' certificate shall be made available to the
Holder or Holders of this Warrant for inspection at all reasonable times, and
the Company, after each such adjustment, shall promptly deliver a copy of the
officers' certificate relating to that adjustment to the Holder or Holders of
this Warrant.
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6. Reservation of Warrant Securities. The Company hereby agrees that at
all times prior to the Expiration Date it will have authorized and will
reserve and keep available for issuance and delivery to the Holder that number
of Warrant Securities that may be required from time to time for issuance and
delivery upon the exercise of the then unexercised portion of this Warrant and
all similar Warrants then outstanding and unexercised and upon the exercise of
any Warrant Securities.
7. Registration Under the Securities Act of 1933. The shares of Common
Stock issuable upon exercise of this Warrant and the shares of Common Stock
issuable upon conversion of the Note are subject to the Registration Rights
Agreement in substantially the form of Exhibit B attached hereto and by this
reference made a part hereof.
8. Transfer to Comply With the Securities Act of 1933.
(a) This Warrant, the Warrant Securities, all securities underlying
the Warrant Securities, and all other securities issued or issuable upon
exercise of this Warrant, may not be offered, sold or transferred, in whole or
in part, except in compliance with the Act, and except in compliance with all
applicable state securities laws.
(b) The Company may cause substantially the following legend, or
its equivalent, to be set forth on each certificate representing the Warrant
Securities, securities underlying the Warrant Securities, or any other
security issued or issuable upon exercise of this Warrant unless, in the
opinion of legal counsel for the Company, such legend is not required:
"The securities represented by this Certificate
have not been registered under the Securities
Act of 1933 (the Act') and are restricted
securities' as that term is defined in Rule 144
under the Act. The securities may not be
offered for sale, sold or otherwise transferred
except pursuant to an effective registration
statement under the Act or pursuant to an
exemption from registration under the Act, the
availability of which is to be established to the
satisfaction of the Company."
(c) NOTWITHSTANDING ANYTHING HEREIN CONTAINED TO THE CONTRARY, THIS
WARRANT SHALL NOT BE EXERCISABLE UNLESS AND UNTIL THE COMPANY IS SATISFIED
THAT EXERCISE HEREOF WOULD NOT RESULT IN LOSS OF A CLAIMED SECURITIES
REGISTRATION EXEMPTION IN CONNECTION WITH ANY OTHER ACTUAL OR PROPOSED
TRANSACTION THE EFFECT OF WHICH WOULD BE MATERIALLY ADVERSE TO THE COMPANY.
9. Fractional Securities. No fractional securities or scrip
representing fractional shares shall be issued upon the exercise of all or any
part of this Warrant. With respect to any fraction of a security called for
upon any exercise of this Warrant, the Company shall pay to the Holder an
amount in money equal to that fraction multiplied by the current market value
of that security. The current market value shall be determined as follows:
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(i) if the security at issue is listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange
or quoted on the National Market System of the National Association of
Securities Dealers Automated Quotation System, Inc. ("Nasdaq")
quotation service, the current value shall be the last reported sale
price of that security on such exchange or system on the last business
day prior to the date of the applicable exercise of this Warrant or, if
no such sale is made on such day, the average of the highest closing
bid and lowest asked price for such day on such exchange or system; or
(ii) if the security at issue is not so listed or quoted or
admitted to unlisted trading privileges, the current market value shall
be the average of the last reported highest bid and lowest asked prices
quoted on Nasdaq or, if not so quoted, then by the National Quotation
Bureau, Inc. on the last business day prior to the date of the
applicable exercise of this Warrant; or
(iii) if the security at issue is not so listed or quoted or
admitted to unlisted trading privileges and bid and asked prices are
not reported, the current market value shall be determined in such
reasonable manner as may be prescribed from time to time by the Board
of Directors of the Company.
10. Rights of the Holder. The Holder shall not be entitled to any
rights as a shareholder in the Company by reason of this Warrant, either at
law or in equity, except as specifically provided for herein. The Company
covenants, however, that for so long as this Warrant is at least partially
unexercised, it will furnish any Holder of this Warrant with copies of all
reports and communications furnished to the shareholders of the Company.
11. Charges Due Upon Exercise. The Company shall pay any and all issue
or transfer taxes, including, but not limited to, all federal or state taxes,
that may be payable with respect to the transfer of this Warrant or the issue
or delivery of Warrant Securities upon the exercise of this Warrant.
12. Warrant Securities to be Fully Paid. The Company covenants that all
Warrant Securities that may be issued and delivered to a Holder of this
Warrant upon the exercise of this Warrant and payment of the Exercise Price
will be, upon such delivery, validly and duly issued, fully paid and
nonassessable.
