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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from January 1, 1996 to September 30, 1996
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. [X]
The issuer's revenues for the nine month period ended September 30,
1996 were $295,176.
The aggregate market value of voting stock held by nonaffiliates of the
issuer as of December 16, 1996 was $2,543,032, based upon the average bid
and asked prices of such stock on that date.
The number of shares outstanding of the issuer's common stock, as of
December 16, 1996 was 14,975,116.
Transitional Small Business Disclosure Format. Yes No X <PAGE>
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PART I
Item 1. Description of Business
General
Rentech, Inc. (the Company or Rentech) was organized as a Colorado
corporation in 1981 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 (Technology) 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 conversion process and a catalyst that is essential to
use of its Technology.
Economic use of the Rentech 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.
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. These
sources of fuel are in abundant supply worldwide. 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. Other sources of feedstock include methane,
a gas collected from coal beds, as well as industrial off gases.
The principal products of the Rentech 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 business is licensing the Rentech Technology, including
sale of its proprietary catalyst, in exchange for license fees and ongoing
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 Conversion Technology."
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Developments During 1994, 1995 and 1996
Future Fuels Subcontract for Henan Project, China
In 1994 the Company, through its wholly-owned subsidiary, Future Fuels
Pty Ltd., an Australian corporation, obtained a design and procurement
subcontract for a plant to be constructed in Henan, China. The plant was
licensed to use the Rentech Technology for the production of diesel fuel and
waxes as a small part of its overall production of liquid hydrocarbons to
be derived from the gasification of coal. The primary purpose of the plant
is to use coal gasification to produce a low grade liquid fuel for local use
in nearby cities. The subcontract was awarded to Future Fuels by an
Australian joint venture comprised of Energy Equipment Pty Ltd. and CMPS&F
Pty Ltd. The joint venture, which is the developer of the Henan Project,
had entered into a contract with the local Chinese government for
construction of the project. During 1995, Future Fuels delivered basic
design documentation and test reports for the design of the Henan plant to
the Australian joint venture. The joint venture contended that the basic
design documentation and test reports were not timely delivered according
to the subcontract between Future Fuels and the joint venture. Future Fuels
asserted that it had met the contract requirements, and a contract dispute
procedure was invoked by the parties. After negotiations, the parties
agreed to discontinue work on the subcontract, thus ending Rentech's
involvement with the Henan Project. Management of Rentech believes that the
subcontract was terminated due to changes in strategy by the Chinese
government or the joint venture relating to financing of the Henan Project
or the products to be obtained.
After the loss of its only major contract, Future Fuels terminated the
employment of all its employees and independent contractors as of December
31, 1995 and went out of business. On February 16, 1996, Future Fuels filed
in an Australian court for liquidation. A liquidator for Future Fuels was
appointed by Australian court order on March 21, 1996, pursuant to
Australian law. These transactions ended Rentech's involvement with the
Henan Project in China, ending its subcontract in the approximate amount of
$10.9 million from which Rentech had expected substantial profits over the
period from 1994 through 1998 in progress payments, and terminated Rentech's
business conducted through Future Fuels.
Arunachal Pradesh Project, India
In 1994 the Company contracted to provide the basic engineering design
for a gas conversion plant to be constructed in the state of Arunachal
Pradesh in India. The plant is licensed by the Company to use the Rentech
Technology, and is to produce only products that are based upon the
Technology. During 1995 Rentech completed the preliminary engineering
design for the Arunachal Pradesh plant. Rentech received a $250,000
contract in February 1996 for the basic engineering design for the plant.
The plant is now in the final design phase for construction. See Part I,
Item 1, "Description of Business--Present Licenses and Contracts for the Gas
Conversion Technology."
ITN/ES LLC
As a step in its goal of broadening its business beyond licensing its
gas conversion Technology, in October 1996 Rentech 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 the LLC
by ITN Energy Systems, Inc., which will be the manager of the LLC. The LLC
was organized under Colorado law.
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The technologies and products to be owned by the 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.
Rentech's ownership interest in the 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 by February 14, 1997, or upon
contribution of an additional $25,000, by April 15, 1997. 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.
The agreement 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 up to a
maximum of 49% of each technology in which it invests.
Okon Acquisition Agreement
Rentech has entered into an agreement on December 6, 1996 to purchase
the assets of Okon, Inc. of Lakewood, Colorado. The Company intends to use
the assets to engage in the business of producing and selling water
repellent sealers and stains for wood, concrete and masonry. The purchase
price is $1,300,000, of which $50,000 has been advanced and $950,000 is to
be paid in cash upon closing and $300,000 is due by the terms of a
promissory note. The note is payable in 12 monthly installments commencing
one year after the closing.
Okon, Inc. has been engaged for over 20 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. 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.
Management believes that the acquisition of the Okon assets by the
Company fits well into Rentech's business development plan. Okon's assets
provide an environmentally friendly line of products and are expected to
generate sales revenues that the Company believes have a potential for
growth. Okon's trade name is a recognized name within its industry. The
environmental advantages of the Okon products complement Rentech's continued
dedication to its business philosophy of producing environmentally cleaner
fuels and products from its patented and proprietary gas conversion
technology. The acquisition of Okon's assets will produce revenues to
Rentech and a cash flow that provides a more secure financial base from
which Rentech can expand and strengthen its core business.
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Completion of the asset acquisition is subject to due diligence and
funding of the purchase by Rentech by January 24, 1997, which date can be
extended to March 24, 1997 by payment of an additional $50,000. Rentech
must obtain funding for the cash due at closing to complete the purchase.
There is no assurance that such funding can be obtained or that acquisition
of the assets will be completed. The transaction is subject to other
material terms and conditions as disclosed in the purchase agreement filed
as an exhibit to this report.
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 and presently owns approximately
4.8% of Rentech's common stock.
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 (see
Part I, Item 1, "Description of Business--Developments During 1994, 1995 and
1996"), and a preliminary design contract for the Arunachal Pradesh plant
under construction in India. See Part I, Item 1, "Description of
Business--Present Licenses and Contracts for the Gas Conversion 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.
General Arrangements for Licensing Gas Conversion Technology
The Company's objective for its 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.
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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 approximately five thousand or more
barrels per day of product. The 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 may 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.
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.
Present Licenses and Contracts for the Gas Conversion Technology
Several licenses for use of its 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 fees, engineering
design fees, and continuing 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 ITN/ES LLC. See Item 1, "Description of Business, Developments
During 1994, 1995 and 1996." 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 compensation from such plants as its compensation. ITN continues to
assist with marketing the Rentech Technology in India.
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Through the efforts of ITN, Rentech has entered into Memoranda of
Understanding for the design and construction of three process plants in
India using Rentech's Technology. The first plant now under final design
and construction, is to be a 350 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. In March 1996, Rentech received $120,000 as the initial payment
due toward its license fee. The Synhytech plant, which will provide the
majority of base components of the proposed 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, (see Part I, Item 1,
"Description of Business--Developments During 1994, 1995 and 1996"),
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.
Construction contracts are expected to be let after completion of the final
engineering design by Humphries & Glasgow. That design is expected to be
finished in early 1997. Donyi-Polo has announced that construction of the
plant is to commence upon completion of the final engineering design but may
be delayed due to monsoon weather.
A second Memorandum of Understanding has been entered into for an
Indian plant to produce 300 barrels of hydrocarbon products per day and to
be located in the state of Gujarat in northwestern India. The plant is
planned to use flared gas and will be owned by Metropolitan Organic and
Chemical Industries, Ltd., a large integrated industrial corporation
headquartered in Bombay, the Gujarat Petrochemicals Corporation, Ltd., a
state owned company, and ITN-Inc., Rentech's Indian representative.
