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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission File No. 0-19260
RENTECH, INC.
(Exact name of registrant as specified 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)
Registrant'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)
Indicate by check mark whether the registrant: (1) has 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 .
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not 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-K
or any amendment to this Form 10-K. [ ]
At November 15, 2001, the aggregate market value of voting and
non-voting common equity held by nonaffiliates of the registrant was
approximately $38,702,054 based upon the average of the bid and ask prices of
the stock on that date of $0.595 per share.
At November 15, 2001, the number of shares outstanding of the
registrant's common stock was 68,257,224.
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS............................................................ 2
ITEM 2. PROPERTIES..........................................................43
ITEM 3. LEGAL PROCEEDINGS...................................................44
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS...............44
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................45
ITEM 6. SELECTED FINANCIAL DATA.............................................46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................47
ITEM 7A..QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................66
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................67
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS....................................67
ITEM 11. EXECUTIVE COMPENSATION..............................................72
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................74
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................75
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................76
1
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
the federal securities laws, as well as historical and current facts. These
forward-looking statements include those relating to the Rentech GTL Technology;
the continued development of the Rentech GTL Technology to increase its economic
efficiency and use; market acceptance of the technology; ability to obtain
financing for plants using the Rentech GTL Technology; ability to economically
construct new plants or retrofit existing gas plants; the timing by which plants
may be constructed and begin production; ability to obtain low-cost feedstocks
and to economically operate the plants; successful operation of the plants; the
market value and acceptance of the liquid hydrocarbon products; revenues from
exploiting the Rentech GTL Technology; market acceptance of and the anticipated
revenues from the stains and sealers produced by OKON, Inc.; the market demand
and anticipated revenues from the oil and gas field services provided by
Petroleum Mud Logging, Inc.; the ability of REN Corporation to complete its
sales orders; ability to obtain needed capital; and statements about business
strategies, future growth, operations and financial results. These statements
often can be identified by the use of terms such as "may," "will," "should,"
"expect," "believe," "anticipate," "estimate," "intend," "plan," "project,"
"approximate" or "continue," or the negative thereof. Although we believe that
the expectations reflected in these forward-looking statements are reasonable,
we caution readers not to place undue reliance on any forward-looking
statements. Those statements represent our best judgment as to what may occur in
the future. Forward-looking statements, however, are subject to risks,
uncertainties and important factors beyond our control that could cause actual
results and events to differ materially from historical results of operations
and events and those presently anticipated or projected. Important factors that
could cause actual results to differ from those reflected in the forward-looking
statements include the risks of overruns in costs of constructing, retrofitting
and operating commercial plants using the Rentech GTL Technology, problems with
mechanical systems in the plants that are not directly related to the Rentech
GTL Technology, dangers associated with construction and operation of gas
processing plants like those using the Rentech GTL Technology, risks inherent in
making investments and conducting business in foreign countries, protection of
intellectual property rights, competition, difficulties in implementing our
business strategies, and other risks described in this report.
As used in this Annual Report on Form 10-K, the terms "we," "our" and
"us" mean Rentech, Inc., a Colorado corporation and its subsidiaries, unless the
context indicates otherwise.
PART I
ITEM 1. BUSINESS
OVERVIEW
We are engaged in the gas-to-liquids (GTL) business, which is the
process of converting gases made from carbon-bearing materials into liquid
hydrocarbons. We have developed and own a patented and proprietary process for
the conversion of synthesis gas produced from natural gas, coal, refinery
bottoms, industrial off-gas and other hydrocarbon feedstocks into clean,
sulfur-free, and aromatic-free alternative fuels, naphthas and waxes. The
ability of our GTL technology (Rentech GTL Technology) to convert this broad
range of materials is one important advantage of our technology compared to
other GTL technologies. Our patented, iron-based catalyst provides several other
advantages that reduce the costs of Rentech GTL Technology. Based on successful
demonstrations of our technology, we believe it is ready for use on a commercial
basis in the proper circumstances.
2
While there are no commercial-scale GTL process plants that use Rentech
GTL Technology now in existence, we believe there is the potential for the use
of Rentech GTL Technology in a significant number of plants around the world.
This opportunity stems from the growing, worldwide demand for energy, especially
environmentally clean energy, and large supplies of available feedstocks for our
process.
In some instances, we may invest with others to acquire equity
interests in plants that would use our technology. We hope to acquire interests
in one or more existing industrial gas plants that are underutilized because of
depressed markets for their products or for other reasons. These plants might be
converted to use Rentech GTL Technology to produce liquid hydrocarbons.
The focus of our business is licensing the Rentech GTL Technology to
oil and gas companies, operators of industrial gas plants, owners of other
carbon-bearing feedstocks, and other members of the energy industry. We grant
licenses in exchange for license fees and ongoing royalties to be charged for
each barrel of liquid hydrocarbons produced by process plants that use Rentech
GTL Technology. After we grant a license, our licensees are responsible for
financing, constructing and operating their own plants to use the licensed
technology. They must also acquire their own feedstock and sell the products
that their plants produce.
In October 1998, we granted a license to Texaco Energy Systems, Inc.,
now a division of ChevronTexaco Corporation, for exclusive use of Rentech GTL
Technology in plants where solid and liquid hydrocarbons are used as feedstock.
Texaco Energy Systems, Inc. (Texaco) also has the right to grant sublicenses for
this use. We retained rights to grant licensees to others for natural gas
feedstocks, which includes industrial off-gases. Examples of the types of solids
and liquid feedstocks that Texaco could process under our license are liquids
such as heavy crude oil and refinery byproducts and solids like coal and
petroleum coke. In addition, we granted Texaco a non-exclusive license to use
the technology in plants that use natural gas as feedstock. Texaco's
non-exclusive license does not include the right to grant sublicenses to third
parties.
In connection with the Rentech GTL Technology, we are also providing
engineering designs and technical services, under contract, for Texaco and some
of our other licensees and potential licensees. They are using this information
to consider the feasibility of constructing one or more plants to use our
technology.
We intend to continue providing engineering design and technical
services for our licensees when they design and construct their plants. To
assist our licensees, we may also contract to provide our operational support
services during startup of licensed plants. In addition, we may reserve the
right to contract for the engineering and supply of the synthesis gas conversion
reactors that are essential for use of the Rentech GTL Technology. The reactors
must be specially configured for each plant according to the composition of the
synthesis gas to be converted and the throughput desired. When plants are
constructed and in operation, we will sell our patented catalyst, which is a
necessary component of our conversion process, to our licensees.
We have granted several licenses in exchange for license fees. Our
licensees are in various stages of evaluating the Rentech GTL Technology,
seeking financing, and planning how to proceed. Because there are no process
plants now in operation that use the Rentech GTL Technology, we are not
receiving royalties from production of liquid hydrocarbons or revenues from
sales of our catalyst. We are, however, receiving advance royalty payments from
Texaco as required by our license to it.
3
The emergence of gas-to-liquids technology, as developed by us and a
few other companies is expected by the Battelle Memorial Institute to be one of
the ten most economically important energy innovations by the year 2010. This
conclusion was reached by a panel of energy experts from Battelle and the
national laboratories that it co-manages for the U.S. Department of Energy, and
reported by Energy User News, September 2000. The labs include the Brookhaven
National Laboratory, National Renewable Energy Laboratory, Oak Ridge National
Laboratory, and Pacific Northwest National Laboratory.
An important part of our business strategy has been to acquire other
businesses to generate revenues. Our intent is to help support our core business
related to the Rentech GTL Technology during the period before its commercial
use is established. We own interests in other businesses, not related to
gas-to-liquids. OKON, Inc., based in the Denver metropolitan area, is our
wholly-owned subsidiary. It manufactures and sells environmentally clean stains,
sealers and coatings that are used on masonry, concrete and wood surfaces.
Petroleum Mud Logging, Inc., located in Oklahoma City, Oklahoma, is another
wholly-owned subsidiary. It provides well logging services to the oil and gas
industry. We acquired 56 percent of REN Corporation as of August 1, 2001. REN,
based in Stillwater, Oklahoma, manufactures computer-controlled testing
equipment systems for manufacturers of industrial products. We lease office and
warehouse space located in our research and development facility in Denver to a
third party. We also own interests in ITN Energy Systems, Inc., a privately held
high technology and development company located in the Denver metropolitan area.
All of these interests are described subsequently in this item under the heading
"Other Businesses." Financial information about our business segments is given
in note 13 of our financial statements attached to this report.
FISCHER-TROPSCH TECHNOLOGY
The Rentech GTL Technology is based upon the Fischer-Tropsch conversion
process that was originally developed in Germany during the 1920s to create
synthetic transportation fuels. The Fischer-Tropsch (F-T) process was
subsequently used by several German companies in commercial-scale industrial
plants constructed with government funding. These plants first manufactured
synthesis gas, a mixture of hydrogen and carbon monoxide, from coal. The
synthesis gas was converted through the Fischer-Tropsch process into liquid
hydrocarbons, principally diesel fuel. German production of diesel fuel by this
method peaked at about 16,000 barrels per day in 1944, but it was not cost
competitive with conventional motor fuels. After the end of World War II, the
German companies discontinued active production. Soon after the war, the South
African government started work on Fischer-Tropsch development. That effort led
to the F-T process now owned by South African Synthetic Oil, Ltd. (Sasol), which
is presently used in four plants in South Africa. Those plants produce
approximately 180 thousand barrels per day of liquid hydrocarbons.
After World War II, the U.S. Bureau of Mines and several U.S. companies
conducted research and development on Fischer-Tropsch processes. All of those
U.S. efforts were ultimately abandoned because domestic and imported oil and
conventionally refined liquid hydrocarbons were available in the United States
at costs lower than those for the Fischer-Tropsch synthetic fuels. As petroleum
imports became readily available after World War II, Fischer-Tropsch research
went into decline.
The Arab oil embargo of 1973 created fuel shortages, and that crisis renewed
interest by several companies in Fischer-Tropsch technology. This stimulated new
research, primarily in the United States. The principal goal of the research was
to develop Fischer-Tropsch processes that produced synthetic diesel fuel at
4
costs competitive with conventional diesel fuel. Several companies, including
ours, began work then, or by the early 1980s, to develop proprietary F-T
processes. The other companies include Exxon, the Royal Dutch/Shell group,
BP/Amoco, all of which are major oil companies, and Syntroleum Corp, among
others. Sasol continues to operate three of its F-T plants in South Africa and
to license its technology for use in that country in a fourth GTL facility, the
Mossgas plant. Each of these companies, except Sasol, uses a cobalt catalyst for
its own proprietary F-T process.
Dr. Charles B. Benham, a founder of Rentech, started to conduct
research on F-T processes at the Naval Weapons Center in China Lake, California,
starting in 1973. He continued similar research later at the Solar Energy
Research Institute in Golden, Colorado. Dr. Mark S. Bohn, another founder of
Rentech, participated in Dr. Benham's F-T research at the Solar Energy Research
Institute. Based on the pioneering work of Dr. Benham and Dr. Bohn, we developed
our own Fischer-Tropsch technology in the early 1980s. Like Sasol's, our F-T
process uses an iron-based catalyst.