13. Notices. All notices, certificates, requests or other similar items
provided for in this Warrant shall be in writing and shall be personally
delivered or deposited in the United States mail, postage prepaid, addressed
to the respective party as indicated in the portions of this Warrant preceding
Section 1. All notices shall be deemed to be delivered upon personal delivery
or upon the expiration of three business days following deposit in the United
States mail, properly addressed and with postage prepaid. The addresses of
the parties may be changed, and addresses of other Holders and holders of
Warrant Securities may be specified, by written notice delivered pursuant to
this Section 13. The Company's principal office shall be deemed to be the
address provided pursuant to this Section for the delivery of notices to the
Company.
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14. Applicable Law. This Warrant shall be governed by and construed in
accordance with the laws of the state of Colorado, and courts located in
Colorado shall have exclusive jurisdiction over all disputes arising
hereunder.
15. Miscellaneous Provisions.
Subject to the terms and conditions contained herein, this Warrant shall
be binding on the Company and its successors and shall inure to the benefit of
the original Holder, its successors and assigns and all holders of Warrant
Securities. The exercise of this Warrant in full shall not terminate the
provisions of this Warrant as it relates to holders of Warrant Securities.
(a) If the Company fails to perform any of its obligations hereunder, it
shall be liable to the Holder for all damages, costs and expenses resulting
from the failure, including, but not limited to, all reasonable attorney's
fees and disbursements.
(b) This Warrant cannot be changed or terminated or any performance or
condition waived in whole or in part except by an agreement in writing signed
by the party against whom enforcement of the change, termination or waiver is
sought.
(c) If any provision of this Warrant shall be held to be invalid,
illegal or unenforceable, such provision shall be severed, enforced to the
extent possible, or modified in such a way as to make it enforceable, and the
invalidity, illegality or unenforceability shall not affect the remainder of
this Warrant.
(d) The Company agrees to execute such further agreements, conveyances,
certificates and other documents as may be reasonably requested by the Holder
to effectuate the intent and provisions of this Warrant.
(e) Paragraph headings used in this Warrant are for convenience only and
shall not be taken or construed to define or limit any of the terms or
provisions of this Warrant. Unless otherwise provided, or unless the context
shall otherwise require, the use of the singular shall include the plural and
the use of any gender shall include all genders.
RENTECH, INC.
ATTEST:
By:
------------------------- By: --------------------------
, Secretary , President
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NOTICE OF EXERCISE
to RENTECH, INC.
(to be executed by a Holder desiring to exercise the right pursuant to
a Warrant issued by Rentech, Inc., in connection with its 1997 private
placement of its 10% convertible subordinated notes, to purchase Units)
The undersigned Holder of a Warrant hereby:
(a) irrevocably elects to exercise the attached Warrant to the extent of
purchasing --------------- Units, consisting of one 10% convertible
subordinated promissory note of Rentech, Inc., each in the principal amount of
$10,000, and 10,000 shares of the $.01 par value Common Stock of Rentech,
Inc.;
(b) makes payment in full of the aggregate Exercise Price for those
Units in the amount of $_____________ by the delivery of certified funds or a
bank cashier's check in the amount of $_____________;
(c) requests that certificates evidencing the securities underlying such
Units be issued in the name of the undersigned or, if the name and address of
some other person is specified below, in the name of such other person:
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
(Name and address of person other than the undersigned
in whose name Units are to be registered)
(d) requests, if the number of Units purchased are not all the Units
purchasable to the unexercised portion of the Warrant, that a new Warrant of
like tenor for the remaining Units purchasable pursuant to the Warrant be
issued and delivered to the undersigned at the address stated below.
Dated:
-------------------- ------------------------------------
Signature
(This signature must conform in all
respects to the name of the Holder
as specified on the face of the Warrant)
------------------------- ------------------------------------
Social Security Number or Printed Name
Employer ID Number
Address:
--------------------------
--------------------------
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ASSIGNMENT FORM
(of Unit issued by Rentech, Inc. Consisting of One 10% Convertible
Subordinated Promissory Note and 10,000 Shares of $.01 Par Value
Common Stock)
FOR VALUE RECEIVED, the undersigned, ----------------------------------
---------------------------, hereby sells, assigns and transfers unto:
Name: -----------------------------------------------------------------
(Please type or print in block letters)
Address: --------------------------------------------------------------
------------------------------------------------------------------------
the right to purchase ------------------------------------------ Units of
Rentech, Inc. (the "Company") pursuant to the terms and conditions of the
Warrant held by the undersigned. The undersigned hereby authorizes and
directs the Company (i) to issue and deliver to the above-named assignee at
the above address a new Warrant pursuant to which the rights to purchase being
assigned may be exercised, and (ii) if there are rights to purchase Units
remaining pursuant to the undersigned's Warrant after the assignment
contemplated herein, to issue and deliver to the undersigned at the address
stated below a new Warrant evidencing the right to purchase the number of
Units remaining after issuance and delivery of the Warrant to the
above-named assignee. Except for the number of Units purchasable, the new
Warrants to be issued and delivered by the Company are to contain the same
terms and conditions as the undersigned's Warrant. To complete the assignment
contemplated by this Assignment Form, the undersigned hereby irrevocably
constitutes and appoints -----------------------------------
---------------------------- as the undersigned's attorney-in-fact to transfer
the Warrants and the rights thereunder on the books of the Company with full
power of substitution for these purposes.