Definite plans to proceed with this project have not been made, and Rentech
does not expect engineering design contracts, license fees or other revenues
from it in the foreseeable future.
A third Memorandum of Understanding is for a plant ranging from 500 to
2,500 barrels per day, using synthesis gas produced from coal as its
feedstock. The owners will be OSWAL Agro Mills, Ltd., New Delhi, one of
India's largest business conglomerates, and Rentech, India, a proposed
subsidiary of Esquire Gujarat Petrochemicals Corporation, Ltd. Definite
plans to proceed with this third project have not been made, and Rentech
does not expect engineering design contracts, license fees or revenues from
it in the foreseeable future.
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.
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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 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 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.
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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.
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 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.
<PAGE>
PAGE 12
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 Conversion 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.
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 Part I, Item
1, "Description of Business--Patents Relating to the Gas Conversion
Technology."
Large synthetic fuel projects require that substantial reserves of
natural gas or synthetic gas be readily available, whereas smaller plants
using Rentech's Technology can be economically constructed and operated in
areas having much smaller reserves of feedstock gas. 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 Conversion 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.
<PAGE>
PAGE 13
Feedstock Supplies for the Gas Conversion 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. Additional sources of
feedstock include methane gas collected from coal beds and industrial off
gases. Carbon-bearing solids such as coal and biomass that are first
converted to synthesis gas, a mixture of hydrogen and carbon monoxide, can
provide another feedstock source.
Future conversion plants will normally be constructed in relatively
close proximity to feedstock sources in order to minimize the cost of
transporting the feedstock to a plant. However, depending upon future costs
and sales prices of Rentech products, it may be economical to construct
feedstock collection facilities and transmission pipelines to bring the
feedstock to a plant.
Patents Relating to the Gas Conversion Technology
Rentech has been granted several United States patents related to
certain process applications, products produced, and materials used in its
gas conversion process. The patents and a pending application with
additional claims are directed to technology in the field of conversion of
gaseous hydrocarbons to liquid hydrocarbons through use of Fischer-Tropsch
processes.
Rentech has been granted U.S. patents covering a method for cracking
a Fischer-Tropsch wax, a method of making a promoted iron catalyst for
Fischer-Tropsch synthesis reactors, a synthetic oxygenated diesel fuel
produced by Fischer-Tropsch synthesis, an oxygenated diesel fuel to be used
as an additive, and a patent covering the overall process.
The Company has received notice from the U.S. Patent Office that three
additional patents will be issued to it. One of them is for Rentech's
oxygenated, sulphur and aromatic-free diesel fuel as an additive. This
solidifies its previous patent relating to use of Rentech's diesel fuel as
an additive, which increases the oxygen content in diesel fuel while
maintaining diesel fuel specification limits for viscosity. Two of the
pending patents include key elements of the process that enables Rentech's
iron-based catalyst to compete with cobalt-based catalysts. These patents
to be issued 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, due to their toxicity, are less
environmentally friendly as 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.
<PAGE>
PAGE 14
United States patents issued before the GATT treaty have a term of 17
years from the date of issue. Patents based on applications filed before
the GATT treaty was adopted in 1991 have a term of 20 years from the date
of application. The issuance of any one or more patents does not assure the
Company 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.
Governmental Regulations Pertaining to the Gas Conversion 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 Conversion Technology
The Company spent no money on research and development during either
the nine-month period ended September 30, 1996, or the 12-month period ended
December 31, 1995.
Employees
At present, the Company has seven full-time employees, four of whom are
officers. One additional officer and director provides consulting services
on a part-time basis. Further personnel requirements, if any, will be
satisfied as necessary.
Item 2. Description of Property
Synhytech Plant Buildings
In 1995, the Company sold the Synhytech plant and other equipment and
assets that were transferred to it from Public Service Company of Colorado
(PSCo) and Fuel Resources Development Company (Fuelco) in May 1993. Two
buildings formerly used to support operations at the Synhytech plant are
located in Pueblo, Colorado, on land leased from PSCo and Fuelco that is
owned by the City of Pueblo. The Synhytech plant has been sold and removed
from the site by the licensee of the Arunachal Pradesh, India plant.
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 $38,700 per year.
<PAGE>
PAGE 15
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 September 19,
1996. At the meeting, Dennis L. Yakobson was elected to a term ending in
1999 as a member of the board of directors. The terms of Ronald C. Butz,
Mark S. Bohn, D. Barry McKennitt and Erich W. Tiepel as directors continue
after the meeting. The shareholders also adopted the Company's 1996 Stock
Option Plan which authorizes purchase of 500,000 shares of the Company's
common stock by employees, directors and consultants pursuant to stock
options to be granted.
The following tabulation shows the votes cast at the meting on each
matter voted upon, including election of directors.
<TABLE>
<CAPTION>
Withheld/ Not
For Against Voted
<S> <C> <C> <C>
Election of Directors:
Dennis L. Yakobson 8,104,089 391,461 0
Approval of the 1996 Stock
Option Plan: 7,149,052 1,240,145 106,353
</TABLE>
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters
Beginning in April of 1991, the common stock of the Company trades on
the NASDAQ Small-Cap 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 bid prices represent
inter-dealer quotations, without adjustment for retail mark-ups, mark-downs
or commissions and may not necessarily represent the actual transactions.
<TABLE>
<CAPTION>
Price Ranges (closing bid)
For Fiscal Quarters in 1996, 1995 and 1994
1996 1995 1994
Low High Low High Low High
<S> <C> <C> <C> <C> <C> <C>
First quarter 3/16 11/16 1-1/8 2 1-5/8 2-1/8
Second quarter 1/4 21/32 29/32 1-1/4 1-3/8 2-3/8
Third quarter 7/32 1/2 5/8 1-1/4 1-1/4 2-5/16
Fourth quarter --- --- 7/16 15/16 1-1/4 2-1/8
</TABLE>
<PAGE>
PAGE 16
Based solely upon the number of record holders, the approximate number
of shareholders of the common stock of the Company as of September 30, 1996
was 331. The number of beneficial owners is estimated by management at not
less than 1,200.
No dividends have been declared during the 9-month period ended
September 30, 1996 and the 12-month period ended December 31, 1995 with
respect to the common stock.
The Nasdaq Stock Market has proposed increasing its financial
requirements for companies whose stocks are listed on Nasdaq. One of the
proposals would make stocks trading at less than $1 ineligible for listing.
Another would increase the total assets requirement to $3 million. At
present Rentech does not meet the $1 stock trading requirement. If it does
not meet that proposed requirement upon its approval by the Securities and
Exchange Commission within the time allowed, which may occur during 1997,
the common stock would be dropped from Nasdaq's Small Cap 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. The sales were all made without a principal underwriter. The
warrants are exercisable at $.25 per share of common stock on or before
September 20, 1997.
<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>
Sep. 19, 1994 Common Stock 1,032,000 $1,290,000 $129,000 Accredited Rule 505 and
Investors 506 and
Section 4(6)
Sep. 30, 1994 Common Stock 500,000 $ 500,000 $0 Accredited Rule 506 and
Investor Section 4(6)
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 and 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
Stock and Investors and Section 4(6)
Warrants to
Purchase
138,724
shares of
Common Stock
<PAGE>
PAGE 17
Sep. 30, 1996 Common 151,422 $ 37,245 $0 Accredited Rules 505,
Stock and Investors 506 and
Warrants to Section 4(6)
Purchase
33,724
shares of
Common Stock
</TABLE>
Item 6. Management's Discussion and Analysis or Plan of Operation
Results of Operations
For the nine months ended September 30, 1996 and the twelve months
ended December 31, 1995, the Company had net losses of $392,478 and
$2,452,823, respectively. The reduction of approximately 84% in loss for
the nine-month period in 1996 compared to the loss for the twelve month
period in 1995 is primarily due to discontinuance of work by Future Fuels
Pty Limited, a wholly-owned subsidiary, on its engineering design contract
for the Henan Project in China, and the shorter period during which general
and administrative expenses were incurred. The loss for the nine months
ended September 30, 1996 includes an extraordinary gain from debt
extinguishment of $200,434. The loss also includes a non-cash allowance of
$100,000 on the Synhytech plant held for sale in the 1996 period compared
to a non-cash allowance of $240,000 on the sale of Synhytech assets sold
during the 1995 period. If these extraordinary and non-cash items are
excluded, the comparable losses are $492,478 for the nine months ended
September 30, 1996 and $2,222,823 for the twelve months ended December 31,
1995.