The Fischer-Tropsch process is a chemical process by which
carbon-bearing materials are converted into synthetic liquid hydrocarbons. The
first step in the process is to reform hydrocarbon feedstocks, by one of several
commercially available processes, into synthesis gas, a mixture of hydrogen and
carbon monoxide. The synthesis gas, sometimes called syngas, is then converted
through the F-T process into a slate of several liquid products in a reactor
vessel where the syngas reacts with the catalyst. The process includes three
stages:
o The Syngas Step (sometimes called the front end process)--the
carbon-bearing material is converted into synthesis gas, a
mixture of hydrogen and carbon monoxide. Oxygen must be added
for the conversion of any solid or liquid feedstock. Oxygen
may also be necessary for gaseous feedstocks, depending on the
technology selected to reform the gaseous feedstocks into the
desired composition of synthesis gas.
o The Fischer-Tropsch Step (sometimes called the back end
process)--the synthesis gas is fed through a F-T reactor and
chemically altered in the presence of a catalyst, to form
synthetic liquid hydrocarbon products.
o The Upgrading Step--the synthetic hydrocarbon products are
upgraded by distillation or other conventional processing
steps in the same plant to the specifications required for the
target market.
DEVELOPMENT OF THE RENTECH GTL TECHNOLOGY
The ability of the Rentech GTL Technology to convert carbon-bearing
gases into valuable liquid hydrocarbons was first established in our original
pilot plant. This was a small, skid-mounted system operated periodically between
1982 and 1985. This capability was again demonstrated in our second and larger
pilot plant operated during 1989. Additional confirmation of several significant
aspects of the Rentech GTL Technology was obtained from tests conducted between
1991 and 1998 in a third pilot plant. We continue to use our third pilot plant
at our F-T testing laboratory to further advance development of the Rentech GTL
Technology and to develop F-T data in response to inquiries from our licensees
and prospective licensees.
5
Use of the Rentech GTL Technology in a commercial-scale GTL plant was
successfully demonstrated in 1992 and 1993. This plant, the Synhytech plant
located at Pueblo, Colorado, had a designed capacity of 235 barrels of liquid
hydrocarbons per day. Our licensee, Fuel Resources Development Company (Fuelco),
had full control of the supply of feedstock gas and the construction and
operation of the plant. We designed the F-T reactors and provided our catalyst
for use in the F-T reactors. Fuelco decided to construct the plant at the Pueblo
municipal landfill. Fuelco selected that location to allow it to use, at minimal
cost, the methane in the landfill gas that was generated each day from the
decomposition of the landfill material, and also to take advantage of tax
credits then available for preventing release of these carbon-bearing gases into
the atmosphere. When Fuelco started the plant, Fuelco determined that the volume
of landfill gas it captured was inadequate to operate the plant on an economic
basis. An additional problem was that the energy content of the gas that Fuelco
did collect had only approximately one-twelfth of the energy content that Fuelco
had initially projected. In January 1992, despite the insufficiency of the
feedstock, Fuelco operated the plant at reduced capacity and produced liquid
hydrocarbons through use of our technology. The Rentech GTL Technology,
including the F-T reactors and catalyst, performed as expected. In mid-1992, due
to the lack of adequate feedstock from the landfill, inability to obtain
low-cost pipeline gas as an alternative feedstock, and a desire of Fuelco's
parent, Public Service Company of Colorado (PSCo), to return to its core
business, Fuelco closed the plant.
By the terms of a negotiated settlement between PSCo and us, ownership
and control of the Synhytech plant, plus cash, was then transferred to us. In
order to further evaluate performance of the Rentech GTL Technology at a
commercial-scale, we decided to operate the plant for a short period of time. We
made extensive modifications to improve the safety and reliability of several
mechanical systems of the plant that did not involve Rentech GTL Technology. We
decoupled the landfill gas source from the plant, and added a temporary supply
of natural gas supplied by pipeline. In July and August 1993, we operated the
plant continuously for three weeks. The results confirmed that the Rentech GTL
Technology operated successfully. This demonstration confirmed our success in
several areas that are key to the use our technology. These were the ability to
control the reactor temperature and its hydrodynamics, the amount of feedstock
that was converted to liquid hydrocarbons, and our ability to produce the
desired products.
We decided to close the Synhytech plant at the end of 1993 because no
cost-efficient source of permanent feedstock was available. In 1995, we sold the
plant to Donyi Polo Petrochemicals Pty, our licensee for India. Donyi Polo
dismantled the plant in 1996 and shipped the components to India for possible
reassembly and reuse.
The use of the Rentech GTL Technology in the Synhytech plant at Pueblo
demonstrated that the technology can be successfully used in commercial-scale
plants to produce the desired products. Because of the lack of low-cost gas
feedstock for the plant, the economic feasibility of the Rentech GTL Technology
was not established by those operations.
FEATURES AND ADVANTAGES OF THE RENTECH GTL TECHNOLOGY
We believe that the Rentech GTL Technology represents a significant
enhancement of the Fischer-Tropsch process first conceived and used in Germany.
Our technology is based on the original Fischer-Tropsch technology, with several
developments that make it unique. Special aspects of our technology are the
formulation of our catalyst, the method of deployment of the catalyst in the
synthesis gas reactor, design of the reactor and configuration of the process.
These features are proprietary to us, and some of them are patented by us.
6
Perhaps the most important feature of any gas-to-liquids technology is
the cost of each barrel of liquid hydrocarbons produced by plants using the
technology. The cost per barrel includes the cost of the feedstock, the
amortized cost of the plant that uses Rentech GTL Technology, and the operating
cost of the plant. For widespread acceptance of any GTL technology, we
anticipate that the cost per barrel probably must be not much more than the cost
of similar, conventionally refined oil and gas products. While we believe the
Rentech GTL Technology can be cost-effective, the costs of our products will not
be reliably established until a commercial-scale plant using our technology is
in production.
One of our potential licensees has had an independent study made of the
capital cost of plants that might be constructed for it to use Rentech GTL
Technology. Based on this independent cost estimate and additional studies of
our technology by other independent third parties, we anticipate that our
technology is not significantly more costly, and may be no more expensive, than
the GTL technology offered by the most cost effective of the other GTL
processes. These independent cost estimates also indicate that the Rentech GTL
Technology would be cost-competitive with conventional fuels at crude oil prices
in the range of $25 per barrel for plants with capacities of 10,000 barrels per
day of production and with natural gas prices less than $1 per million BTU. We
believe that plants constructed with a larger production capacity would be cost
competitive, because of economy of scale, at world prices of less than $25 per
barrel.
The Rentech GTL Technology uses an iron-based catalyst. An important
aspect of our catalyst is that it operates on feedstock having wide ranges of
hydrogen-to-carbon ratios. This enables our technology to work with most
carbon-bearing materials. We believe that cobalt catalysts, which are used in
most other GTL processes, can only be used efficiently to convert so-called
sweet (sulphur-free) natural gas to liquid hydrocarbons. The capabilities of our
iron-based catalyst, which to our knowledge is shared only by Sasol, enable the
Rentech GTL Technology to convert either gases, liquids or solids that contain
carbon materials into liquid hydrocarbons. Over 90% of current GTL production
depends on use of iron-based catalysts.
We believe the Rentech GTL Technology has unique and favorable
qualities when compared to the other GTL technologies. Many of these
advantageous properties result from the fact that our catalyst is iron-based,
rather than being derived from cobalt, as are all the other catalysts except the
iron catalyst used by Sasol. Compared to cobalt-based catalysts, we believe our
iron-based catalyst:
o Is less expensive because the raw materials for the catalyst are
readily available.
o Works with gas, liquid and solid feedstocks because it uses a wide
range of hydrogen-to-carbon monoxide ratios.
o Is more tolerant of sulphur contained in the feedstock, which makes it
perhaps the only feasible catalyst for industrial off-gases, natural
gas reserves with excessive amounts of carbon dioxide, nitrogen or
other diluents, and with refinery residues.
o Produces more olefinic products, which may create better fuels and
petrochemical feedstocks.
o Has the disadvantage of a shorter catalyst life, which is offset by the
lower cost of the catalyst.
Another advantage of the Rentech GTL Technology is use of a slurry
reactor for the key F-T conversion step. We believe that a slurry reactor,
unlike the fixed bed and fluidized bed reactors used by most of our competitors,
offer the following advantages:
7
o Lower capital cost.
o Lower operating cost.
o Lower pressure drop from the inlet to the outlet of the F-T reactor,
under some design conditions.
o Catalyst replacement on-line, without being required to shut down the
plant.
o No anticipated patent infringement when used with our iron-based
catalyst.
BENEFITS OF OUR GAS-TO-LIQUIDS PRODUCTS
Our liquid hydrocarbon products are similar to analogous products
derived from crude oil refining, but have environmental benefits that
traditional refinery products do not possess. Because of the way they are
produced, GTL products are less polluting, and the products are substantially
free of contaminants usually found in crude oil, such as sulphur, aromatics,
nitrogen and heavy metals. The virtual absence of these contaminants
substantially reduces harmful air emissions from vehicles that use these
products. The environmental benefits may lead to sales of our diesel fuel at a
premium, compared to conventional diesel fuel.
Vehicle engine tests of our synthetic diesel product conducted by
independent labs show it is clean-burning. GTL products are free of sulfur,
eliminating the release into the atmosphere of harmful sulfurous oxide (SO). Our
diesel product is also free of chemical compounds known as aromatics, which are
believed to be carcinogenic.
Our diesel fuel can be used directly or as a blending component with
conventionally refined petroleum diesel to reduce harmful emissions. Moreover,
we believe our diesel can be used in currently available diesel engines without
any modifications.
SOURCES OF FEEDSTOCKS FOR THE RENTECH GTL TECHNOLOGY
Economic use of Rentech GTL Technology requires substantial quantities
of inexpensive carbon-bearing gases, liquids or solids that can be economically
converted into feedstock gases. The licensees of our technology are responsible
for obtaining their own supplies of carbon-bearing feedstock.
Many types of carbon-bearing materials are suitable sources of
feedstock for the Rentech GTL Technology. Several of these materials are in
abundant supply worldwide.
Natural gas is one of the most important feedstocks for the Rentech GTL
Technology. There are vast worldwide sources of this gas. The U.S. Department of
Energy has reported that there are estimated worldwide gas reserves in excess of
5,000 trillion cubic feet as of January 1, 2000. Participants in the natural gas
industry have estimated, according to the Oil & Gas Journal, Special Report,
December 6, 1999, that approximately half of the world's natural gas reserves
may not be marketable in the near future because they are stranded in remote
locations.
8
Many large, known natural gas reservoirs around the world are presently
uneconomic to develop because they are stranded in remote locations too far from
markets for economic transportation in the gaseous state. Stranded gas refers to
gas in identified reservoirs for which there is no profitable market because the
gas cannot be economically transported, usually because of the costs of
transportation, over a great distance, to a market where it might be used.
Rentech GTL Technology may provide a means of utilizing carbon-bearing
resources that are currently unmarketable for several reasons.
Stranded reserves may be suitable sources of low-cost feedstock for
plants using our technology that may be constructed near the reserves. After
conversion of the natural gas or other feedstock into liquid hydrocarbons, the
liquid products can be transported in trucks, tankers and pipelines like
conventional liquid hydrocarbons.
Other natural gas produced in association with oil fields may be vented
or flared into the atmosphere or reinjected into the oil field because the
natural gas lacks value due to its remote location. The fact that these
resources are stranded makes them potential sources of inexpensive feedstock for
Rentech GTL Technology.
Still other natural gas reserves are unmarketable due to the presence
of diluting gases, including carbon dioxide or nitrogen. These low-energy
content gases may be suitable feedstock for Rentech GTL Technology because our
iron-based catalyst can use a wide variety of feedstocks, including many of the
diluents.