Dated:
----------------- ---------------------------------
Signature
(This signature must conform in all
respects to the name of the Holder as
specified on the face of the Warrant)
---------------------------------
Printed Name
Address: ---------------------------------
---------------------------------
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FORM OF 10% CONVERTIBLE SUBORDINATED PROMISSORY NOTE
NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK ISSUED OR ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE PROVISIONS OF ANY APPLICABLE
STATE SECURITIES LAWS, BUT HAVE BEEN AND MAY BE ACQUIRED BY THE REGISTERED
HOLDER HEREOF FOR PURPOSES OF INVESTMENT AND IN RELIANCE ON STATUTORY
EXEMPTIONS UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS.
THIS NOTE MAY NOT BE CONVERTED, AND NEITHER THIS NOTE NOR THE SHARES OF COMMON
STOCK ISSUED OR ISSUABLE UPON CONVERSION OF THIS NOTE MAY BE SOLD, PLEDGED,
TRANSFERRED OR ASSIGNED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER
PROVISIONS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT; AND IN THE CASE OF AN
EXEMPTION, ONLY IF THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT SUCH TRANSACTION DOES NOT REQUIRE
REGISTRATION OF THIS NOTE OR SUCH SHARES.
No. -------- $10,000.00
RENTECH, INC.
1997
--------------- ---,
Ten Percent Convertible Subordinated Note
Due , 1998
-----------------
Subject to all terms, conditions and provisions hereof, Rentech, Inc., a
Colorado corporation (the "Corporation"), for value received, promises to pay
to ---------------------------------------------, the sum of $10,000.00 on
--------------------------, 1998 (180 days after the original date of
issuance of this Note) (the "Maturity Date"), upon presentation and
surrender of this Note at the office of the Corporation in Denver, Colorado,
together with interest at the rate of ten percent per annum. Payment of
principal and interest shall be made at the offices of the Corporation, in
lawful money of the United States of America, and shall be mailed to the
registered owner hereof at the address appearing on the books of the
Corporation. The interest rate may increase as provided in Section 3.e
herein.
1. Series. This Note is one of a duly authorized issue of promissory notes
of the Corporation designated as its Ten Percent Convertible
Subordinated Promissory Notes due on the Maturity Date (the "Notes") in
the aggregate principal amount of up to $550,000 and issued in
denominations of $1,000 and integral multiples thereof, all of like
date, tenor and maturity, except variations necessary to express the
number and payee of each Note.
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2. Equal rank. All Notes of this issue rank equally and ratably without
priority over one another.
3. Conversion.
a. Voluntary Conversion. Subject to Section 10 herein, the holder of
this Note may convert the principal amount of this Note into shares
of the common stock, $.01 par value, of the Corporation (the "Common
Stock") (i) at any time prior to the Maturity Date at a conversion
price of $0.33 per share of Common Stock, and (ii) if the Note is
not paid upon the Maturity Date, at any time during the
180-day period following the Maturity Date, at a per-share
conversion price of 70% of the average Closing Bid Price (as defined
herein) of the Common Stock for the five trading days preceding the
Conversion Date (as defined herein), but not more than $0.33 per
share (the "Conversion Price").
b. Automatic Conversion.
i. If at any time during the 180-day period following the Maturity
Date the average Closing Bid Price of the Common Stock for five
consecutive trading days is $0.50 or more, then the principal amount
of this Note shall automatically convert into shares of Common Stock
at a price of $.033 per share.
ii. If this Note has not been converted or paid in full on or
before ------------------, 1998 (360 days after the original date of
issuance of this Note), then the principal amount of this Note shall
automatically convert into shares of Common Stock at the
per-share Conversion Price of 70% of the Closing Bid Price of the
Common Stock for the five trading days preceding such date, but not
more than $0.33 per share.
iii. The Conversion Date for these purposes shall be deemed to be
the date on which automatic conversion of this Note occurred.
c. Termination of Conversion Right. If the Corporation has called this
Note for redemption, the right to convert shall terminate at the
close of business on the second business day prior to the day fixed
as the date for the redemption.
d. Conversion Date. To convert this Note, the holder must surrender
the same at the office of the Corporation, accompanied by a written
notice of conversion and by a written instrument of transfer in a
form satisfactory to the Corporation, properly completed and
executed by the registered holder hereof or a duly authorized agent.