During the nine months ended September 30, 1996 the Company recognized
$55,176 in contract revenues related to an engineering design and consulting
contract related to the Arunachal Pradesh plant to be constructed in India
compared to contract revenues of $970,814 during the twelve months ended
December 31, 1995, $629,735 of which was from the Future Fuels contract for
the Henan Project in China, $131,666 of which was related to the Arunachal
Pradesh project in India, and $209,413 was from services provided to test
certain processes at the Synhytech plant before it was removed.
During the nine months ended September 30, 1996, the Company recognized
$240,000 in 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.
Total revenues for the nine-month period ended September 30, 1996 were
reduced by 70% to $295,176, from the $982,633 in total revenues for the
twelve months ended December 31, 1995. The reduction primarily reflects
discontinuance of the Future Fuels contract for the Henan Project in 1995,
which was offset only in small part by the new contract revenues and license
fees related to the Arunachal Pradesh project in India.
<PAGE>
PAGE 18
During the nine months ended September 30, 1996 the Company incurred
cost of contracts of $29,463 related to its design work for the Indian plant
compared to $1,381,301 during the twelve months ended December 31, 1995
related to its discontinued contract work for the China project.
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. The gross loss of $398,668 for the twelve
months ended December 31, 1995 is a result of the contract for the Henan
Project in China, and reflects greater cost of contracts than revenues from
the contract during that period.
During the nine months ended September 30, 1996 general and
administrative expenses decreased by 36% compared to the twelve months ended
December 31, 1995. The decrease is primarily caused by the shorter period
during which the costs were incurred and the decrease in the holding costs
of the Synhytech plant.
After the Future Fuels contract was discontinued during 1995, Future
Fuels was placed in liquidation. The Company consequently recognized a loss
on disposition of subsidiary of $500,908 for the 1995 fiscal year.
Depreciation and amortization decreased by approximately 26% during the
nine months ended September 30, 1996 compared to the twelve months ended
December 31, 1995 is primarily due to the shorter period during which
equipment was depreciated and licensed technology was amortized.
Loss from operations for the nine months ended September 30, 1996 was
reduced by 74% to a loss of $553,799 compared to a loss of $2,147,225 for
the twelve months in 1995. The reduced loss in large part reflects both the
reduction of total operating expenses and costs of contracts related to
Future Fuels and elimination of the Synhytech holding costs, the benefit of
which was offset in part by the corresponding reduction in revenues from the
discontinued contract of Future Fuels for the Henan Project.
Gain of $3,140 on sale of 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, compared to the loss of
$240,329 from sale of the Synhytech plant during the twelve months ended
December 31, 1995. 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 twelve months ended December 31, 1995, the Company
recorded a loss of $75,000 on its investment in Clean Fuels Development
Corporation, a licensee which did not proceed with development of a gas
processing plant intended to use the Company's technology. 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 income was
reduced by approximately 80% for the nine months ended September 30, 1996
compared to the twelve months ended December 31, 1995 reflecting lower cash
balances during most of the later period. Interest expense increased by
approximately 100% during the nine months of the 1996 period compared to the
twelve months of the 1995 period due to interest paid on the convertible
notes that were converted into the Company's stock during September 1996.
<PAGE>
PAGE 19
Liquidity and Capital Resources
The Company has incurred losses since its inception that raise
substantial doubt about its ability to continue as a going concern. At
September 30, 1996, the Company had working capital of $456,560 as compared
to a working capital deficit of $388,159 at December 31, 1995. The increase
in working capital is due to the issuance during the nine months ended
September 30, 1996 of 1,024,822 shares of common stock as payment of debts
totaling $365,001. During the 1996 period the Company also borrowed
$787,000 in the form of convertible notes payable. During September 1996
these notes plus interest were converted into 3,993,426 shares of the
Company's common stock. These stock issuances were the primary cause of the
Company's working capital balance at September 30, 1996.
The Company's financial outlook was seriously worsened in the fourth
quarter of 1995 when a contract dispute arose between the Company's
Australian subsidiary, Future Fuels Pty Ltd., and the Australian joint
venture composed of Energy Equipment Pty Ltd. and CMPS&F Pty Ltd. The joint
venture had let a subcontract to Future Fuels to provide basic engineering
design and operating data to the joint venture for construction of the Henan
Project in China. As a result of the dispute, the subcontract was suspended
in 1995 and considered terminated at December 31, 1995 for accounting
purposes. The discontinuance of Future Fuels' subcontract for the Henan
Project deprived the Company of what it had expected to be the major source
of its income through 1998. The contract was for a total of approximately
$10.9 million, of which approximately $1,431,000 had been received. Future
Fuels was owed approximately $356,000 by the joint venture when the
subcontract was deemed terminated, and does not expect to recover that sum
from the joint venture. As a result of the discontinuation, and ultimate
termination for accounting purposes, of Future Fuels' contract for the Henan
Project, the operations of Future Fuels were closed, the employees and
independent contractors discharged, and the business wound up in late 1995.
In February 1996, Future Fuels filed for liquidation under Australian law.
On March 21, 1996, a trustee was appointed to liquidate the assets and
discharge the liabilities to the extent of the assets. The liabilities of
Future Fuels exceed the value of its assets, and the Company, as sole
shareholder and major creditor, does not expect to receive any distribution
from the liquidation of the subsidiary.
During the third quarter of 1996 the Company received net proceeds of
$787,000 from a private placement of its common stock. The Company issued
its 10% convertible promissory notes that were converted into 3,993,426
shares of its common stock on September 20, 1996 at $0.20 per share. By
conversion, the note holders became entitled to stock purchase warrants
authorizing purchase of additional shares of common stock at $.25 per share
through September 20, 1997. The number of shares subject to a warrant are
equal to the number of shares a note holder received upon conversion of his
note. The Company has caused all the shares acquired upon conversion of the
notes and exercise of the stock purchase warrants to be registered under the
Securities Act of 1933, as amended.
The funds from the 1996 private placement are expected to be adequate
to fund the Company's operations at the current reduced level into the first
quarter of 1997. In order to provide working capital for periods beyond
that time, the Company plans to conduct additional private placements of its
common stock or other securities in exchange for cash, assets or businesses
that generate net profits. The Company is actively seeking such
opportunities and pursuing its business plan to diversify into other fields.
The Company's ability to continue operations depends upon whether it can
obtain financing of approximately $1,500,000 to accomplish its planned
acquisitions and generate operating income from them before its working
capital is exhausted. See Part 1, Item 1, Description of Business - ITN/ES
<PAGE>
PAGE 20
LLC, and Okon Acquisition Agreement and Note 1 to the Financial Statements
for details of management's plans relative to the going concern problem.