Potential feedstocks of growing significance for the Rentech GTL
Technology are the heavy high-sulphur residual fuels created at crude oil
refineries. These materials are commonly referred to as refinery residues or
refinery bottoms. Some refinery residues, unless they are treated at
considerable expense, must be disposed of as hazardous materials. By
incorporating the Rentech GTL Technology into the refinery, the residues can be
gasified, that is, transformed into synthesis gas, and converted by our process
into valuable end products. The synthesis gas resulting from refinery residues
is characterized by a low hydrogen-to-carbon monoxide ratio. That makes it an
excellent feedstock source for conversion into liquid hydrocarbons by the
application of our iron-based GTL technology. Based on predictions of industry
analysts, we believe that within the next ten years, a surplus of high-sulphur
residues will be accumulated at refineries in amounts that cannot be absorbed by
the market. We believe that Rentech GTL Technology provides a solution for this
growing problem.
Other important sources of feedstock for our process are coal, coalbed
methane gas, and industrial waste gases. Some low grade coal deposits and high
sulphur coal deposits that are uneconomic for coal mining may be economic for
use as feedstock for the Rentech GTL Technology.
APPLICATIONS OF THE RENTECH GTL TECHNOLOGY
The Rentech GTL Technology can convert synthesis gas produced from a
broad range of carbon-bearing feedstocks, whether they are gases, liquid, or
solids, into liquid hydrocarbon products. The gas feedstocks include natural gas
and industrial off-gases. The liquid feedstocks include heavy crude oil and
refinery byproducts. The solid feedstocks include coal and petroleum coke.
9
The Rentech GTL Technology can be applied in both new and existing
petrochemical and industrial plants. For example, our technology would enable
refineries to more fully utilize heavier crude oil and refinery bottoms to
produce an improved slate of high-value products. Potential benefits to the
refiner include co-production of gas-to-liquids products, together with steam
and electrical power; a reduction in waste disposal costs; and as a result,
increased profit margins on operations of the refinery.
Some industrial gas plants are currently uneconomic. This is due, in
some situations, to an oversupply of the products or low prices for the
products. In other circumstances, the uneconomic conditions may result from the
impact of environmental regulations applicable to the original products. We
anticipate that some of these plants, particularly those with larger production
capacities, can be converted to use our technology and operate profitably to
produce GTL products.
A high priority for the Rentech GTL Technology includes remote or
stranded reserves of natural gas as well as natural gases associated with
producing crude oil fields that are currently being flared, re-injected into the
reservoir or merely left in the ground unproduced. We believe that increasing
environmental and regulatory pressures to reduce the wasteful flaring of natural
gas, the economic attractiveness of monetizing stranded assets, and the growing
need for cleaner fuels will lead to increased interest of oil and gas producers
in this application. Our technology makes feasible on-site conversion of these
resources into liquid hydrocarbons that can be more easily and cost-effectively
transported to market.
We believe that the Rentech GTL Technology could provide significant
benefits to consumers and businesses around the world in a variety of ways. The
potential benefits of the Rentech GTL Technology include:
o Improving transportation fuels, through blending with conventional
diesel, to reduce the sulfur content which produces harmful air
emissions. It can also reduce the aromatics released into the
atmosphere, which are believed to be carcinogenic.
o Improving refinery economics through more efficient use of heavy and
sour crude oil and refinery residues.
o Enhancing the value of uneconomic other industrial plants that have
costly gas reforming systems in place that can be alternatively used to
make synthesis gas for the production of GTL products.
o Allowing natural gas producers to economically develop and produce
remote and substandard gas resources, thus increasing the proved
reserves and revenues of the producers.
o Facilitating efficient co-production of electricity and GTL products
from coal and other feedstocks while significantly reducing harmful
emissions.
o Broadening available supplies of clean energy and transportation fuel
to help meet the rapidly growing worldwide demand.
o Producing high-value, high-purity specialty products to meet
increasingly stringent environmental standards and product
specifications.
10
o Enhancing U.S. energy security by facilitating expanded use of
relatively abundant coal and natural gas resources for needs
traditionally met by increasing amounts of imported crude oil and fully
refined products.
BUSINESS STRATEGY FOR THE RENTECH GTL TECHNOLOGY
Our business strategy is to achieve commercial use of our technology in
commercial gas-to-liquids projects. That commercial use would expand our revenue
and earnings through increased license fees and engineering contracts, as well
as providing royalties on production of liquid hydrocarbons and revenues from
sales of our catalyst.
Our business goal is to achieve successful use of Rentech GTL
Technology in a commercial-scale GTL plant as soon as practical. We believe the
results will demonstrate economic use of the technology. Economic operation of a
plant would likely encourage others to build commercial plants using Rentech GTL
Technology, and the commercialization of the Rentech GTL Technology would
probably be accelerated.
We are seeking to implement our goal of bringing a commercial-scale
plant into operation through two principal means. These are to retrofit an
existing industrial gas plant to use the Rentech GTL Technology, and to
encourage at least one licensee to start construction of a new plant.
o RETROFITTING EXISTING INDUSTRIAL GAS PLANTS
We believe that retrofitting one or more existing industrial gas plants
would enable us to commercialize our technology more quickly than would building
a new plant. To further this strategy, we are studying the feasibility of
converting one of several industrial gas plants to use our technology.
We believe that our concept of retrofitting existing industrial gas
plants to use Rentech GTL Technology may be a cost effective method for
producing GTL products. Some industrial gas plants have the front-end equipment
in place to prepare synthesis gas. That equipment can be used to manufacture
synthesis gas for the Rentech GTL Technology. In addition, these established
plants have other facilities that could be used as they are. These include
boiler feed water systems, control rooms, fire protection, product
transportation facilities, security fencing and governmental permits. To
retrofit a plant, we would add our synthesis gas conversion reactors to the
existing front-end system, which would be much simpler than building a new
plant.
While some industrial plants cannot be economically converted, we
believe others could be retrofitted to use our technology at significantly less
expense than constructing a new plant to use Rentech GTL Technology. We are
studying the economic feasibility of converting an industrial plant for this
purpose.
Successful conversion of an existing industrial plant would provide
several benefits to us. We might receive fees for granting licenses for use of
the Rentech GTL Technology, contract payments for our engineering services,
payments for our catalyst, and royalties on the products. If we succeed in
acquiring an equity interest in a plant, sale of the products would provide new
revenue streams to us, assuming the retrofitting project is economically
successful and sales are made at a profit.
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We are targeting two types of industrial gas plants for our studies on
the feasibility of converting them to use Rentech GTL Technology. One type is
mothballed plants that have been closed because they no longer economically
produce ammonia or other products, or are operating only at marginally economic
rates. The feedstock for our technology would be obtained from the natural gas
pipeline that already runs to the site.
We are also considering the economic feasibility of converting several
industrial gas plants that presently are operating and producing industrial
off-gases to use Rentech GTL Technology. These plants would use the off-gases as
feedstock. We are studying both the cost of adding equipment and systems to
apply our technology to the industrial off-gas as well as the market for the
liquid hydrocarbon products.
We are exploring the possibilities with a major chemical company of
using the off-gas produced by its existing industrial gas plant, as feedstock
for a plant to use Rentech GTL Technology. We have completed studies of the
economic feasibility of this project and of the expected capital costs. These
projections have been encouraging. We are now seeking commitments for the
purchase of the proposed products. If these efforts indicate the market prices
for the products would be adequate, we plan to seek investors who would join
with us in paying the costs of construction in exchange for an ownership
interest and rights to license our technology for their other sites. If we
succeed in obtaining the large amount of capital that we need, and proceed with
this project, we currently intend to make a substantial investment in it to
acquire a significant ownership interest.
We own a 50% interest in the Sand Creek methanol plant in the Denver
area. The plant is closed and not in operation. We have completed a feasibility
study of the basic engineering and design work that would be required to convert
this plant from a methanol facility to a GTL facility that uses Rentech GTL
Technology. Considering the relatively high costs for natural gas that prevails
in the Denver area, the small size of the plant and the limited production it
would generate, we believe that the Sand Creek plant could not be economically
converted and used for commercial production of GTL products.
o CONSTRUCTION OF NEW PLANTS TO USE THE RENTECH GTL TECHNOLOGY
Our business strategy also includes selling licenses to oil and gas
companies and other providers of energy. These licensees would construct their
own new plants for use with feedstocks that they own or acquire.
We believe that there are substantial numbers of potential users of
Rentech GTL Technology who could benefit from its use, particularly because of
several trends impacting the energy, transportation and environmental
industries. These factors include:
o Increasingly stringent requirements to reduce tailpipe
emissions and strengthen clean-air standards.
o The contradictory need of refiners to cost-effectively produce
cleaner fuel from increasingly poor quality crude oils.
o The regulatory curtailment of natural gas flaring.
o Economic incentives to profitably develop vast, remote
resources of natural gas.
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o Steadily increasing power demand around the world.
o A need to utilize coal to generate power without the emissions
generated at coal-fired power plants.
o The search for a practical fuel source for fuel cells that
would produce electricity.
For new plants, we intend to focus on small to medium-sized projects,
with production capacities ranging from 500 to 20,000 barrels per day of GTL
products. While our technology would enable us to pursue larger projects, we
believe that small to medium size projects are economic and represent a
substantial portion of the near-term GTL market.
MARKETING
We market licenses of our Rentech GTL Technology for use to owners of
existing industrial gas plants as well as to owners of natural gas feedstock who
would construct, finance, and own their plants. To facilitate business
development, we often meet with oil and gas companies, refiners, owners of
fossil fuel resources, and others involved in the energy industry. Our senior
officers are frequent participants and speakers at gas-to-liquids seminars and
energy conferences. We employ one person whose primary duties are marketing. The
features of the Rentech GTL Technology have become generally known to major oil
and gas companies and others throughout the energy industry.
o PETRIE PARKMAN & CO.
In February 2001, we engaged Petrie Parkman & Co. to assist us as our
financial advisor in accelerating commercial use of Rentech GTL Technology. The
focus of the engagement is to bring substantial capital and oil and gas industry
experience to bear on the commercialization of Rentech GTL Technology. Under
consideration are various options including formation of one or more joint
ventures with strategic industry partners, a merger, or a sale of all or part of
our assets.
We believe that the time when GTL technology will be used commercially
is approaching. Several major oil companies have announced that they intend to
construct GTL projects at various places around the world. Other significant
members of the energy industry have not announced efforts to apply GTL
technology. Some of them are undertaking research and development in the field
of gas to liquids technology. Many industry members have no GTL technology.
Those companies without the technology may not be able to license or develop a
competitive GTL process that does not infringe upon the patented technology of
others. We believe our patented technology is mature and offers these companies
an opportunity to apply GTL technology.
We believe Petrie Parkman is well suited to help us bring Rentech GTL
Technology to market. Petrie Parkman is active as an investment banker in the
oil and gas industry. It has in-depth knowledge of the energy industry, direct
contacts with companies doing business in oil and gas, and the ability to bring
Rentech GTL Technology and the advantages it offers to the attention of
companies that might license our technology and enter into other relationships
with us.
13
By September 30, 2001, Petrie Parkman completed its study and analysis
of the field of GTL technology, including Rentech GTL Technology. Petrie Parkman
is now making contacts and continuing to assist us in advancing our goal of
realizing commercial use of Rentech GTL Technology.