The date the Corporation actually receives such documentation in
proper form shall be referred to herein as the "Conversion Date."
Subject to Section 10 hereof, on the Conversion Date (i) this Note
shall be deemed to have been canceled and paid in full, (ii) the
Corporation shall pay all interest accrued on this Note to the
Conversion Date, and (iii) the Holder shall be deemed to have all
rights of a holder of the Common Stock to the extent of the number
of shares of Common Stock issuable upon such conversion of this
Note.
<PAGE>
PAGE 79
e. Registration of Common Stock. The Corporation covenants to file, to
use its best efforts to cause to become effective and to maintain in
effect for one year a registration statement under the Securities
Act of 1933, as amended, and the laws of the states where the
original holders of the Notes resided upon sale thereof, with
respect to Common Stock issuable upon the conversion of the Note in
accordance with the terms of the Registration Rights Agreement in
the form of Exhibit A attached hereto and by this reference made a
part hereof. In the event the registration statement shall not have
become effective within 120 days following the original date of
issuance of this Note, then the interest rate payable with respect
to the principal balance of this Note shall increase to 14% per
annum.
f. Fractional shares. No fractional shares or scrip representing
fractional shares shall be issued upon the conversion of this Note.
With respect to any fraction of a share called for upon any
conversion hereof, the Corporation shall pay to the Holder an amount
in cash equal to such fraction multiplied by the Closing Bid Price
of such fractional share, determined as follows:
i. If the Common Stock is listed on a national securities exchange
or admitted to unlisted trading privileges on such exchange, the
Closing Bid Price shall be the last reported sale price of the
Common Stock on the composite tape of such exchange on the last
trading day prior to the date of conversion of this Note or if no
such sale is made on such day, the Closing Bid Price for such day on
the composite tape of such exchange; or
ii. If the Common Stock is not so listed or admitted to unlisted
trading privileges, the Closing Bid Price shall be the mean of the
last reported bid price reported by the Nasdaq Stock Market (or, if
not so quoted on the Nasdaq Stock Market, on the OTC Bulletin Board
or by the National Quotation Bureau, Inc.) on the last trading day
prior to the date of the conversion of this Note; or
iii. If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid prices are not so reported, the Closing
Bid Price shall be an amount, not less than book value, determined
in such reasonable manner as may be prescribed by the Board of
Directors of the Corporation, such determination to be final and
binding on the Holder.
g. Adjustments to Conversion Price.
i. If the Corporation at any time pays to the holders of its Common
Stock a dividend in Common Stock, the number of shares of Common
Stock issuable upon the conversion of this Note shall be
proportionally increased, effective at the close of business on the
record date for determination of the holders of Common Stock
entitled to the dividend.
ii. If the Corporation at any time subdivides or combines into a
larger or smaller number of shares its outstanding shares of Common
Stock, the number of shares of Common Stock issuable upon the
conversion of this Note shall be proportionally increased in the
case of a subdivision and decreased in the case of a combination,
effective in either case at the close of business on the date that
the subdivision or combination becomes effective.
<PAGE>
PAGE 80
iii. If the Corporation is recapitalized, consolidated with or
merged into any other corporation, or sells or conveys to any other
corporation all or substantially all of its property as an entity,
(a) the obligation of this Note shall remain in full force and
effect, and (b) provision shall be made as part of the terms of any
such transaction so that the holder of this Note may receive, in
lieu of the Common Stock otherwise issuable to him upon conversion
hereof, the same kind and amount of securities or property as may be
receivable or distributable upon the recapitalization,
consolidation, merger, sale or conveyance with respect to the Common
Stock into which this Note would have otherwise been convertible.
4. Subordination. The rights of the holder of this Note to receive
payment of any principal or interest hereon are subject and subordinate to the
prior payment of the principal of (and premium, if any) and the interest on
all other indebtedness of the Corporation incurred for money borrowed
pursuant to promissory notes, debentures or other comparable evidences of
indebtedness, whether now outstanding or subsequently incurred, whether
secured or unsecured, and any deferrals, renewals or extensions of such
indebtedness, or of any debentures, bonds or notes evidencing such
indebtedness (the "Senior Indebtedness"). Senior Indebtedness shall not
include the general obligations of the Corporation, including but not limited
to its accounts payable, which are not incurred as a result of the borrowing
of money. In the event (i) of any uncured or unwaived default in the payment
of the principal and interest of Senior Indebtedness, (ii) of any
receivership, insolvency, assignment for the benefit of creditors, bankruptcy,
reorganization, sale of all or substantially all of the assets, dissolution,
liquidation or any other marshaling of the assets and liabilities of the
Corporation, or (iii) this Note is declared due and payable upon the
occurrence of an Event of Default as defined in this Note, then no amount
shall be paid by the Corporation with respect to principal and interest hereon
unless and until the principal of and interest on all Senior Indebtedness then
outstanding is paid in full. Any amounts not paid hereon as a result of the
provisions of this Section 4 shall be due and payable at such time as the
restriction on such payment hereunder is no longer in effect and until
payment, shall accrue interest as provided herein.