The Company intends to continue to license its gas conversion
technology and expects to realize income from license fees and construction
subcontracts for the Arunachal Pradesh project in India and from other
projects that it seeks in India and elsewhere. Approximately $65,000 from
work on the Company's engineering contract for the Arunachal Pradesh project
in India is expected over the next 12 months. Additional income from the
gas conversion technology is not anticipated until after startup and
production from the plant, which is not expected before late 1997. There
are no assurances that additional capital can be raised or that assets or
other businesses that generate operating income to the Company can be
realized in time or in amounts adequate to enable the Company to continue
its operations as a going concern, or that operating profits will be
ultimately derived from the gas conversion technology.
The Company has made no commitments for material capital expenditures,
either in the short or the long term, and does not presently expect such
requirements in the near future.
The Company has deferred tax assets with a 100% valuation allowance at
September 30, 1996 and December 31, 1995. 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 $392,478 during the nine
months ended September 30, 1996 and $2,452,823 during the twelve months
ended December 31, 1995. During the nine-month period in 1996, non-cash
expenses included depreciation which was 36% less than during the
twelve-month period in 1995, primarily due to the shorter period during
which equipment was depreciated, amortization which was 41% less than
during the twelve-month period in 1995 primarily due to the shorter period
during which licensed technology was amortized, a $100,000 write-down of
the Synhytech plant held for sale, and a gain of $3,140 on sale of assets
compared to a $240,329 loss on sale of assets in the 1995 period due to
sale of the Synhytech plant. Shares of the Company's common stock were
issued in the nine-month period to discharge $151,125 due for services.
The Company recorded a bad debt expense of $103,930 for the twelve months
ended December 31, 1995, realized a loss of $500,908 on disposition of its
Future Fuels subsidiary in the 1995 period, and recorded a loss on
investment of $75,000 during the 1995 period.
Changes in operating assets and liabilities were significantly affected
during the nine months ended September 30, 1996 by the receipt of proceeds
from the sale of non-subordinated notes payable. The Company was able to
pay down approximately $533,000 of its accounts payable. There was no
reduction in restricted cash during the 1996 period compared to a $25,000
reduction in restricted cash in the twelve months ended December 31, 1995.
Accounts receivable decreased by $38,613 during the 1996 period compared to
a $237,070 increase during the 1995 period. There was an increase of $4,239
in advances and other current assets during the 1996 period compared to a
decrease of $12,832 during the 1995 period. Accrued liabilities increased
by $30,290 during the 1996 period, compared to a $24,354 increase during the
1995 period. Billings in excess of costs and estimated earnings on
uncompleted contracts decreased by $109,393 during the twelve months ended
December 31, 1996 due to termination of the contract for the Henan project.
<PAGE>
PAGE 21
The total net cash used in operating activities decreased by 60% to
$493,234 in the nine months ended September 30, 1996 compared to a decrease
of $1,253,642 during the twelve months ended December 31, 1995. The
decrease reflects discontinuance of work on the Future Fuels contract for
the Henan Project in China, as well as the shorter period during which
general and administrative expenses were incurred.
Investing activities during the nine months ended September 30, 1996
resulted in $3,140 in proceeds from the sale of assets compared to $223,620
in proceeds from the sale of the Synhytech plant during the twelve months
ended December 31, 1995. There was no purchase of equipment during the 1996
period compared to equipment purchases of $6,480 during the 1995 period.
The net cash provided by investing activities during the 1996 period
decreased to $5,573 from $220,770 during the 1995 period.
Financing activities during the nine months ended September 30, 1996
produced $50,000 as proceeds from issuances of common stock and $798,750 as
proceeds from non-subordinated notes payable, offset by offering costs of
$104,761. During the twelve months ended December 31, 1995, the Company
received $158,063 as proceeds of notes payable, and during the 1996 period,
made payments of $61,750 on a note payable. The net cash provided by
financing activities during the 1996 period was $682,239, an increase of
approximately 77% compared to the $158,063 provided by financing activities
for the 1995 period.
Cash increased during the first nine months of 1996 by $194,578
compared to a decrease of $874,809 for the year ended December 31, 1995.
These changes increased the ending cash balance to $210,486 at September 30,
1996 from $15,908 at December 31, 1995.
Item 7. Financial Statements
The financial statements identified in Item 13 are filed as part of
this Transition 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 1995 fiscal year. The
Company has not reported disagreement with its auditors on any matter of
accounting principles or practices or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;'
Compliance with Section 16(a) of the Exchange Act
<PAGE>
PAGE 22
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) Vice President - Engineering 1981 to date 1998
and Director
Ronald C. Butz(2) Vice President, Chief Operating 1984 to date 1998
Officer, Secretary and Director
D. Barry McKennitt(3) Director 1984 to date 1997
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>
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. CMPS&F Pty Ltd., an
Australian corporation and a shareholder group identified as RIG 86,
however, each have the right to nominate one person to serve as a director
of the Company. As of this date, these rights have not been exercised.
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:
<PAGE>
PAGE 23
Charles B. Benham, Vice President - Research and Development--
Dr. Benham, age 60, 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, Vice President - Engineering, Assistant Secretary and
Director--
Dr. Bohn, age 46, 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, and devotes
approximately 20% of his working hours to the business of the Company.
<PAGE>
PAGE 24
Ronald C. Butz, Vice President, Chief Operating Officer, Secretary and
Director--
Mr. Butz, age 59, 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.
D. Barry McKennitt, Director--
Mr. McKennitt, age 58, received a Bachelor of Science degree in
Geological Engineering in 1959 and a Master of Science degree in Geology in
1962 from the University of Manitoba and a Masters Degree in Business
Administration from Harvard University in 1964. He was employed from 1958
through 1963 by Imperial Oil, Atlantic Richfield and Mobil Oil Company in
various capacities, including planning and evaluation, exploration research
and exploration and development drilling. Mr. McKennitt was a consulting
industrial economist in energy and resource economics from 1964 through 1969
with S.R.I. International in Menlo Park, California. From 1969 through
1971, he was a senior investment analyst for Investors Diversified Services
in Minneapolis, Minnesota. In 1971, he joined The Boston Company, Boston,
Massachusetts, where he became a senior vice president and group director
in investment research and technology responsible for all energy and
resource investments. In 1978, Mr. McKennitt founded and was elected
president of Energy Associates, Inc., engaged in oil and gas investments and
finance. From 1989 to October 1992, he was also a vice president of Equitor
North American Asset Management, Inc., the North American investment arm of
Standard Chartered Bank of London, UK. In October 1992, Mr. McKennitt was
elected executive vice president and director of Constitution Management
Company, Inc., a Boston, Massachusetts investment management company. Mr.
McKennitt was a founding director of the National Association of Petroleum
Investment Analysts for which he has been a past president, director and is
an honorary life member. In 1995 he was elected Executive Director of the
Association. From 1988 through 1994 he also served on the advisory council
of ITT Corporation, Sheraton Hotels division, and since 1991 he has been a
member of the advisory council of Associated Luxury Hotels, Inc. He is also
a member of the Association for Investment Management and Research, The
Boston Security Analysts Society and the Petroleum Analysts of Boston. He
has been a director of the Company since 1984.
<PAGE>
PAGE 25
James P. Samuels, Vice President - Finance, Chief Financial Officer,
Treasurer--
Mr. Samuels, age 49, 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 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 53, 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.
<PAGE>
PAGE 26
Dennis L. Yakobson, President, Chief Executive Officer, Director and
Chairman of the Board--
Mr. Yakobson, age 60, 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 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 $100,000.