Either on our own or through Petrie Parkman, we are presently engaged
in exploratory discussions with several potential licensees. The sources of
feedstock that they own vary from several types of stranded natural gas to
differing sources of industrial off-gas. The projects would be located at sites
scattered around the world. The plants being discussed would range in production
capacity from about 2,000 to 50,000 barrels per day of liquid hydrocarbons. None
of these possibilities have developed into specific proposals or license
negotiations. We have contracted to perform studies on the feasibility of the
proposals for a few of these potential licensees. It is too early in the study
process for us to know whether one or more of these proposals will result in a
license followed by construction of a plant to use the Rentech GTL Technology.
In order to increase our marketing capability, we have formed strategic
alliances with three significant engineering firms. Each of these firms has an
international presence and has experience in fields related to the Rentech GTL
Technology. Each of them is seeking situations where our technology could be
used in GTL plants and they could obtain contracts to provide their respective
engineering services.
o BC PROJECTOS, LTD.
We have designated BC Projectos, Ltd., a Brazilian engineering firm, as
our exclusive engineering representative in Brazil. BC Projectos is one of
Brazil's foremost engineering firms in the field of cogeneration plants,
thermoelectric power generation and energy optimization studies. Its staff has
designed Brazil's first combined cycle plant, a highly efficient electric plant
powered by natural gas and steam. It has also designed more than 70% of Brazil's
capacity of thermoelectric plants using gas turbines. BC Projectos has provided
services to Amoco, Consolidated Natural Gas, Shell, Total, Union Carbide,
Petrobras, the national oil and gas company of Brazil, and numerous other South
American customers.
Together with BC Projectos, we intend to jointly identify projects for
use of the Rentech GTL Technology, especially in Brazil. We will conduct
feasibility studies, identify potential joint venture parties and financing, and
cooperatively provide detailed engineering support for the projects.
o JACOBS ENGINEERING UK
In February 2000 we made an arrangement with Jacobs Engineering UK
Limited for joint marketing of the Rentech GTL Technology and Jacobs'
engineering services. We are marketing our combined capabilities to potential
customers in several locations throughout the world.
We are targeting customers who would use our joint services in new
natural gas plants as well as in existing industrial gas plants that would be
retrofitted for our technology.
The Jacobs Engineering Group, headquartered in Pasadena, California, is
the parent company. It is an international engineering and construction company
with approximately 23,000 employees and annual revenues of U.S.$3 billion. It
has offices located throughout the world.
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Jacobs is experienced in engineering for gas synthesis technology. It
provides a full range of consulting and construction engineering services from
inception of a project through construction, start-up, operations and
maintenance.
o COMART
In November 2000 we granted rights to COMART, an Italian engineering
firm based in Livorno, Italy, to market our Rentech GTL Technology for use with
natural gas feedstock. COMART is authorized to license our technology worldwide,
excluding India, on a non-exclusive basis. We also granted COMART the exclusive
right to market our technology to ENI SpA, Italy's largest oil and gas company,
and Edison SpA, Italy's largest private producer of electric energy. These
marketing rights apply worldwide to projects that would use natural gas.
COMART has some 800 employees. It is a consortium created by two of
Italy's leading energy design and construction companies. These are Calderia
Construzioni Termo-meccaniche S.r.l. (CCT), a subsidiary of the Gruppo
Marcegaglia, an Italian conglomerate with 3,600 employees and over US$1.5
billion in revenue, and Tozzi Sud S.p.A. (Tozzi).
CCT, founded in 1955, designs and markets steam generators and boilers.
It also designs, constructs and assembles environmentally friendly power plants.
Tozzi, with over 40 years of experience, is one of Italy's leading
designers and producers of electric switchboards and electro-instrumentation
plants. Additionally, Tozzi Engineering and Development (Ted) a division of
Tozzi, offers complete turnkey engineering and construction services, mainly to
the oil, gas, and chemical industries.
COMART holds the exclusive worldwide rights to license four gas
processing technologies owned by Gas Conditioners International Co. (GCI), a
U.S. company. One of these processing technologies is the "Coldfinger" process.
Coldfinger is an exhauster for removing trace quantities of water from glycol
solutions. It is used by such COMART clients as Amereda Hess, BP Amoco,
ChevronTexaco Corp., Exxon/Mobil, and Valero Energy, among others. Coldfinger,
along with the three other GCI technologies, conditions gas in over 100
facilities around the world.
o POTENTIAL CUSTOMERS AND MARKETS
The potential customers and markets for our Rentech GTL Technology are
diversified and worldwide. Industries and other business segments most likely to
use the Rentech GTL Technology include the following:
o Existing industrial plants that are underutilized and now
uneconomical because of low market prices for the present
product.
o Owners of stranded natural gas seeking an economical way to
develop and transport these resources to market.
15
o Owners of offshore natural gas with no access to pipelines,
which desire to convert the gas into transportable liquid
hydrocarbons through plants mounted on barges that use the
Rentech GTL Technology.
o Owners of reservoirs of substandard natural gas that is not
useable through traditional means because it contains
excessive amounts of carbon dioxide, nitrogen or other
diluents.
o Owners of oil fields where flaring of natural gas is outlawed
or penalized, or where natural gas is reinjected into oil
wells but interferes with oil production from the wells.
o Municipalities that are required by clean air laws to operate
fleets of cleaner buses and other vehicles.
o TEXACO ENERGY SYSTEMS SUBLICENSES FOR LIQUIDS AND SOLIDS
Texaco Energy Systems, Inc. (Texaco), now a division of ChevronTexaco
Corp., is our exclusive licensee for liquid and solid carbon-bearing feedstocks.
The liquid materials include heavy crude oil and refinery byproducts such as the
so-called refinery bottoms. The solid materials are such hydrocarbons as coal
and petroleum coke. The prospective users of a sublicense from Texaco include
the following:
o Owners of refineries, whose efficiency and profits might be
increased by adding the Rentech GTL Technology to better
utilize as feedstock an increasingly heavier crude oil supply
and growing inventory of refinery bottoms.
o Owners of coal resources, including low grade and high sulfur
coal deposits.
o Owners of heavy oil and tar sands properties.
LICENSES, CONTRACTS AND JOINT VENTURES FOR THE RENTECH GTL TECHNOLOGY
We exploit the Rentech GTL Technology by granting licenses for its use.
License agreements are generally granted in exchange for license fees,
engineering design fees, and production royalties. The royalties are based upon
a percentage of gross proceeds from sales of the liquid hydrocarbons produced
through use of Rentech GTL Technology or upon some other measure of product
value. Licenses may be granted either exclusive or non-exclusive rights to use
Rentech GTL Technology in identified countries or other geographic areas. The
license fees and terms are individually negotiated and may vary.
We expect that most plants that will use Rentech GTL Technology will be
constructed and owned by licensees at no cost to us. We may also provide
contract engineering, operational and other technical services to licensees
during construction and startup phases of a new plant. We may supplement our
licensing fees and royalties with direct investments in gas-to-liquids plants
and facilities. Our licenses provide that we are entitled to revenues from sales
of our catalyst whenever Rentech GTL Technology is used, whether in plants
licensed directly by us or sublicensed by our licensees.
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We have granted Texaco an exclusive, worldwide license (except in
India, for which Donyi Polo Petrochemicals Ltd. holds an exclusive license), to
use and sublicense Rentech GTL Technology for conversion of solid and liquid
feedstocks in plants where a gasification process is used. We are to share in
revenues received by Texaco from its exclusive license to use the Rentech GTL
Technology in projects where solids and liquids are used as feedstock.
We retain rights to license Rentech GTL Technology in the entire range
of use for natural gas conversion projects. We, and several engineering firms to
which we have granted marketing rights, are actively marketing licenses of our
technology for use in plants using natural gas.
Our licensees are responsible for financing, constructing and operating
their own conversion plants that use the Rentech GTL Technology, including our
catalyst. Licensees will also be required to pay for our synthesis gas reactor
modules that may be supplied by us or our fabricator to meet the special design
specifications required for each plant. It is the licensee's obligation to
obtain the feedstock material, either carbon bearing solids, liquids or gases,
to be fed into the licensee's plant. Each licensee is also responsible for
marketing the liquid hydrocarbon products produced from its licensed plant.
The successful use of the Rentech GTL Technology by licensees largely
depends upon their ability to successfully finance, design, construct and
operate commercial scale plants using the technology. Their ability to obtain
low-cost feedstock is essential to economical use of the technology. They must
obtain adequate financing, construct plants specifically designed for the
chemical composition of the feedstock, and assure that the plant equipment and
machinery is mechanically adequate. Licensees are also responsible for obtaining
governmental permits and for successfully operating their plants. In remote
locations, licensees may be required to add supporting infrastructure such as
roads and utilities.
Our belief that our technology can be cost effective and that
commercial grade plants using the technology can be profitably operated depends
upon several key factors. These include the availability of low cost feedstock,
the economic efficiency of the technology, and market demand for the end
products at profitable prices.
Conversion plants that use the Rentech GTL Technology may be designed
to produce from several thousand up to 50,000 or more barrels per day of
product. The smaller plants are expected to be assembled from modular systems
that are trucked into remote locations where inexpensive sources of feedstock
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 production capacity;
available infrastructure such as electrical power, water supplies, roads, gas
pipelines and other utilities; location; cost of financing; whether the
feedstock is a gas or carbon-bearing solid that must first be converted to
synthesis gas, and other factors.
The designs of plants for use of Rentech GTL Technology are complex.
Each design must be developed to fit the chemical composition of the feedstock
and must also be tailored to produce the desired products. 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
schedules for financing, design, construction and startup of operations of a
plant following the initial decision to proceed with construction.
Revenues related to the Rentech GTL Technology represented
approximately 30%, 20%, and 19% of our revenues during the fiscal years ended
September 30, 2001, 2000 and 1999, respectively.
17
o TEXACO ENERGY SYSTEMS, INC. LICENSE FOR LIQUIDS AND SOLIDS
In October 1998, we granted a technology license to Texaco Natural Gas,
Inc. (now Texaco Energy Systems, Inc., a division of ChevronTexaco Corporation)
to use and sublicense Rentech GTL Technology in projects where solid and liquid
hydrocarbons are used as feedstock. This license grants exclusive rights in this
particular field. The license also granted Texaco a non-exclusive license for
conversion of natural gas to liquids.
Under the license, Texaco can use Rentech GTL Technology in combination
with Texaco's proprietary gasification technology to produce liquid hydrocarbon
products such as transportation diesel fuel, naphtha, and specialty products.
The Texaco gasification process is a proprietary technology for producing
synthesis gas from a broad range of feedstocks including coal, petroleum coke,
residual oils, and byproducts generated in refineries and chemical plants.
Worldwide there are 68 Texaco-owned or licensed gasification plants operating or
under construction. Texaco may also sublicense the Rentech GTL Technology to
third parties that may use Texaco's gasification technology or similar gasifiers
provided by third parties, including Lurgi and Royal Dutch/Shell, among others.
Under the terms of the agreement, Texaco has an exclusive, worldwide
license, except in India, to use for its own account, and sublicense Rentech GTL
Technology to third parties in projects where solid and liquid hydrocarbons
(non-gaseous materials) are used as feedstocks for the generation of synthesis
gas in a gasification process such as the proprietary Texaco gasification
process. Additionally, we granted Texaco a non-exclusive license to use Rentech
GTL Technology anywhere in the world except India, for its own account with 100%
natural gas feedstock. Texaco does not have the right to sublicense to third
parties the Rentech GTL Technology for natural gas. We retain the right to
license to others the entire range of our technology for use with natural gas.