5. Redemption. This Note may be redeemed in whole or in part at any
time and from time-to-time during the 180-day period following the Maturity
Date by the payment in good funds of the principal amount of this Note to be
redeemed together with accrued interest on the amount redeemed to the date of
redemption, at the office of the Corporation, upon the giving of the notice
described below. The Corporation shall not call this Note for redemption
unless the requirements of Section 10 have been satisfied. If the Corporation
gives notice of redemption, the holder of this Note shall have the right for
seven business days after the notice is given to convert the principal amount
of the Note called for redemption, and accrued interest thereon, into Common
Stock at a per-share conversion price of 70% of the Average Closing Bid Price
of the Common Stock for the five trading days preceding the Conversion Date or
$.33 per share, whichever is less. This Note shall be deemed to have been
canceled to the extent of the principal amount hereof redeemed upon payment of
the redemption price or the setting aside of funds sufficient to pay the
redemption price.
6. Covenants. The Corporation shall not pay any dividend or make any
other distribution on Common Stock except for distributions described in
Section 3.g hereof.
<PAGE>
PAGE 81
7. Notices.
a. Redemption. Notice of redemption shall be mailed to the holder of
the Note not less than ten days prior to the date fixed for
redemption at his last address as it appears upon the records of
the Corporation. If this Note is redeemed in part, the Corporation
shall, without charge to the holder hereof, either (i) execute and
deliver to the holder a Note for the unredeemed balance of the
principal amount hereof, or (ii) make note hereon of the principal
amount called for redemption and redeemed, upon surrender of this
Note at the office of the Corporation. Following the date fixed
for redemption, interest shall be payable only on the portion of
this Note not called for redemption.
b. Distributions. So long as this Note shall be outstanding and
unconverted, (i) if the Corporation shall pay any dividend or make
any distribution upon the Common Stock or (ii) if the Corporation
shall offer to the holders of Common Stock for subscription or
purchase by them any shares of stock of any class or any other
rights or (iii) if any capital reorganization of the Corporation,
reclassification of the capital stock of the Corporation,
consolidation or merger of the Corporation with or into another
corporation, sale, lease or transfer of all or substantially all of
the property and assets of the Corporation to another corporation,
or voluntary or involuntary dissolution, liquidation or winding up
of the Corporation shall be effected, then in any such case the
Corporation shall cause to be delivered to the holder, at least 20
days prior to the date specified in (x) or (y) below, as the case
may be, a notice containing a brief description of the proposed
action and stating the date on which (x) a record is to be taken
for the purpose of such dividend, distribution or rights, or (y)
such reclassification, reorganization, consolidation, merger,
conveyance, lease, dissolution, liquidation or winding up is to
take place and the date as of which the holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock
for securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up.
c. Automatic Conversion. Notice shall be mailed to the Holder
regarding automatic conversion of this Note. The Holder agrees
promptly to deliver this Note to the office of the Company which,
upon receipt thereof, shall issue the shares of Common Stock
issuable upon such conversion in the name of the Holder.
d. Giving of Notice. Any such notice shall be deemed to have been
given or delivered upon deposit in the United States Mail, postage
prepaid, addressed to the holder of the Note at his last address as
it appears upon the records of the Corporation.
8. Registered owner. The Corporation may treat the person or persons
whose name or names appear hereon as the absolute owner or owners
of this Note for the purpose of receiving payment of, or on account
of, the principal and interest due on this Note and for all other
purposes, and it shall not be affected by any notice to the
contrary.
<PAGE>
PAGE 82
9. Corporate obligation. The holder of this Note shall not have any
recourse for the payment in whole or of any part of the principal
or interest on this Note against any incorporator or present or
future stockholder, officer or Director of the Corporation. The
holder of this Note, by the acceptance hereof and as a part of the
consideration for this Note, expressly agrees that the Note is the
obligation solely of the Corporation and expressly releases all
claims and waive all liability against the foregoing persons in
connection with this Note.