Summary Compensation Table
<TABLE>
<CAPTION
Long-Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted
Name and Annual Stock LTIP All Other
Principal compen- Award(s) Options/ Payouts Compen-
Position Year Salary($) Bonus($) sation($) ($) SARs(#) ($) sation($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dennis L. Yakobson 1996 $ 60,937(1) --- --- --- 166,200(2) --- ---
Chief Executive 1995 102,486 --- --- --- 79,382 --- ---
Officer 1994 105,516 --- --- --- 59,382 --- ---
Ronald C. Butz 1996 $ 58,825(1) --- --- --- 164,440(2) --- ---
Chief Operating 1995 98,934 --- --- --- 79,382 --- ---
Officer 1994 101,868 --- --- --- 59,382 --- ---
Charles B. Benham 1996 $ 58,825(1) --- --- --- 164,440(2) --- ---
Vice President - 1995 98,934 --- --- --- 79,382 --- ---
Research & 1994 101,868 --- --- --- 59,382 --- ---
Development
- --------------------
<FN>
<F1> For 1996, the period consisted of the nine months ended September 30, 1996.
<PAGE>
PAGE 27
<F2> Warrants to purchase shares of common stock at $.25 each expiring September 20, 1997.
</FN>
</TABLE>
Option/SAR Exercises and Holdings
The following table sets forth information with respect to the named
executives, concerning the exercise of options and/or limited SARs during
the last fiscal year and unexercised options and limited SARs held as of
the end of the fiscal period for the nine months ended September 30,
1996.
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values:
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired at FY-End(#) at FY-End($)
on Value Exercisable/ Exercisable/
Name Exercise(#) Realized ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Dennis L. Yakobson --- --- 96,882(1) $0(1)
Ronald C. Butz --- --- 96,882(1) 0(1)
Charles C. Benham --- --- 96,882(1) 0(1)
--------------------
<FN>
<F1> Exercisable.
</FN>
</TABLE>
Employment Contracts
The Company employs Messrs. Yakobson, Benham and Butz pursuant to
employment contracts that extend through March 31, 1997. The contracts
provide for annual cost of living adjustments only.
The contracts provide that the individuals will serve as president and
chief executive officer, vice president and chief operating officer, and
vice president - research and development, respectively, together with such
duties, responsibilities and powers as the board of directors may reasonably
specify. The contracts provide for three-year terms, and if the Company
terminates employment early without cause, for severance pay for the
remainder of the term or one year, which ever is more. The contracts impose
obligations of confidentiality as well as covenants not to compete with the
Company for three years following termination of employment for any reason
whatsoever.
<PAGE>
PAGE 28
Option/SAR Repricings
There have been no adjustments or amendments to the exercise price of
stock options or SARs previously awarded to any of the named executive
officers, whether through amendment, cancellation or replacement grants or
any other means during the 9-month period ended September 30, 1996, except
warrants to purchase shares of common stock expiring September 20, 1997, as
follows:
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Individual Grants Appreciation for Option Term
(a) (b) (c) (d) (e) (f) (g) (h)
Number of % of Total Market
Securities Options/SARs Price on
Underlying Granted to Exercise or Date of Expira-
Options/SARs Employees in Base Price Grant tion
Name Granted(#) Fiscal Year ($/Sh) ($/Sh) Date 0%($) 5%($) 10%
<S> <C> <C> <C> <C> <C> <C> <C>
Dennis L. Yakobson 166,200 21% $.25 $.28 9/20/97 $.03 $.04 $.06
Ronald C. Butz 164,440 21% .25 .28 9/20/97 .03 .04 .06
Charles B. Benham 164,440 21% .25 .28 9/20/97 .03 .04 .06
</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.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following tables set forth certain information as of December 16,
1996 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:
<PAGE>
PAGE 29
<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 3.7%
12878 W. 68th Avenue and Development (287,322 indirectly)(1)(2)
Arvada, CO 80004
Mark S. Bohn Vice President - Engineering, 443,431 of record 4.3%
1614 Tamarac Drive Assistant Secretary and (207,928 indirectly)(1)(2)
Golden, CO 80401 Director
Ronald C. Butz Vice President, Chief 533,583 of record(3) 5.3%
711 Marion Street Operating Officer, Secretary (287,322 indirectly)(1)(2)
Denver, CO 80218 and Director
D. Barry McKennitt Director 65,000 of record 1.2%
415 Hayward Mill Road (119,382 indirectly)(1)
Concord, MA 01742
James P. Samuels Vice President - Finance, 0 of record 1.9%
1331 17th St., Suite 720 Chief Financial Officer (280,000 indirectly(1)(2)
Denver, CO 80202
Erich W. Tiepel Director 123,277 of record 2.5%
2494 Houston Waring Cir. (263,106 indirectly)(1)(2)
Littleton, CO 80120
Dennis L. Yakobson President, Chief Executive 404,354 of record 4.6%
8847 Norwich Street Officer and Director (293,082 indirectly)(2)
Westminster, CO 80030
Mary H. Butz Shareholder 369,432 of record 5.3%
711 Marion Street (451,473 indirectly)(4)
Denver, CO 80218
Satish B. Parekh Shareholder 607,763 of record 4.1%
10 E. Lee Street, #809
Baltimore, MD 21202
CMPS&F Pty Ltd. Shareholder 772,000 of record 5.2%
67 Albert Avenue
Chatswood, NSW Australia 2057
Fuel Resources Development Shareholder 723,710 of record 4.8%
Co.
1225 17th St., Suite 2100
Denver, CO 80202
All Directors and Executive Officers and Directors 1,845,085 of record(3) 21.4%
Officers and a Group (1,738,142 indirectly) (12.3% of record)
(7 persons)
</TABLE>
[FN]
<F1> Includes shares of common stock underlying presently exercisable stock
options in the number indicated as owned indirectly.
<F2> Includes shares of common stock subject to warrants to purchase from
the Company.
<F3> Includes 369,432 shares of common stock held of record by his spouse
as to which shares he denies beneficial ownership.
<F4> Includes 164,151 shares of common stock owned of record by her spouse
and 287,322 shares subject to option to purchase by her spouse as to
which shares she denies beneficial ownership.
[/FN]
<PAGE>
PAGE 30
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 1995.
Mark S. Bohn, a director, performed engineering consulting services for
the Company during 1995 in the amount of $11,976.
During the 9 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.
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
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Summary of Accounting Policies
Notes to Financial Statements
(b) Reports on Form 8-K.
The following Forms 8-K were filed with the Commission during the quarter
ended September 30, 1996.
Form 8-K dated November 7, 1996; Item 5, Other Events;
Form 8-K/A dated November 7, 1996; Item 5, Other Events;
Item 7, Financial Statements and Exhibits;
Form 8-K dated November 14, 1996; Item 5, Other Events;
Form 8-K dated November 15, 1996; Item 5, Other Events;
Item 7, Financial Statements and Exhibits;
Form 8-K dated December 16, 1996; Item 5, Other Events;
Item 8, Changes in Fiscal Year.<PAGE>
<PAGE>
PAGE 31
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: January 14, 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: January 14, 1997 Dennis L. Yakobson, President, Chief
Executive Officer and Director
(signature)
------------------------------------
Date: January 14, 1997 Mark S. Bohn, Vice President, Director
(signature)
------------------------------------
Date: January 14, 1997 Ronald C. Butz, Chief Operating Officer,
Vice President, Secretary and Director
(signature)
------------------------------------
Date: January 14, 1997 D. Barry McKennitt, Director
(signature)
------------------------------------
Date: January 14, 1997 James P. Samuels, Vice President
- Finance, Chief Financial Officer
(signature)
------------------------------------
Date: January 14, 1997 Erich W. Tiepel, Director
<PAGE>
<PAGE>
PAGE 32
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 Form of Warrant to Purchase Shares of Common Stock
(incorporated herein by reference from the
exhibits to Registrant's Registration Statement
No. 333-11567 filed with the Securities and
Exchange Commission on September 6, 1996).
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 33
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 Key man insurance on the life of Charles D.
Benham (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-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).