We received a license fee for granting the Texaco license. Texaco is also paying
us advanced royalty fees. Texaco is to pay for all costs of further developing,
marketing and deploying its use of the Rentech GTL Technology. Texaco and we
will share revenues from plants licensed under the Texaco license agreement. The
license to Texaco enables it to terminate the agreement upon certain payments to
us.
o TEXACO ENERGY SYSTEMS, INC. TECHNICAL SERVICES AGREEMENT
On June 15, 1999, Texaco entered into a technical services agreement
with us to follow up our 1998 licensing agreement. Under the 1999 contract, we
are undertaking the necessary tasks required for the integration of the Rentech
GTL Technology with Texaco's gasification process. The combination of these
technologies will allow for the use of a broad range of feedstocks like coal,
petroleum coke, residual oils and byproducts generated in refineries and
chemical plants.
We are performing technical and development work for Texaco at our
development and testing laboratory in Denver. Our work is being conducted in
cooperation with Texaco's personnel. Texaco is paying us for our technical
services and costs.
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o EARLY ENTRANCE COPRODUCTION PLANT
In August 1999, we, as part of a team led by Texaco, were selected by
the U.S. Department of Energy to develop the data and designs for what the DOE
calls a coproduction facility, or more specifically, an "Early Entrance
Coproduction Plant". Texaco plans to combine its gasification technology with
the Rentech GTL Technology to enable it to produce both high quality
transportation fuels and electricity from coal and petroleum coke at a
coproduction plant.
The Texaco proposal was one of three proposals selected by the DOE in
August 1999 to proceed on this program. The DOE's contract is intended to
encourage private industry to develop a set of entirely new multi-purpose energy
plants that combine several energy processes into a single facility, and thus to
facilitate the early entry of this new technology into the commercial
marketplace. The DOE contract requires designs that enable highly efficient
conversion of the energy in fossil fuels into electricity or heat as well as
transportation fuels and chemicals.
The DOE is making an award of approximately $14 million to Texaco's
project team, payable over the lifetime of the contract. We are being paid
through those contract funds. The work is anticipated to continue at least
through 2002. The team members are using Texaco's gasification technology, the
Rentech GTL Technology, General Electric's power generation design, Praxair's
oxygen plant design and Kellogg, Brown and Root's engineering capabilities.
After feasibility studies and successful completion of an integrated design, the
team will develop an engineering design package for a fossil fuel plant to use
the combined technology.
We have completed our part of the first phase of the DOE contract. That
work consisted primarily of preparing a preliminary engineering design for the
plant that would use the Rentech GTL Technology. We are now working on phase
two. This phase is focused on the development work that was identified during
the first phase.
We consider the DOE contract award to be an important recognition of
the significance of utilizing the Rentech GTL Technology with Texaco's
gasification process to produce synthetic liquid hydrocarbons from non-gaseous
fossil fuels. We believe the DOE contract will help lead to commercial use of
the Rentech GTL Technology, not only with this type of feedstock, but also with
other potential feedstocks.
o IMPORTANCE OF OUR TEXACO AGREEMENTS
Our agreements with Texaco are important to us in several ways.
Revenues from Texaco provided 21%, 20% and 19% of our total revenues for the
years ended September 30, 2001, 2000 and 1999. Texaco's decision to study use of
the Rentech GTL Technology also has the potential to lead to additional revenues
for us in the future.
o We are presently receiving royalties from Texaco for our
technology license and other payments for providing our
technical services.
o We are also receiving revenues from our participation with
Texaco as part of the team it has organized to work on the DOE
contract to develop an early entrance coproduction plant. If
this development work results in an engineering design package
that can be used in coproduction plants, it could lead to use
of our technology in plants of this type.
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o We expect that commercial use of our technology in the
announced DOE project might encourage other members of the
energy industry to use our Rentech GTL Technology.
If Texaco should decide to terminate its various agreements with us, we
would lose revenues that we are presently receiving from it, potential future
revenues from projects with which we are associated with it, and credibility in
the energy industry and financial market. Loss of this customer could have a
material adverse impact upon our revenues and our future prospects.
o OROBOROS AB LICENSE
We entered into a letter of intent in October 1999 to grant a license
to Oroboros AB, a Swedish corporation headquartered in Gateborg, Sweden. The
license would allow Oroboros to use the Rentech GTL Technology for the
industrial off-gas produced by Oroboros's steel plant located at Oxelosund,
Sweden, or other steel mills.
The Oxelosund steel plant currently generates approximately 140 million
normal cubic meters per year of off-gases. These industrial off-gases are now
flared into the atmosphere. The flaring, which occurs daily, produces about
100,000 tons of carbon dioxide, which is a greenhouse gas, and 20,000 tons of
de-ionized water, per year. By using the Rentech GTL Technology, these
industrial off-gases, a mixture of hydrogen and carbon monoxide, can be
converted into clean burning, synthetic fuels and other useful products rather
than polluting the atmosphere. Oroboros has estimated that use of our technology
in this one steel plant could reduce carbon dioxide emissions in Sweden by
100,000 tons per year or the equivalent of one-quarter of 1% of the total annual
carbon dioxide emissions in Sweden.
Oroboros plans to produce what it refers to as eco-paraffin, sometimes
called ecodiesel. According to an assessment by Oroboros, the cost of producing
eco-paraffin will be lower than for other alternative fuels, such as
reformulated diesel fuel, currently available in Sweden. Additionally, Oroboros
has stated that no engine modifications are necessary for vehicles that use
eco-paraffin.
Oroboros has applied to the Swedish government to designate the
eco-paraffin it would produce as a clean fuel that is entitled to tax credits in
Sweden. Tax credits are necessary to make the project economic. Oroboros has
stated it anticipates it will receive a tax credit equivalent to about $.60 a
gallon. Oroboros believes that cost advantage and a few other changes in
regulatory requirements will enable it to proceed to retrofit the plant to use
Rentech GTL Technology. If those changes are made, we anticipate that Oroboros
will proceed with its project. No schedules have been announced for beginning
construction, completing construction, or start up of operations of a proposed
GTL plant for Oroboros.
o OTHER OPPORTUNITIES FOR THE RENTECH GTL TECHNOLOGY
We are discussing several other proposals for use of the Rentech GTL
Technology. We are participating in some feasibility studies with other
companies that intend to provide their engineering services or financing
capabilities to the proposed projects. Some of these talks are directly with
owners of natural gas resources. These discussions are in preliminary stages,
and no plans to proceed have been made at this time.
20
One of the proposals is to construct a floating gas-to-liquids plant
for use offshore to process natural gas that is now flared from offshore oil
wells now in production. This type of gas resource is now stranded because there
are no current means to bring it to market.
We believe that use of Rentech GTL Technology in offshore floating
ships provides great potential for us. Offshore production of oil from floating
platforms dates from the mid-1970s. Production of oil by this method is now
occurring from more than 120 offshore fields. Sixty of these fields are located
in predominantly calm waters. International Maritime Associates, Inc. has
published, in the Oil & Gas Journal, October 9, 2001, a list of 155 offshore
projects in various stages of development where a floating production or storage
system is being considered.
According to the Oil & Gas Journal, October 9, 2001, more than 34
floating production or storage systems for oil are scheduled to be online off
the west coast of Africa by the end of 2006. Not all of those projects will
produce natural gas, and in others the gas may be reinjected. We anticipate that
large quantities of this natural gas will be flared.
We believe these offshore projects off of Africa, and other oil fields
with substantial associated gas resources, both onshore and offshore, offer
potential opportunities for us. Our preliminary studies to date on the
feasibility of installing Rentech GTL Technology on a ship indicate that it can
be done, and that the process can be used economically for some offshore gas
fields from that type of platform. We think that operators of offshore oil
fields should find the rates of returns they might realize from using our
technology or some projects are attractive. Until now, the only options they
have had are expensive reinjection of the gas or undesirable flaring of it into
the atmosphere.
We have completed a pre-feasibility study for a company that is
investigating use of a floating GTL plant. The company is considering whether to
proceed with engineering studies to select the technology to be used with our
Rentech GTL Technology, both at the front-end and the back-end of the plant.
We have done preliminary studies for Pertamina, the Indonesian state
oil and gas mining company. It is considering constructing a plant to use
Rentech GTL Technology in Indonesia. The plant would use Pertamina's stranded
natural gas as feedstock. The intended products would be synthetic diesel fuels,
naphthas, waxes and other high-value liquid hydrocarbons. We have defined with
Pertamina the scope of work and responsibilities of each party for a feasibility
study to assess the cost, financial viability of the plant, and markets for the
products. We have done some preliminary work on the proposed project. We entered
into an agreement for the feasibility study and have initiated work on the
study. Our work is expected to extend over four to six months.
Pertamina is one of the world's largest oil companies, with
approximately 30,000 employees. Pertamina controls a substantial part of the
country's daily production of 1.9 million barrels of oil and 8.7 billion cubic
feet of gas that are produced by 35 operators in fields all over Indonesia, both
onshore and offshore.
Several other discussions involve deposits of natural gas or existing
industrial gas plants. The sites where these possibilities exist are located
around the world, and include most of the continents.
21
We are having discussions with GTL Bolivia, S.A., a company newly
formed in Bolivia. It is developing plans to construct process plants in that
country that would use Rentech GTL Technology. GTL Bolivia is focusing on
efforts to construct a plant for the production of 10,000 barrels per day of GTL
products by use of our technology. GTL Bolivia is seeking contracts for the gas
that would be fed to the plant, investors and financing, and other basic
requirements for its plans.
o THERMAL CONVERSION CORPORATION
In August 1998, we entered into a research and development venture with
Thermal Conversion Corporation (TCC) whose offices are located in central
Washington. TCC is a wholly-owned subsidiary of Nuvotec, Inc. of Richland,
Washington. Among other technologies, TCC is developing and marketing its
patented technology for reforming natural gas into synthesis gas to be used as
feedstock for Fischer-Tropsch plants.
TCC's technology creates an electrically generated high-power electric
current inside a high temperature reactor to convert carbon bearing gases
induced into the reactor into synthesis gas. The TCC technology is a thermal and
chemical process referred to as plasma technology. Tests have been conducted by
TCC to determine whether TCC's plasma technology, when used with our catalyst,
economically converts natural gas into synthesis gases of predetermined
compositions. If so, the synthesis gases produced by this process could be
suitable for use in plants that use the Rentech GTL Technology, avoiding the
expense of an oxygen unit to prepare the synthesis gas. Successful combination
of TCC's plasma technology with the Rentech GTL Technology would enable users of
our technology to use smaller scale and less expensive gas conversion plants
than are now required. This could provide a cost-effective solution to the need
for conversion plants that are small enough to be mounted and economically used
on barges for production of liquid hydrocarbons from offshore natural gas wells.
The initial demonstration of using our catalyst with TCC's plasma
technology yielded positive results. The energy lost in the conversion of
methane to synthesis gas was as low as 1%. Syngas mixtures were controlled close
to the compositions predicted by chemical equilibrium calculations. Carbon
deposition (or soot), a wasteful byproduct of syngas produced by other thermal
methods, was controlled to insignificant levels. Continuing tests are now needed
to focus on optimizing the process for energy efficiency and cost. The U.S.
Department of Energy made a $175,000 grant in July 1999 to support the
Rentech-TCC demonstration project. The DOE's grant funds were used to test
whether introducing steam to natural gas feedstocks of various compositions
increases the energy efficiency and cost effectiveness of the combined
Rentech-TCC technologies. TCC continues to seek funding in order to continue
these tests and its research and development. It is focusing on attempts to
organize a consortium of business corporations to support this work. We do not
expect these efforts to be completed in the near future.