10. Transfer to Comply with the Securities Act of 1933.
a. Neither this Note nor the shares of Common Stock or any other
security issued or issuable upon conversion of this Note may be
offered or sold except in conformity with the Securities Act of
1933, as amended, and then only against receipt of an agreement
of such person to whom such offer of sale is made to comply
with the provisions of this Section 10 with respect to any
resale or other disposition of such securities.
b. The Corporation may cause the following legend to be set forth
on each certificate representing the Common Stock or any other
security issued or issuable upon conversion of this Note unless
counsel for the Corporation is of the opinion as to any such
certificate that such legend is unnecessary:
The securities represented by this certificate
may not be offered for sale, sold or otherwise
transferred except pursuant to an effective
registration statement filed under the
Securities Act of 1933 (the "Act"), or pursuant
to an exemption from registration under the Act
the availability of which is to be established to
the satisfaction of the Corporation.
c. NOTWITHSTANDING ANYTHING HEREIN CONTAINED TO THE CONTRARY, THIS
NOTE SHALL NOT BE CONVERTIBLE INTO COMMON STOCK OR ANY OTHER
SECURITY UNLESS AND UNTIL THE CORPORATION IS SATISFIED THAT
CONVERSION HEREOF WOULD NOT RESULT IN LOSS OF A CLAIMED
SECURITIES REGISTRATION EXEMPTION IN CONNECTION WITH ANY OTHER
ACTUAL OR PROPOSED TRANSACTION THE EFFECT OF WHICH WOULD BE
MATERIALLY ADVERSE TO THE CORPORATION.
11. Amendments and Waivers.
a. The Corporation may amend or supplement the Notes without notice
to or the consent of the holders of the Notes (i) to cure any
ambiguity, omission, defect or inconsistency and (ii) to make
any other change that does not adversely affect the rights of
the holders of the Notes. The Corporation may similarly waive
compliance with any provision of the Notes which waiver does not
adversely affect the rights of the Note holders.
b. If it should ever be determined that the Notes were or are
subject to provisions of the Trust Indenture Act of 1940, the
Corporation may find it necessary or desirable to cause the
Notes to be covered by a trust indenture administered by an
independent trustee. Accordingly, the Holders agree that the
Corporation shall have the right and power to enter into a trust
<PAGE>
PAGE 83
indenture meeting the applicable requirements of the Trust
Indenture Act of 1940, to appoint an independent trustee
thereunder and, subject to Section 11.c herein, to make such
modifications and amendments to the Notes as the board of
directors of the Corporation, in the exercise of its discretion,
shall deem necessary or desirable without any requirement for
approval by the holders of the Notes.
c. The Corporation may otherwise amend the Notes only with the
written consent of the holders of at least a majority of the
principal amount of the Notes then outstanding; provided,
however, that without the consent of the holder of each Note
affected, no such amendment may (i) reduce the rate or extend
the time for payment of interest on the Notes, (ii) reduce the
principal of or extend the maturity of the Notes, or (iii)
reduce the required percentage for waiver or modification of the
Notes.
d. Except as otherwise provided in Section 11.c above, the
observance of any term or provision of this Note may be waived
(either generally or in a particular instance and either
retroactively or prospectively) and any default or event of
default may be waived with the written consent of the
Corporation and the Holders of at least a majority in principal
amount of Notes then outstanding.
e. Except as otherwise provided in Section 11.c above, any
amendment or waiver effected in accordance with this Section 11
shall be binding upon each Holder of any Notes at the time
outstanding, each future holder of all such Notes and the
Corporation. Each Holder acknowledges and agrees that by
operation of this Section, the Holders of a majority in
principal amount of Notes then outstanding will have the right
and power to diminish or eliminate certain material rights of
the Holder hereunder.
12. Miscellaneous.
a. The Corporation may consider and treat the person in whose name
this Note shall be registered as the absolute owner thereof for
all purposes whatsoever and the Corporation shall not be
affected by any notice to the contrary. This Note shall be
registered as to both principal and interest on the books of the
Corporation. Subject to Section 10 herein, the transfer of the
Note may be effected only by operation of law, accompanied by
evidence satisfactory to the Corporation substantiating the
transfer. Communications sent to any registered holder shall be
effective as against all holders or transferees of the Note not
registered at the time of sending communication.
b. Payment of principal and interest shall be made to the
registered owner of this Note upon presentation on or after the
Maturity Date. No interest shall be due on this Note for such
period of time that may elapse between the maturity of this Note
and its presentation for payment.