EX-99-2 Agreement of Purchase and Sale of Assets between
Rentech, Inc. and Okon, Inc. dated December 6, 1996
(incorporated herein by reference from the exhibits
to Registrant's Current Report on Form 8-K dated
December 16, 1996 filed with the Securities and
Exchange Commission on December 18, 1996).
</TABLE>
<PAGE>
<PAGE>
PAGE 34
Report of Independent Certified Public Accountants
Stockholders and Board of Directors
Rentech, Inc.
Denver, Colorado
We have audited the accompanying balance sheets of Rentech, Inc. (the
"Company") as of September 30, 1996 and December 31, 1995, and the related
statements of operations, stockholders' equity and cash flows for the nine
months ended September 30, 1996 and for the year ended December 31, 1995.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
September 30, 1996 and December 31, 1995 and the results of its operations
and its cash flows for the nine months ended September 30, 1996 and for the
year ended December 31, 1995, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company 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 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
December 2, 1996
Denver, Colorado<PAGE>
<PAGE>
PAGE 35
Rentech, Inc.
Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------- ---------
Assets
<S> <C> <C>
Current:
Cash $ 210,486 $ 15,908
Restricted cash (Note 8) 25,000 25,000
Accounts receivable, net of no allowance
for doubtful accounts 198,457 237,070
Property tax receivable 71,813 -
Stock subscription receivable 50,000 -
Advances and other current assets 23,511 4,272
----------- ----------
Total current assets 579,267 282,250
----------- ----------
Equipment -
Equipment, net of accumulated depreciation
of $ 94,620 and $75,744 57,156 76,032
----------- ----------
Other:
Licensed technology, net of accumulated
amortization of $715,464 and $543,907 (Note 4) 2,715,684 2,887,241
Synhytech plant held for sale (Note 4) 99,500 199,500
Deposits and other 7,276 9,709
----------- ----------
Total other assets 2,822,460 3,096,450
----------- ----------
$ 3,458,883 $3,454,732
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 53,948 $ 620,255
Accrued liabilities 68,759 50,154
----------- ----------
Total current liabilities 122,707 670,409
----------- ----------
Commitments (Note 8)
Stockholders' Equity (Note 6)
Preferred stock - $10 par value; 1,000,000 shares
authorized; none issued and outstanding - -
Common stock - $.01 par value; 100,000,000 shares
authorized; 14,975,116 and 9,956,868 shares issued
and outstanding 149,748 99,567
Additional paid-in capital 10,888,152 9,994,002
Accumulated deficit (7,701,724) (7,309,246)
----------- ----------
Total stockholders' equity 3,336,176 2,784,323
----------- ----------
$ 3,458,883 $3,454,732
=========== ==========
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to financial statements.
<PAGE>
PAGE 36
<TABLE>
Rentech, Inc.
Statements of Operations
<CAPTION>
Nine
Months Ended Year Ended
September 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Contract revenues (Note 3) $ 55,176 $ 970,814
License fees 240,000 -
Other - 11,819
----------- -----------
Total revenues 295,176 982,633
----------- -----------
Cost of contracts (Note 3) 29,463 1,381,301
----------- -----------
Gross profit (loss) 265,713 (398,668)
----------- -----------
Operating expenses:
General and administrative expense 629,079 991,487
Loss on disposition of subsidiary (Note 2) - 500,908
Depreciation and amortization 190,433 256,162
----------- -----------
Total operating expenses 819,512 1,748,557
----------- -----------
Loss from operations (553,799) (2,147,225)
----------- -----------
Other income (expense):
Gain (loss) on sale of assets (Note 4) 3,140 (240,329)
Write-down of Synhytech plant held
for sale (Note 4) (100,000) -
Loss on investment (Note 5) - (75,000)
Other income 71,813 -
Interest income 3,593 18,528
Interest expense (17,659) (8,797)
----------- -----------
Total other income (expense) (39,113) (305,598)
----------- -----------
Loss before extraordinary item (592,912) (2,452,823)
Extraordinary gain from debt extinguishment,
net of $0 income tax expense 200,434 -
----------- -----------
Net loss $ (392,478) $(2,452,823)
=========== ===========
Loss per common share:
Loss before extraordinary item $ (.06) $ (.25)
Extraordinary gain .02 -
----------- -----------
Net loss $ (.04) $ (.25)
Weighted-average number of shares outstanding 10,401,922 9,956,868
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to financial statements.
<PAGE>
<PAGE>
PAGE 37
Rentech, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1996
and for the Year Ended December 31, 1995
Foreign
Additional Currency
Common Stock Paid-In Accumulated Treasury Translation
Shares Amount Capital Deficit Stock Adjustment
---------- --------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 9,956,868 $ 99,567 $ 9,920,502 $ (4,856,423) $ (1,500) $ (5,550)
Common stock issued
from treasury for
settlement of note
payable 1,500
Foreign currency trans-
lation adjustment 5,550
Net loss (2,452,823)
---------- --------- ------------ ------------ -------- --------
Balances, December 31, 1995 9,956,868 99,567 9,994,002 (7,309,246) -0- -0-
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) $ -0- $ -0-
========== ========= ============ ============ ========= =========
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to financial statements.
<PAGE>
<PAGE>
PAGE 38
Rentech, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1996 1995
---------- -------------
<S> <C> <C>
Increase (Decrease) in Cash
Operating activities:
Net loss $ (392,478) $ (2,452,823)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 18,876 29,563
Amortization 171,557 289,353
Bad debt expense - 103,930
Write-down of Synhytech plant held for sale 100,000 -
Loss on disposition of subsidiary - 500,908
Loss on investment - 75,000
(Gain) loss on sale of assets (3,140) 240,329
Stock issued for services 152,125 -
Changes in operating assets and liabilities:
Restricted cash - 25,000
Accounts receivable 38,613 (237,070)
Property tax receivable (71,813) -
Advances and other current assets (4,239) 12,832
Accounts payable (533,025) 244,375
Accrued liabilities 30,290 24,354
Billings in excess of costs and estimated
earnings on uncompleted contracts - (109,393)
---------- -------------
Net cash used in operating activities (493,234) (1,253,642)
Investing activities:
Proceeds from sale of assets 3,140 223,620
Purchase of equipment - (6,480)
Receipts for deposits and other assets 2,433 3,630
---------- -------------
Net cash provided by investing activities 5,573 220,770
---------- -------------
Financing activities:
Proceeds from issuance of common stock 50,000 -
Proceeds from non-subordinated notes payable 798,750 -
Payment for offering costs (104,761) -
Proceeds from note payable - 158,063
Payments on note payable (61,750) -
---------- -------------
Net cash provided by financing activities 682,239 158,063
---------- -------------
Increase (decrease) in cash 194,578 (874,809)
Cash, beginning of period 15,908 890,717
---------- -------------
Cash, end of period $210,486 15,908
========== =============
</TABLE>
See accompanying report of independent certified public accountants, summary
of accounting policies and notes to financial statements.
<PAGE>
PAGE 39
Rentech, Inc.
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, naphthas 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.
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.
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.
Permanent impairments are evaluated periodically based upon expected future
cash flows in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets."
Synhytech Plant Held for Sale
The Synhytech plant held for sale is recorded at the lower of cost or net
realizable value. Permanent impairments are evaluated periodically based
upon expected future cash flows in accordance with Statements of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets."
Equipment
Equipment is stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets, which range from five to
seven years. Maintenance and repairs are expensed as incurred. Major
renewals and improvements are capitalized. When equipment is retired or
otherwise disposed of, the asset and accumulated depreciation are removed
from the accounts and the resulting profit or loss is reflected in income.
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.
<PAGE>
PAGE 40
Rentech, Inc.
Summary of Accounting Policies
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.
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.
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 1995 financial statements
in order for them to conform to the 1996 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 receivables are
limited due to a few customers dispersed across geographic areas.