If this joint venture is successful, we will be entitled to a
nonexclusive license to use the TCC plasma technology with the Rentech GTL
Technology. We are also to receive, for 10 years, 5% of any future license fees,
royalties or other payments in lieu thereof that are received by TCC for use of
its plasma technology in any other Fischer-Tropsch projects. To date no revenues
have been earned related to this license.
o DONYI POLO PETROCHEMICALS
In September 1992, we granted exclusive rights to ITN, Inc., a Colorado
corporation, to market the Rentech GTL Technology in India. ITN, Inc. is owned
by Dr. Mohan S. Misra, who also owns a majority of INICA, Inc., formerly ITN
Energy Systems, Inc. See "ADVANCED TECHNOLOGIES--INICA, Inc. ITN, Inc. is
entitled to 20% of our royalty, license fee or other revenues from plants in
India.
22
Through the efforts of ITN, Inc., we granted a license to Donyi Polo
Petrochemicals Ltd., an Indian company, for a plant in India using Rentech GTL
Technology. Donyi Polo proposed to build a 360 barrel per day plant, designed to
use flared gas in the state of Arunachal Pradesh in northeastern India. Gas
feedstock that is presently flared from oil wells has been allocated to this
project by the state government of Arunachal Pradesh. We completed a $300,000
contract for the basic design of the plant in 1995. Also in 1995, Donyi Polo
purchased our Synhytech plant in Pueblo, Colorado. In 1996, it moved the
components to India for reassembly. In addition to a $250,000 contract for
preliminary engineering services awarded to us, Donyi Polo Petrochemicals
contracted with Humphries & Glasgow, Mumbai, India, for the prime engineering
contract. In 1998, the detailed engineering design of the plant was completed by
Humphries & Glasgow. We have earned $120,000 as payments due toward our license
fee. The license agreement provides for royalty payments to us for seven years
after commencement of production from the plant. The licensee is to construct
and operate its own manufacturing plant, using our patents, to produce catalyst
for its plant.
Donyi Polo has not announced a decision to proceed with completion of
the Indian plant. We do not expect additional engineering design contracts,
license fees or other revenues from it in the foreseeable future.
PRODUCTS AND MARKETS FOR GTL PRODUCTS
Plants using the Rentech GTL Technology can be designed and configured
to produce a variety of liquid hydrocarbon products. The principal products of
the Rentech GTL Technology process are:
o Clean-burning and premium-grade diesel fuel.
o Naphthas useful as a feedstock for chemical processing and for
refining into varnishes and mineral spirits.
o Specialty products such as waxes useful in hot-melt adhesives,
inks and coatings.
o Base oil for lube oils.
o Normal paraffins.
o A variety of other wax-based products.
Our sulfur-free diesel fuel and naphthas might be good feedstocks for
fuel cells when those potential new products are ready for the market. This is
not expected to occur in the next few years.
The products resulting from use of the Rentech GTL Technology will
compete with traditional petroleum products and synthetic liquid hydrocarbon
products produced by other F-T technologies. To a great extent, competition will
be based upon price, and the price at which liquid hydrocarbons can be produced
by use of the Rentech GTL Technology has not yet been established. Experience
with F-T technology by others since its development in the 1920s has indicated
that earlier versions of the technology could not economically produce synthetic
fuels. We believe that our enhancements and variations of the basic F-T
technology allow the Rentech GTL Technology to be cost-effective in some
situations.
23
Products resulting from the Rentech GTL Technology, like other F-T
processes, are environmentally benign relative to analogous products produced
from crude oil refining. GTL products are free of the sulphur, aromatics,
nitrogen and heavy metals that are typically found in crude oil. For example,
our clean burning diesel fuel has excellent combustion qualities and can help
reduce harmful exhaust emissions. Likely uses of our diesel include use as a
blending stock to improve the quality of commonly available diesel fuel and as a
blending component for upgrading low quality stock that would otherwise be used
in lower value fuel oil.
Rentech Diesel Fuel
Laboratory tests made to determine the properties of the diesel
produced by the Rentech GTL Technology have been conducted by independent
testing agencies. These tests indicate that our diesel fuel is a high-grade
diesel fuel with environmental advantages compared to diesel fuel derived from
crude oil. Compared to Commercial No. 2 diesel fuel, our diesel fuel has four
properties that make it less polluting. These are an absence of sulphur, zero
percent aromatics by volume, a higher cetane number, and a lower 90%
distillation temperature.
Independent third-party tests of our diesel fuel, both in vehicles and
engine test stands, were completed by the High Altitude Research Center, Denver,
Colorado (under high altitude conditions), and by Detroit Diesel, Michigan, and
the California Air Resources Board, (under low altitude conditions). Our diesel
fuel demonstrated significant reductions in harmful exhaust gas emissions and
improved combustion characteristics as measured by its higher cetane value.
We believe our clean burning diesel fuel could help users meet the
increasingly stringent requirements for cleaner fuels. 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. We believe our diesel
fuel exceeds all current and proposed federal and state diesel emissions
requirements. This includes new requirements adopted by the U.S. Environmental
Protection Agency and those adopted by the California Air Resources Board.
In January 2001, the EPA adopted new rules to drastically reduce the
sulfur content in diesel fuel by 2007. The proposed emission standards would
reduce the sulfur content of diesel from 500 parts per million to 15 parts per
million by 2007, a 97% reduction. The EPA said the proposal would reduce harmful
air emissions from tractor-trailers, buses and other heavy trucks by more than
90%. According to the EPA, the result would be significantly healthier air for
all persons in the United States, with less sooty, thin particular matter that
causes respiratory illness.
Energy and transportation groups representing oil and gas refiners, oil
companies, trucking companies and others oppose the new EPA rule for diesel
fuel, arguing that it will be costly and require technology that may not be
available. We believe that the Rentech GTL Technology is ready for commercial
use and could help by providing clean burning diesel fuel.
The diesel fuel fraction produced by use of the Rentech GTL Technology
is an excellent blending stock to upgrade non-specification fuels or to improve
the quality of the commercial diesel currently being produced in refineries.
Blending with our diesel fuel lowers the aromatic and sulphur content and
increases the cetane index of commercial diesel. We have patented the blending
of our F-T diesel with conventional diesel to reduce harmful emissions.
24
From 1993 to 1997, several California refiners used the Fischer-Tropsch
fuel produced by Shell at its plant in Malaysia to blend with conventional
diesel. The blend reduced the percentage of aromatics in the fuel. These sales
ended because of an explosion in December 1997 at the plant in the air
processing unit.
Unlike alternative fuels such as methanol and compressed natural gas,
we believe our diesel fuel can be used in conventional compression ignition
engines without any engine or vehicle modification. Fuel mileage may be slightly
decreased, although minor engine adjustments are expected to increase the fuel
mileage to the level provided by conventional diesel fuel. Before our diesel
could be said to be a practical alternative to conventional diesel fuel,
long-term wear tests on engines fueled by the diesel are necessary. Our diesel
fuel can be manufactured and distributed through the nation's existing refining
and transportation infrastructures.
Most of the diesel fuel produced throughout the world is refined from
crude oil. As of 1996, the total worldwide demand for diesel fuel was estimated
at 18.5 million barrels per day, according to the U.S. Department of Energy. The
DOE also forecast growth in demand at an average rate of 2% per year. The
largest market is in the U.S., where in1996 the demand was approximately 3.4
million barrels per day. The demand for diesel vastly exceeds the potential
volume of GTL diesel that could be produced by all the Fischer-Tropsch
technologies. Thus, the comparatively small amount of GTL diesel that may be
produced by us and others will have no impact on prices for conventionally
produced diesel. This means that GTL diesel will have to compete with the
prevailing diesel price in the future. We do, however, anticipate that our GTL
diesel may command a premium, as Shell's GTL diesel did when purchased by the
California refineries during the 1993 to 1997 period.
We have no arrangements by which vehicle manufacturers have approved
the use of our fuel and no arrangements for the sale of our products. We are not
aware of any reason why our fuel would not be readily saleable, especially for
use as a blending stock for conventional diesel.
In 2000, Congress designated domestically produced GTL fuels made from
natural gas as an alternative fuel under the Energy Policy Act of 1992. The
designation of GTL fuels, such as those produced by use of our GTL technology,
could lead to reduction of the federal excise taxes and road taxes that apply to
conventional fuels. The designation could reduce costs of GTL fuels. That might
provide an incentive for users of diesel fuel to switch to cleaner burning GTL
fuels. It could also reduce the expensive capital costs that government agencies
must otherwise undertake to modify their vehicle fleets to meet the emission
goals of the Energy Policy Act.
Naphtha
Naphthas are liquid hydrocarbon products that are lighter than diesel
fuel. The use of naphthas as a feedstock for petrochemicals is growing, and at a
more rapid rate than its demand for use in fuels. 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 GTL Technology are expected to be in demand due to
their lower toxicity and lower aromatic content compared to other naphthas. The
U.S. market for the type of naphtha produced using the Rentech GTL Technology is
estimated at a minimum of 60,000 barrels per day.
25
Wax Products
The waxes produced by Rentech GTL Technology are useful in hot-melt
adhesives, inks, coatings and several other wax-based products. The market
prices for these waxes is high, but demand is limited. The wax market could
easily become saturated when more GTL processes start commercial production. As
an alternative, the waxes produced can also be thermally or hydro cracked to
yield additional naphtha, diesel fuel, kerosene, jet fuel, solvents and
specialty products. Another option is the hydrosomerization of the wax to
produce base oil used for lubricating oils.
Light Crude Oil
If required, the conversion process in plants using the Rentech GTL
Technology can be easily modified to produce a light crude oil for sale to
refineries. The Rentech GTL Technology produces a high-grade crude oil, already
partially refined that we believe could be inexpensively refined in existing
refineries into end products.
Normal Paraffins
Normal paraffins are saturated linear hydrocarbons with molecular
ranges between 9 and 15 carbon atoms. They are primarily used in the production
of laundry detergent, cosmetics, pharmaceuticals, paints, stains, ink oils,
aluminum rolling oils and lamp oils. Paraffins produced by the Rentech GTL
Technology are free of sulfur, a requirement for many of these products.
Synthetic Lube Base Oil
We anticipate that specifications for motor oil will become more
stringent in the future as automobile manufacturers respond to tightening
emissions requirements. This could result in increased demand for high quality
base oils as blending stock for manufacture of premium lubricating oils. The
hydrocarbons with molecular ranges between 20 and 50 carbon atoms that are
produced by the Rentech GTL Technology would provide excellent blending material
for production of synthetic lube oil.
Synthetic Drilling Fluid
The hydrocarbons produced by the Rentech GTL Technology with a
molecular range from 17 to 22 carbon atoms would be a potential base material
for synthetic drilling fluids. Drilling fluids are used in the drilling of oil
and gas wells as a coolant and lubricant for the drill bit. In off-shore
operations, oil based fluids, which have been used historically, degrade slowly
and can suffocate aquatic plant and animal life. In response to increased
environmental pressures, synthetic drilling fluids have been developed and used
in the Gulf of Mexico and other offshore locations. The key advantage of
synthetic drilling fluids is that cuttings associated with use of these fluids
appear to be environmentally acceptable in regard to crude contamination and
toxicity and therefore can be discharged in many Gulf locations instead of being
barged to shore for disposal. This yields considerable cost savings to drillers.
As defined by the U.S. Environmental Protection Agency, materials falling under
the synthetic category include linear alpha olefins and synthetic paraffins,
such as those produced by the Rentech GTL Technology.