<PAGE>
PAGE 84
c. The Holder shall not, by virtue hereof, be entitled to any
rights of a shareholder in the Corporation, either at law or in
equity, and the rights of the Holder are limited to those
expressed in this Note.
d. Upon receipt by the Corporation of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation
of this Note, and in the case of loss, theft or destruction, of
reasonably satisfactory indemnification, and upon surrender and
cancellation of this Note, if mutilated, the Corporation shall
execute and deliver a new Note of like tenor and date.
e. This Note shall be construed and enforced in accordance with the
laws of the State of Colorado, without regard to its conflicts
of laws rules or principles.
f. No recourse shall be had for the payment of the principal or
interest of this Note against any incorporator or any past,
present or future stockholder, officer, director, employee or
agent of the Corporation or of any successor corporation, either
directly or through the Corporation or any successor
corporation, all such liability of the incorporators,
stockholders, officers, directors, employees and agents being
hereby waived, released and surrendered by the Holder hereof by
the acceptance of this Note.
g. This Note shall be binding upon, enforceable by and against, and
inure to the benefit of the Holder and the Corporation, and
their respective heirs, personal representatives, successors and
assigns.
h. In case any one or more of the provisions contained in this Note
should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or
impaired thereby.
IN WITNESS WHEREOF, the Corporation has signed and sealed this
Convertible Subordinated Promissory Note this --- day of --------------, 1997.
RENTECH, INC.
---------------------------------------
President
(Corporation Seal)
------------------------------
Secretary
<PAGE>
PAGE 85
FORM OF REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is made and entered into this ------ day of -----------,
1997, between RENTECH, INC., a Colorado corporation ("Company") and -------
--------------------------------------------------------------------------
("Holder").
In consideration of the mutual covenants contained herein, the parties
agree as follows:
1. Definitions.
(a) The term "Act" means the Securities Act of 1933, as amended;
(b) The terms "register," "registered," and "registration" refer to
a registration effected by preparing and filing a registration statement in
compliance with the Act and the declaration or ordering of effectiveness of
such registration statement.
(c) The term "Registrable Securities" means (i) up to 1,666,667
shares of Common Stock, par value $.01 per share, of the Company issuable or
issued to those persons who purchase the Company's Ten Percent Convertible
Subordinated Notes, together with 550,000 shares of Common Stock, plus 10%
additional shares issuable as placement agent compensation, (collectively the
"Holders"), and (ii) any Common Stock of the Company issued as a dividend or
other distribution with respect to, or in exchange or in replacement of, such
Common Stock.
2. Request For Registration. Within 30 days after the Holder and other
Holders acquire the Company's Ten Percent Convertible Subordinated Notes that
may be converted into at least 1,666,667 shares of the Registrable Securities
and 550,000 shares of Common Stock, plus 10% additional shares issuable as
placement agent compensation, and (i) the Common Stock of the Company shall
then be registered pursuant to Section 12(g) under the Securities Exchange Act
of 1934 (the "1934 Act"); (ii) the Company is then current with all filing
requirements under the 1934 Act; and (iii) if the Company shall then qualify
for use of a registration statement on Form S-3 covering all such Registrable
Securities; then the Company except as otherwise provided below, shall use its
best efforts to cause the registration under the Act of all Registrable
Securities. The Company shall be obligated to effect only one registration
pursuant to this paragraph. If the Company so elects, any request for
registration under this paragraph may be for an underwritten public offering
to be managed by an underwriter or underwriters of recognized standing
reasonably acceptable to the Company. Whenever required to use its best
efforts to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
<PAGE>
PAGE 86
(a) Prepare and file with the Securities and Exchange Commission a
registration statement on Form S-3 with respect to such Registrable Securities
and use its best efforts to cause such registration statement to become and
remain effective; provided, however, that the Company shall in no event be
obligated to cause any such registration to remain effective for more than the
earlier of sale of all Registrable Securities covered thereby or one year
after the date which the registration statement was declared or ordered
effective.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of
the Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holder such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under the securities or blue sky laws
of such other jurisdictions as shall be reasonably appropriate for the
distribution of the securities covered by the registration statement, provided
that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions, and further provided
that (anything in this Agreement to the contrary notwithstanding with respect
to the bearing of expenses) if any jurisdiction in which the securities shall
be qualified shall require that expenses incurred in connection with the
qualification of the securities in that jurisdiction be borne by selling
shareholders pro rata, the Holder shall pay such costs to the extent required
by such jurisdiction.
3. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action that the Holder shall furnish to
the Company such information regarding him or her, the Registrable Securities
held by him or her, and the intended method of disposition of such securities
as the Company shall reasonably request and as shall be required in connection
with the action to be taken by the Company.
4. Expenses of Registration. All expenses incurred in connection with a
registration pursuant to paragraph 2 (excluding underwriters' or securities
broker-dealers' discounts, commissions and expenses), including, without
limitation, all registration and qualification fees, printers' and accounting
fees, and fees and disbursements of counsel for the Company, shall be borne by
the Company.
5. Delay of Registration. Holder shall not have any right to take any
action to restrain, enjoin, or otherwise delay any registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Agreement.