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.
<PAGE>
PAGE 41
Rentech, Inc.
Summary of Accounting Policies
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value
information about financial instruments. Fair value estimates discussed
herein are based upon certain market assumptions and pertinent information
available to management as of September 30, 1996.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments
include cash, accounts receivable, accounts payable and accrued liabilities.
Fair values were 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.
<PAGE>
PAGE 42
Rentech, Inc.
Notes to Financial Statements
1. Going Concern
The Company 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 the LLC by ITN Energy
Systems, Inc., which will be the manager of the LLC. The technologies and
products to be owned by the 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 ware; 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
period of time. The Company's ownership interest in the 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 by February 24, 1997,
or, on April 15, 1997 upon contribution of an additional $25,000. 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 to a
maximum of 49% of each technology in which it invests. The Company will be
entitled to distribution of revenues from the LLC and the additional
business entities in a percentage equal to its ownership interest.
On December 6, 1996, the Company entered into an agreement to purchase the
assets of Okon, Inc. of Lakewood, Colorado. The Company intends to use the
assets to engage in the business of producing and selling biodegradable and
environmentally clean water-based sealers and stains for wood, concrete and
masonry. The purchase price is $1,300,000 of which $50,000 has been
advanced and $950,000 is to be paid in cash upon closing and $300,000 is due
by the terms of a promissory note. The note is payable in 12 monthly
installments commencing one year after the closing.
The Company is seeking additional financing to provide for these
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 participations, or a combination
of these methods. 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.
2. Future Fuels
On August 27, 1993, the Company acquired all of the stock of Future Fuels
Pty Limited ("Future Fuels"), an Australian corporation that was a
majority-owned subsidiary of CMPS&F Pty Limited, an Australian corporation.
The acquisition was accounted for as a purchase and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair
values at date of acquisition. The excess of cost over fair value of the net
assets acquired was accounted for as goodwill and was being amortized over a
15-year period.
<PAGE>
PAGE 43
Rentech,Inc.
Notes to Financial Statements
During the later part of 1995, a dispute arose between Future Fuels and the
Australian joint venture for which Future Fuels was providing engineering
design services as discussed in Note 3. This dispute led to financial
difficulties for Future Fuels which forced Future Fuels to go into
liquidation during the first quarter of 1996. As a result of Future Fuels
going into liquidation, the Company recorded a loss of approximately
$501,000 from its investment in Future Fuels for the year ended December 31,
1995.
3. Contracts
During June 1994, the Company entered into a contract with a company
incorporated in India to provide basic engineering design and consulting
relating to a plant to be constructed in India to use the Company's
technology. The contract called for $300,000 to be paid to the Company.
The primary work relating to the contract was performed by Future Fuels and
the work was completed during March 1995. For the year ended December 31,
1995, the Company recognized contract revenue of $131,666 and incurred
direct costs, excluding general and administrative expenses of the Company,
of $67,973.
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 recognized contract
revenue of $55,176 and incurred direct costs of $29,463.
During July 1994, Future Fuels entered into a contract with an Australian
joint venture between CMPS&F Pty Limited ("CMPS&F"), a former stockholder
of Future Fuels, and another Australian corporation (the "JV"). The JV had
an underlying contract with the Chinese government which it entered into for
approximately $10,916,000 in gross revenues over several years. Future
Fuels provided basic engineering design and certain equipment for the gas
conversion plant to be located in the Henan Province, China using the
Company's Technology. During 1995, a dispute arose between the JV and
Future Fuels. The JV asserted that Future Fuels breached the contract for
failure to timely deliver the final portion of the basic design
documentation and final reports on a centrifuge test and bubble column
reactor test that had been requested by the JV. Future Fuels asserted that
it had delivered all required documentation and reports on a timely basis
and that any documentation or reports provided by Future Fuels later than
requested by the JV, or that had not yet been provided to the JV, are not
required by the contract. The JV's and Future Fuels' assertions led to the
discontinuance of work under the contract. For the year ended December 31,
1995, the Company recognized contract revenue of $629,735 relating to the
contract and had incurred costs of $1,313,328. As of December 31, 1995, the
Company has recorded a loss from this contract of $683,593.
<PAGE>
PAGE 44
Rentech, Inc.
Notes to Financial Statements
4. 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.
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 $3.3 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, 1996 and December 31, 1995, the Company has recorded a balance
remaining of $99,500 and $199,500 in the Synhytech plant, which consists of
the remaining buildings.
<PAGE>
PAGE 45
Rentech, Inc.
Notes to Financial Statements
5. Investment
During 1992, the Company purchased, for $75,000, a two percent interest in
Clean Fuels Development Corporation. During 1995, the Company determined
that its investment was permanently impaired and recorded a $75,000 loss
from its investment.
6. Stockholders' Equity
During January 1996, the Company issued 100,000 shares of common stock for
$50,000 in cash.
During July 1996, the Company issued 487,080 shares of common stock to
reduce the Company's debt of $97,416 to its officers in satisfaction of all
compensation due and unpaid under their employment agreements.
During July 1996, the Company issued 91,046 shares of common stock to reduce
the Company's debt of $18,209 to a director for engineering consulting
services provided to the Company.
During September 1996, the Company issued 120,000 shares of common stock to
reduce the Company's debt of $24,000 to an individual for commissions
associated with the Company's license revenue.
During September 1996, the Company issued 115,555 shares of common stock to
a company for $27,500 in consulting services. Of the consulting services,
$15,000 are prepaid through December 31, 1996.
During September 1996, the Company issued 111,141 shares of common stock in
settlement of $33,282 in accounts payable. Of these shares, 18,724 were
issued to a director of the Company.
During August 1996, the Company completed the sale of $848,750
non-subordinated 10% promissory notes (the "Notes") convertible into shares
of the Company's common stock at $.20 per share together with warrants to
purchase, at $.25 per share, additional shares of the Company's common. The
Company received net proceeds of $743,989 after deducting $104,761 in
offering costs. During September 1996, the noteholders elected to convert
$787,000 of their notes, including accrued interest of $11,685, into
3,993,426 shares of the Company's common stock.
Stock Options
At September 30, 1996, the Company has four stock option plans, which are
described below. 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.
<PAGE>
PAGE 46
Rentech, Inc.
Notes to Financial Statements
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 1996 and 1995, respectively: dividend yield
of 0 percent for all years; expected volatility of 17 and 15 percent;
risk-free interest rates of 5.52 and 6.88 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:
<TABLE>
<CAPTION>
1996 1995
--------- -------------
<S> <C> <C>
Net loss
As reported $(392,478) $ (2,452,823)
Pro forma $(425,884) $ (2,504,823)
Net loss per share
As reported $ (.04) $ (.25)
Pro forma $ (.04) $ (.25)
</TABLE>
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. No options were granted under the plan for the nine months ended
September 30, 1996.
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 and 1995, the Company granted 150,000 and
130,000 options to acquire shares of the Company's $0.01 par value common
stock. The options' exercise price was equal to the common stock's market
price at the date of grant. The following options are outstanding as of
September 30, 1996:
<PAGE>
PAGE 47
Rentech, Inc.