26
RESEARCH AND DEVELOPMENT
We own a development and testing laboratory located in Denver. Our
pilot plant, consisting of a bubble column slurry reactor, is located at this
site. The laboratory contains state-of-the-art equipment and support facilities
for development of Fischer-Tropsch technology. Our laboratory staff now consists
of 12 employees. We believe that this facility provides us with a resource for
development and testing that is unmatched in the field of gas-to-liquids
technology.
Two of our founders, Dr. Charles Benham and Dr. Mark Bohn, are directly
responsible for development of the Rentech GTL Technology. These two scientists
and our research and development engineers and technicians continue to work
toward improving our technology and developing new applications.
Our principal efforts at the laboratory are now focused on increasing
the efficiency of our catalyst. We are also developing additional catalysts,
attempting to increase the amount of the feedstock that is converted into liquid
hydrocarbons, and working on other ways of reducing the cost of our process. The
lab work is concentrated on achieving commercial use of Rentech GTL Technology
with as many types of hydrocarbon feedstocks as are available.
We also joined with Texaco Energy Systems, Inc., our licensee, to
demonstrate use of our technology at the La Porte plant in Texas in 2000. Texaco
leased the use of this plant from the U.S. Department of Energy on a short-term
basis to conduct a joint demonstration with us of the results of using the
Rentech GTL Technology. The plant is a pilot plant, with a capacity of four
barrels of product per day. The results from this use of our technology were
successful.
During the fiscal years ended September 30, 2001, 2000, and 1999, we
spent amounts estimated at $204,583, $515,261, and $195,466, respectively, on
research and development activities on the Rentech GTL Technology. During each
of the same fiscal years, we estimate that revenues received from third parties
for research and development activities on the technology were $2,212,432,
$751,166 and $211,246, respectively.
RISKS RELATING TO THE RENTECH GTL TECHNOLOGY
o OUR ABILITY TO CONTINUE TO BENEFIT FROM THE RENTECH GTL
TECHNOLOGY DEPENDS UPON PROPER CONSTRUCTION AND OPERATION OF PLANTS THAT USE THE
TECHNOLOGY ON A COMMERCIAL SCALE.
Our business strategy calls for our licensees to construct and operate
plants that use Rentech GTL Technology on a commercial scale. These plants will
rely on complex mechanical equipment and gas processing systems We expect most
plants to be owned, constructed, and operated by our licensees, but we may
retrofit and operate some plants in which we obtain an ownership interest.
Whether our licensees, and in a few instances, we, can properly design,
construct and operate plants depends upon a number of factors. These include
constructing plants that are properly designed by a licensee for the chemical
composition of the feedstock obtained for the plant; the amount and quantity of
the feedstock; design of the plant and its systems; mechanical adequacy of the
plant equipment and machinery, whether related or unrelated to Rentech GTL
Technology; availability and adequacy of roads, utilities, worker housing and
other infrastructure at the plant site; the plant operator's management and
skills; and proper operating circumstances.
27
o OUR ABILITY TO CONTINUE TO BENEFIT FROM THE RENTECH GTL
TECHNOLOGY DEPENDS UPON ECONOMIC OPERATION OF PLANTS THAT USE THE TECHNOLOGY ON
A COMMERCIAL SCALE.
Whether Rentech GTL Technoloy can be cost effective so that
commercial-scale plants using the technology can be profitably operated depends
upon several factors. The principal conditions include adequate quantities of
low-cost feedstock, the availability and cost of construction financing, the
economic efficiency of the technology, and the market demand for the end
products at profitable prices. Those qualities, especially the economic
performance of the technology, have not yet been established. Poor economic
results at plants using Rentech GTL Technology would adversely impact our
operating results and financial condition by depressing or eliminating our
potential income from the technology.
o CONSTRUCTION AND OPERATION OF COMMERCIAL-SCALE PLANTS THAT USE
THE RENTECH GTL TECHNOLOGY REQUIRE LARGE AMOUNTS OF CAPITAL. FINANCING IN SUCH
AMOUNTS MAY NOT BE AVAILABLE TO OUR LICENSEES OR TO US.
Many of our licensees and potential licensees may not be able to obtain
the large amounts of capital or financing that will be required to construct and
operate commercial-scale plants that use the Rentech GTL Technology. We believe
this situation has slowed and, in some instances, will continue to delay use of
the Rentech GTL Technology. Significant delays may occur before we realize
substantial revenues, if any, from operating plants.
o OUR ABILITY TO CONTINUE TO MARKET THE RENTECH GTL TECHNOLOGY,
TO IMPROVE IT, AND TO ASSIST OUR LICENSEES AND POTENTIAL LICENSEES IN
IMPLEMENTING USE OF THE TECHNOLOGY REQUIRE SIGNIFICANT AMOUNTS OF CAPITAL OR
FINANCING THAT MAY NOT BE AVAILABLE TO US.
In addition to the funds Texaco is currently providing for our
technical services, we have expended and will continue to expend substantial
funds to research and develop our technologies and business, especially the
Rentech GTL Technology. If adequate funds are not available, our marketing and
licensing efforts would be materially hampered. We might have to delay or to
eliminate expenditures for certain of our capital projects or to license to
third parties the rights to commercialize aspects of technologies that we would
otherwise seek to exploit ourselves.
o OUR ABILITY TO CONTINUE TO BENEFIT FROM THE RENTECH GTL
TECHNOLOGY DEPENDS UPON THE EFFORTS OF LICENSEES OF THE TECHNOLOGY. WE DO NOT
CONTROL THEIR ACTIONS.
Except to the extent that we convert existing industrial gas plants, we
do not intend, and do not have adequate capital, to finance, construct and
operate our own commercial-scale plants. At this time, we do not have adequate
capital or financing to retrofit an existing industrial gas plant. Successful
use of the Rentech GTL Technology therefore depends upon our licensees. We will
28
receive royalties and other revenues from operations only from plants that
operate successfully and economically. Under our present and proposed license
agreements, it is a licensee's responsibility to obtain sources of feedstock
that provide adequate supplies at inexpensive rates, conduct feasibility
studies, recruit personnel who are skilled in designing, constructing and
operating gas processing plants, obtain governmental approvals and permits,
obtain sufficient financing on favorable terms for the large capital
expenditures required, possibly construct infrastructure if not otherwise
available at the plant site, market the products, and perform other significant
tasks. Several licensees have allowed their licenses to expire because of their
inability to meet one or more of these conditions for a plant. The ability of
any licensee to accomplish these requirements, and the efforts, resources and
timing schedules to be applied by a licensee, will be controlled by it.
o USE OF THE RENTECH GTL TECHNOLOGY BY LICENSEES DEPENDS UPON
EVALUATIONS OF IT MADE BY THE FIRST INFLUENTIAL LICENSEES AS WELL AS SUCCESSFUL
APPLICATIONS OF THE TECHNOLOGY IN THE FIRST SEVERAL COMMERCIAL-SCALE PLANTS.
If any influential licensee such as Texaco terminates its license or
does not proceed to use the Rentech GTL technology, potential licensees are not
likely to use the technology. If the first few plants to next use the Rentech
GTL Technology are not commercially successful, we may be unable to obtain other
licensees in the future. If licensees do not proceed with plants using the
Rentech GTL Technology or do not successfully operate plants, our operating
results and financial condition would be adversely affected.
o OUR ABILITY TO IMPLEMENT OUR BUSINESS STRATEGY DEPENDS UPON
OUR EXECUTIVE OFFICERS, AND THE CONTINUED IMPROVEMENT OF THE RENTECH GTL
TECHNOLOGY DEPENDS UPON OUR SCIENTIFIC PERSONNEL. LOSS OF ONE OR MORE OF OUR KEY
EMPLOYEES WOULD SUBSTANTIALLY HINDER OUR ABILITY TO EXPLOIT THE RENTECH GTL
TECHNOLOGY.
Our success with our technology is substantially dependent upon the
contributions of our executive officers and key scientific and technical
employees. We believe that the management skills and industry relationships of
our executive officers are important to implement our business strategy. At this
stage of our development, economic success of the Rentech GTL Technology depends
upon continued improvements to the technology, marketing and proper design of
conversion plants and their startup in such a manner that achieves optimal plant
operations. These efforts require knowledge, skills, and relationships unique to
our key personnel. Moreover, to successfully compete through the Rentech GTL
Technology, we will be required to engage in continuous research and development
regarding processes, products, markets and costs. Loss of the services of our
executive officers, our scientists or other key employees could have a material
adverse effect on our business, financing, operating results and financial
condition.
o WE MUST CONTINUALLY DEVELOP IMPROVEMENTS TO OUR TECHNOLOGY AND
MAKE ADVANCES AS COMPETING TECHNOLOGIES ARE IMPROVED AND THE MARKET CHANGES.
The market for advanced technology products is characterized by rapidly
changing technology, new legislation and regulations, and evolving industry
standards. The introduction of products embodying new technology, the adoption
of new legislation or regulations, or the emergence of new environmental and
29
industry standards could render our technology and future uses, if any, obsolete
and unmarketable. Our success and growth will depend, in part, upon our ability
to anticipate changes in technology, market needs, law, regulations, and
industry standards; to continue to attract, retain and motivate qualified
personnel; and to successfully develop and introduce new and enhanced advances
to our technology on a timely basis. We will need to devote a substantial amount
of our efforts to research and development as well as to sales and marketing. If
we do not perform well to meet these requirements, our business operating
results and financial condition would be adversely affected.
o WE EXPECT THAT A LARGE PORTION OF OUR LICENSEES WILL USE THE
RENTECH GTL TECHNOLOGY IN FOREIGN COUNTRIES. THAT WILL SUBJECT US TO THE
UNCERTAINTIES AND RISKS THAT SOMETIMES AFFECT OPERATIONS IN THOSE LOCATIONS.
We expect that licensees of the Rentech GTL Technology will construct
plants in foreign countries where our licensees' conduct of business and
profitability of operations are at risk. The additional risks include rapid
changes in political and economic climates; changes in foreign and domestic
taxation; lack of stable systems of law; susceptibility to loss of protection of
patent rights and other intellectual property rights; expatriation laws
adversely affecting removal of funds; fluctuations of currency exchange rates;
contract rights; labor disputes; the nationalization or appropriation of
property without fair compensation; civil disturbances; and war. International
operations and investments may also be negatively affected by laws and policies
of the United States affecting foreign trade, investment and taxation. Any of
these events could adversely impact our licensees and thereby adversely affect
our operating results and financial condition.
PROPRIETARY DESIGNS, INTELLECTUAL PROPERTY AND PATENTS
We own intellectual property rights consisting of proprietary designs
for our synthesis gas reactors and other key aspects of the Rentech GTL
Technology. We also own confidential information and trade secrets that are
essential to maintain our proprietary ownership of the technology. We seek to
protect our intellectual property rights through patents and trade secret
agreements, including confidentiality agreements with our licensees, employees
and consultants.
Use of the Rentech GTL Technology requires use of our patented
catalyst. The license arrangements with both Texaco and Donyi Polo
Petrochemicals Ltd. authorize them to manufacture our catalyst for their
respective conversion plants or to have the catalyst made for them by a
manufacturer of their choice. We have no present plans to manufacture our own
catalyst. We expect ultimately to grant a license, for which we would receive a
license fee and royalties, to an independent catalyst manufacturer for
manufacture and delivery of catalyst, or to grant a license to individual
licensees of the technology to manufacture catalyst for their own use.