6. Indemnification. If any Registrable Securities are included in a
registration statement:
<PAGE>
PAGE 87
(a) To the extent permitted by law, the Company will indemnify and
hold harmless the Holder, any underwriter (as defined in the Act) for the
Holder, and each such person, if any, who controls such Holder or underwriter
within the meaning of the Act, against any losses, claims, damages, or
liabilities, joint or several, to which they may become subject under the Act
or otherwise, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based on any untrue statement
of any material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, or arise out of or based upon the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading; and will reimburse
the Holder, such underwriter, or controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided,
however, that the indemnity agreement contained in this paragraph 6(a) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld) nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
connection with such registration statement, preliminary prospectus, final
prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with information furnished expressly for use in connection with
such registration by any such Holder, underwriter, or controlling person.
(b) To the extent permitted by law, the Holder will indemnify and
hold harmless the Company, each of its directors, each of its officers who
have signed the registration statement, each person, if any, who controls the
Company within the meaning of the Act, and each agent and any underwriter for
the Company (within the meaning of the Act) against any losses, claims,
damages, or liabilities to which the Company or any such director, officer,
controlling person, agent, or underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereto) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extend, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in such registration statement, preliminary or final prospectus, or
amendments or supplements thereto, in reliance upon and in conformity with
information furnished by the Holder expressly for use in connection with such
registration; and the Holder will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, controlling
person, agent, or underwriter in connection with investigating or defending
any such loss, claim, damage, liability, or action; provided, however, that
the indemnity agreement contained in this paragraph 6(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Holder (which
consent shall not be unreasonably withheld).
<PAGE>
PAGE 88
(c) Promptly after receipt by an indemnified party under this
paragraph of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party under this paragraph, notify the indemnifying party in writing of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties. The failure to
notify an indemnifying party promptly of the commencement of any such action,
if prejudicial to his ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
paragraph, but the omission to so notify the indemnifying party will not
relieve him or any liability that he may have to any indemnified party
otherwise than under this paragraph.
7. No Transfer of Registration Rights. The registration rights of the
Holder under this Agreement may not be transferred.
8. Miscellaneous.
(a) Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties and no party shall be
liable or bound by any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors and assigns of the
parties. Nothing in this Agreement, express or implied, is intended to confer
upon any third party any rights, remedies obligations, or liabilities under or
by reason of this Agreement, except as expressly provided in this Agreement.
(b) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado.
(c) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(d) Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
(e) Rights of Holders. Each Holder shall have the absolute right
to exercise or refrain from exercising any right or rights that such Holder
may have by reason of this Agreement, including, without limitation, the right
to consent to the waiver or any obligation of the Company under this Agreement
and to enter into an agreement with the Company for the purpose of modifying
this Agreement or any agreement effecting any such modification, and such
Holder shall not incur any liability to any other Holder or Holders with
respect to exercising or refraining from exercising any such right or rights.
<PAGE>
PAGE 89
(f) Time of Essence. Time is of the essence regarding performance
of all terms, provisions and conditions contained in this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
RENTECH, INC.
By: ------------------------------
Dennis L. Yakobson, President
HOLDER:
------------------------------
(Signature)
------------------------------
Print Name
<PAGE>
PAGE 90
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
Rentech, Inc.
Denver, CO 80202
We consent to the incorporation by reference in Registration Statement No.
33-90250 of Rentech, Inc. on Form S-8 of our report dated November 26,
1997, relating to the consolidated financial statements (which contained
an explanatory paragraph relative to the going concern uncertainty)
appearing in the Annual Report on Form 10-KSB of Rentech, Inc. for the
year ended September 30, 1997 and for the nine months ended September 30,
1996 incorporated by reference in the Registration Statement and deemed to
be a part thereof.
BDO Seidman, LLP
December 26, 1997
Denver, Colorado
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet at September 30, 1997 and the Statement of Operations for the
12 months ended September 30, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-START> Oct-01-1996
<PERIOD-END> Sep-30-1997
<CASH> 391,487
<SECURITIES> 0
<RECEIVABLES> 150,911
<ALLOWANCES> 2,000
<INVENTORY> 107,151
<CURRENT-ASSETS> 702,237
<PP&E> 172,863
<DEPRECIATION> 126,774
<TOTAL-ASSETS> 4,857,204
<CURRENT-LIABILITIES> 1,377,867
<BONDS> 0
0
0
<COMMON> 295,392
<OTHER-SE> 3,058,945
<TOTAL-LIABILITY-AND-EQUITY> 4,857,204
<SALES> 1,189,536
<TOTAL-REVENUES> 1,189,536
<CGS> 481,797
<TOTAL-COSTS> 481,797
<OTHER-EXPENSES> 1,785,522
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 303,195
<INCOME-PRETAX> (1,375,686)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,375,686)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,375,686)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