Notes to Financial Statements
<TABLE>
<CAPTION>
Grant Expiration Exercise Options
Date Date Price Granted
----- ---------- -------- -------
<S> <C> <C> <C>
April 7, 1995 April 6, 2000 $ 1.27 130,000
July 15, 1996 September 20, 1997 $ .28 150,000
Options outstanding,
September 30, 1996 280,000
</TABLE>
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 385,988 shares for the 1990 Stock Option Plan and
the following options are outstanding as of September 30, 1996:
<TABLE>
<CAPTION>
Grant Expiration Exercise Options
Date Date Price Granted
----- ---------- -------- -------
<S> <C> <C> <C>
September 1, 1991 August 31, 1996 $ 3.60 270,000
May 19, 1993 May 18, 1998 $ 1.88 115,988
Expired options (270,000)
Options outstanding,
September 30, 1996 115,988
</TABLE>
During 1995, the Company extended the expiration date of options to purchase
356,292 shares of the Company's common stock previously granted to officers
and directors. The extension of these options resulted in no compensation
expense in 1995. The following options are outstanding as of September 30,
1996:
<TABLE>
<CAPTION>
Grant Expiration Exercise Options
Date Date Price Granted
----- ---------- -------- -------
<S> <C> <C> <C>
April 13, 1988 December 31, 1996 $ .5052 178,146
May 2, 1989 March 1, 1997 $ .5052 178,146
Options outstanding,
September 30, 1996 356,292
</TABLE>
<PAGE>
PAGE 48
Rentech, Inc.
Notes to Financial Statements
The total options outstanding as of September 30, 1996 and December 31, 1995
were 752,280 and 872,280.
Warrants
During September 1994, warrants to purchase 2,064,000 shares were issued in
connection with a private offering of the Company's $0.01 par value common
stock. Of the 2,064,000 shares available, 1,032,000 shares are still
outstanding and may be purchased for $3.50 per share through September 18,
1997.
During 1996, the Company issued 4,744,000 warrants to purchase common stock
of the Company at an exercise price of $.25 per share. The warrants expire
on September 20, 1997.
As of September 30, 1996, warrants to purchase a total of 5,776,000 shares
of common stock were outstanding.
7. Related Party Transactions
During 1995, a director of the Company provided $11,976 in engineering
consulting services to the Company.
8. Commitments
Employment Agreements
The Company has entered into employment agreements, effective from July 1,
1993 through March 31, 1997 with three of its officers. The employment
agreements, as amended, set forth annual compensation to the three officers
of between $102,000 and $106,000 each. Compensation is adjusted annually
based on the cost of living index.
Profit Sharing Plan
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.
Operating Leases
The Company leases office space under a noncancelable lease which expires
during November 1999, and the Company's lease contains a renewal option for
an additional five years. Future minimum lease payments as of September 30,
1996 are as follows:
<PAGE>
PAGE 49
Rentech, Inc.
Notes to Financial Statements
<TABLE>
<CAPTION>
Years ending September 30, Amount
------------------------- --------
<S> <C>
1997 $ 38,700
1998 38,700
1999 38,700
2000 6,450
Total $122,550
</TABLE>
Total lease expense for the nine months ended September 30, 1996 and for the
year ended December 31, 1995, which includes Future Fuels' lease expenses,
was approximately $39,000 and $82,000.
As collateral for the Company's lease, the Company had a $50,000 letter of
credit with a bank in favor of the landlord and has 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.
9. Income Taxes
There was no provision for income taxes required for the nine months ended
September 30, 1996 and for the year ended December 31, 1995 due to operating
losses in those years.
At September 30, 1996, the Company had available net operating loss
carryforwards and capital loss carryforwards of approximately $6,103,000 and
$152,000 for tax reporting purposes. The operating loss carryforwards
expire through 2011 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, 1996 and December 31, 1995. The tax effect on the
components is as follows:
<PAGE>
PAGE 50
Rentech, Inc.
Notes to Financial Statements
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Net operating loss carryforwards $ 2,258,000 $1,933,800
Capital loss carryforward 56,100 56,100
Compensation expense for common
stock options and common stock
not allowed for income tax purposes 233,100 197,100
Accruals for financial statement
purposes not allowed for income
taxes - cash basis (63,200) 160,400
Basis difference relating to
licensed technology 157,600 118,500
Basis difference relating to
Synhytech plant held for sale 37,000 -
Other 6,700 -
2,685,300 2,465,900
Valuation allowance (2,685,300) (2,465,900)
$ -0- $ -0-
</TABLE>
During the nine months ended September 30, 1996 and the year ended December
31, 1995, the Company's valuation allowance increased by $232,700 and
$75,500.
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
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Cash payments for interest $ 5,974 $ 8,797
</TABLE>
Excluded from the statements of cash flows for the nine months ended
September 30, 1996 and for the year ended December 31, 1995 were the effects
of certain noncash investing and financing activities as follows:
<PAGE>
PAGE 51
Rentech, Inc.
Notes to Financial Statements
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Issuance of common stock from
treasury for settlement of
note payable $ - $ 75,000
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 $ -
</TABLE>
12. Segment and Geographic Information
The Company operates exclusively in the alternative fuels industry. The
Company develops and markets processes for conversion of low-value,
carbon-bearing solids or gases into valuable liquid hydrocarbons. Financial
information, summarized by geographic area, is as follows for 1996 and 1995.
<TABLE>
<CAPTION>
United Intercompany
September 30, 1996 States India Eliminations Consolidated
- ------------------ ----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues $ - $ 295,176 $ - $ 295,176
Loss from operations $ (819,512) $ 265,713 $ - $ (553,799)
Identifiable assets $ 3,013,641 $ - $ - $3,013,641
Corporate assets $ 445,242 $ - $ - $ 445,242
Total assets $ 3,458,883 $ - $ - $3,458,883
</TABLE>
<PAGE>
PAGE 52
<TABLE>
<CAPTION>
United Intercompany
December 31, 1995 States Australia Eliminations Consolidated
- ----------------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenues $ 352,898 $ 629,735 $ - $ 982,633
Loss from operations $(1,463,632) $(683,593) $ - $(2,147,225)
Identifiable assets $ 3,323,811 $ - $ - $ 3,323,811
Corporate assets $ 130,921 $ - $ - $ 130,921
Total assets $ 3,454,732 $ - $ - $ 3,454,732
</TABLE>
13. Significant Customers
During 1996, one customer accounted for 100 percent of total
revenues. During 1995, three customers accounted for 65, 22 and 13
percent of total revenues. As of September 30, 1996, one customer
accounted for 100 percent of total accounts receivable. As of December
31, 1995, two customers accounted for 80 and 20 percent of total accounts
receivable.
14. Fourth Quarter Adjustment
During the fourth quarter of 1995, the Company recorded a loss of
approximately $501,000 from its investment in Future Fuels (See Note 2).
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Rentech, Inc.
1331 17th Street, Suite 720
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 December 2, 1996,
appearing in the Transition Report on Form 10-KSB of Rentech, Inc. for the
nine months ended September 30, 1996 and for the year ended December 31,
1995, and to the reference to us under the heading "Experts" in the
Prospectus, which is part of such Registration Statement.
BDO Seidman, LLP
January 13, 1996
Denver, Colorado
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet at December 31, 1996 and the Statement of Operations for the
9 months ended September 30, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Sep-30-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Sep-30-1996
<CASH> 210,486
<SECURITIES> 0
<RECEIVABLES> 320,270
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 579,267
<PP&E> 151,776
<DEPRECIATION> 94,620
<TOTAL-ASSETS> 3,458,883
<CURRENT-LIABILITIES> 122,707
<BONDS> 0
0
0
<COMMON> 149,748
<OTHER-SE> 3,186,428
<TOTAL-LIABILITY-AND-EQUITY> 3,458,883
<SALES> 0
<TOTAL-REVENUES> 295,176
<CGS> 0
<TOTAL-COSTS> 29,463
<OTHER-EXPENSES> 819,512
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,659
<INCOME-PRETAX> (592,912)
<INCOME-TAX> 0
<INCOME-CONTINUING> (592,912)
<DISCONTINUED> 0
<EXTRAORDINARY> 200,434
<CHANGES> 0
<NET-INCOME> (392,478)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