We have been granted eleven United States patents related to the
Rentech GTL Technology. These patents apply to our processes, applications of
the process, products produced, and materials used as part of the Rentech GTL
Technology. The patents cover a method for cracking produced waxes; a method of
making and activating a promoted iron catalyst for use in slurry synthesis
reactors; production of a synthetic oxygenated diesel fuel; the overall
gas-to-liquids conversion process; use of our oxygenated, sulphur and
aromatic-free diesel fuel as an additive to conventional diesel fuel; and
control of the tail gas from our process to maximize either the production of
electricity from our tail gas, gas-to-liquids products, or a near-pure form of
carbon dioxide. This type of carbon dioxide can be more readily sequestered,
thereby reducing harmful emissions from electrical power plants and
transportation vehicles.
30
Two of our patents include key elements of a process that enables our
iron-based catalyst to compete with cobalt-based catalysts used by other F-T
processes. These patents protect process steps that improve the carbon
conversion efficiency of the Rentech GTL Technology by over 30%. We believe
these procedures make our process cost-effective for converting gases to
liquids.
We have filed additional U.S. patent applications. One Australian
patent has been issued. Several foreign patent applications based on one or more
of the United States patents are pending.
Our first patent for the Rentech GTL Technology is based upon an
application filed in 1992. The patent was issued by the U.S. Patent and
Trademark Office in 1994. Patents have a term of 20 years from the date of
filing the application. Subsequent patents that we have been issued or may
obtain in the future for improvements and additions to the technology may have
the effect of extending our period of exclusive rights to use and license the
technology.
OKON's formulas for the manufacture of its stains, sealers and coatings
are proprietary. They are maintained as trade secrets, and OKON has no patents.
We rely upon confidentiality agreements with our employees and manufacturers of
key components of our stains, sealers and coatings to protect these trade
secrets.
Petroleum Mud Logging provides its services based upon an integrated
system of computer software, skilled computer analysts who interpret the data
and communications devices to readily transmit the information to the mineral
owner. The essential elements of these programs and devices are proprietary.
They are maintained as trade secrets, and PML has no patents. We rely upon
confidentiality agreements to protect these trade secrets.
REN Corporation's computer-controlled testing equipment depends upon
computer software programs and proprietary computer hardware devices. The
programs and hardware components are developed by REN's employees. This
proprietary information is maintained as trade secrets, and REN owns no patents.
REN relies upon confidentiality agreements to protect its proprietary interests.
OUR ABILITY TO EXPLOIT OUR VARIOUS TECHNOLOGIES DEPENDS UPON PROTECTING
AND ENFORCING OUR INTELLECTUAL PROPERTY RIGHTS. OUR ABILITY TO DO SO INVOLVES
COMPLEX LEGAL, SCIENTIFIC AND FACTUAL ISSUES AND UNCERTAINTIES.
The Rentech GTL Technology and our businesses conducted by OKON and
Petroleum Mud Logging and the business of REN Corporation are based upon patents
and trade secrets. We rely upon a combination of patent, trade secret, copyright
and trademark law, nondisclosure agreements and technical security measures to
protect our intellectual property rights in our several lines of business. Our
success in technologies that are based on intellectual property depends on our
ability to establish, protect and enforce intellectual property rights with
respect to our technologies and to successfully defend against any alleged
infringement or related claims.
Protecting and enforcing our intellectual property position involves
complex legal, scientific and factual questions and uncertainties. This may be
especially true in foreign countries, which might become important users of the
Rentech GTL Technology, but which generally do not provide as much protection of
31
intellectual property rights as the United States. The lack of stable systems of
law in some foreign countries could lead to rapid changes in political and
economic climates, civil disturbances and other disruptions that affect
operations. Our ability to protect and enforce our intellectual property
position requires diligent actions by us to strictly maintain the
confidentiality of our trade secrets and to protect our patents. If we do not,
the value of our technologies that are affected would be severely limited.
COMPETITION IN GTL TECHNOLOGY
Based on information from public announcements made by other companies
and from other published information, our competitors in the gas-to-liquids
field include several of the major oil and gas companies as well as a few
smaller companies. All of the competing processes are based on Fischer-Tropsch
technology. The fundamental differences between the various technologies are the
catalyst and the synthesis gas reactors where the synthesis gas reacts with the
catalyst.
Our principal competitors are companies that have developed their own
Fischer-Tropsch technology and have operated full scale plants, or at least
pilot plants, and who are actively seeking customers to license their technology
or to use it on some shared basis. These other arrangements include use of the
technology by a joint venture between the owner of the technology and the owner
of a source of feedstock.
Additional competitors in the field are those who are developing
Fischer-Tropsch technology, but who have not yet completed their research or
tested their technology in an operating pilot plant. Those other competitors
include several major oil and gas companies.
We believe that owners of competing GTL technologies which have
demonstrated use of their technology have spent many years and large sums of
money developing their technologies. We expect that others who may hope to
develop new, competing GTL technologies will face similar requirements of time
and money, to enter the field. We anticipate that these factors and the patents
that have been issued to us will make it difficult for others to enter the field
using an iron-based catalyst.
Several major oil companies are involved in large-scale synthetic fuel
development. These competitors include Royal Dutch/Shell, Exxon, and Sasol.
Syntroleum Corporation, a smaller public company, offers its Fischer-Tropsch
technology to licensees and joint ventures in which it has a part interest.
Exxon has operated a 200 barrel per day plant in Baton Rouge,
Louisiana, to demonstrate its process. While the plant was operated for several
years, it is not now being operated.
Shell operated a 12,500 barrel per day plant in Bintulu, Malaysia from
1993 through 1997 that produced diesel fuel and other products from natural gas.
The diesel fuel was sold to two refineries located in California and used for
blending stock with commercial diesel. This Fischer-Tropsch plant was shut down
in December 1997 because of an explosion in the air separation unit, which is
not a part of the Fischer-Tropsch reactor. Shell's plant came on-line again in
2000 with increased production capacity.
Sasol currently operates three Fischer-Tropsch plants that produce
about 160,000 barrels per day of liquid hydrocarbons. The feedstock is synthesis
gas produced from coal. Mossgas also uses Sasol's technology in South Africa to
produce in excess of 20,000 barrels per day of synthetic oil from natural gas.
In June 1999, Sasol and Chevron signed a memorandum of understanding for the
creation of a new global alliance to implement ventures based on Sasol's
gas-to-liquids technology.
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Syntroleum has operated its 70 barrel per day pilot plant owned with
ARCO at ARCO's Cherry Point refinery in the state of Washington. Syntroleum
Corporation previously reported that it has operated a pilot plant with a
nominal production capacity of two barrels per day. Syntroleum has reported that
its pilot plants have successfully demonstrated certain elements and variations
of Syntroleum's Fischer-Tropsch process.
Unlike iron-based Fischer-Tropsch technologies, the cobalt-based
Fischer-Tropsch technologies are currently only used for the conversion of
synthesis gas produced from natural gas. Cobalt-based technologies can be used
to convert synthesis gas from liquids and solids, but such a plant requires the
addition of expensive equipment that would likely cause reduced product yields
and increased capital and operating costs.
The Rentech GTL Technology uses an iron-based catalyst, as does Sasol.
No claims of patent infringement have been made against us, and none, to our
knowledge, have been made against Sasol. Sasol has announced business
arrangements with Chevron that indicate Sasol currently intends to only license
its technology for conversion of natural gas to companies with sources of the
feedstock who enter a joint venture arrangement with Sasol and Chevron to
jointly share profits.
We believe our Fischer-Tropsch technology can successfully compete
against the technology of the others who are engaged in the same business. We,
Exxon, Shell, Sasol and now Syntroleum are the only companies in the world that
have operated a Fischer-Tropsch plant at larger than laboratory scale.
Syntroleum actively markets license for use of its technology. At this time the
others only use their technology for their own account or for projects in which
they acquire an equity interest.
We believe that our patents protect several unique features of the
Rentech GTL Technology, including our catalyst, that give us competitive
advantages in costs and product yields over those of our competitors. Several
properties of iron-based catalysts provide them significant advantages over
cobalt catalysts. Our catalyst is less expensive than cobalt catalysts, and
unlike them, the residue is not a hazardous waste. Our catalyst also works with
feedstocks containing sulfur, which we think makes it the only feasible catalyst
for industrial off-gases and substandard natural gas. Our iron-based catalyst
has a broad range of application because it can convert synthesis gas from gas,
liquid and solid feedstocks, unlike cobalt catalysts that do not work well with
liquids and solids. We also believe that the conversion rate, that is, the
amount of the feedstock that is converted into valuable liquid hydrocarbons, is
as high for our patented catalyst as it is for cobalt catalysts.
o THE RENTECH GTL TECHNOLOGY MAY NOT COMPETE FAVORABLY WITH
OTHER GTL TECHNOLOGIES. THAT WOULD LIMIT OUR ABILITY TO OBTAIN LICENSEES, AND
WOULD SEVERELY REDUCE OUR REVENUES FROM THE TECHNOLOGY.
Because of increasing worldwide demand for fuels in general, and for
the clean burning products of GTL technology in particular, as well as the large
quantities of carbon-bearing gas, liquid and solid materials available as
feedstock, there are economic incentives for businesses to develop and achieve
significant market penetration for successful Fischer-Tropsch technology.
Several major integrated oil companies, including ExxonMobil Corporation, Royal
Dutch/Shell and Sasol Ltd., as well as Syntroleum Corporation and several
smaller companies, have developed or are developing competing technologies. Most
of these companies, especially the major oil companies, have significantly more
financial and other resources than we do to spend on developing, promoting and
using their technology. The U.S. Department of Energy has also sponsored a
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number of research programs in Fischer-Tropsch technology, some of which might
potentially lower the cost of processes that compete with the Rentech GTL
Technology. These companies, the Department of Energy, or others may develop
technologies that will be more commercially successful or better accepted in the
industry than our technology. This could render our technology obsolete. It
would also have a material adverse effect on our results of operations and
financial condition.
GOVERNMENTAL REGULATION OF THE RENTECH GTL TECHNOLOGY
Conversion plants using the Rentech GTL Technology and plants
manufacturing our proprietary catalyst are subject to extensive federal, state
and local laws, rules and regulations relating to protection of the environment
and employee health and safety. Plants using our technology in foreign countries
will be subject to the environmental and health and safety laws and regulations
of those nations. Violations of these laws and regulations may subject violators
to substantial government fines and criminal penalties as well as legal
liabilities to third parties. Violators may be required to reduce the level of
operations of their plants or to retrofit plants to lessen the environmental
impact. Those changes could be costly. In the most extreme situations, the costs
of environmental compliance could be prohibitively expensive.
Local and sometimes federal governments, typically require that plant
operators obtain a variety of governmental permits before construction and
operation of the plants. These requirements will usually include permits
regulating location of industrial plants, construction, air and water emissions,
and disposal of byproducts. Obtaining the required permits could increase the
costs of designing, constructing and operating plants using the Rentech GTL
Technology. Obtaining the permits could also delay these activities. That would
have the effect of increasing the overall costs of these plants.
OPERATING HAZARDS OF PLANTS USING THE RENTECH GTL TECHNOLOGY
Plants that use the Rentech GTL Technology process carbon bearing
materials, including natural gas, into synthesis gas. Some plants will require
the use of oxygen producing systems to convert the feedstock into synthesis gas.
These gases, especially oxygen, are highly flammable and explosive. Severe
personal injuries and material property damage may result. If such accidents did
occur, we could have substantial liabilities and costs. We are not insured for
these risks. Furthermore, accidents of this type would likely adversely affect
operation of existing as well as proposed plants by increasing costs for safety
features. Widespread market acceptance of the Rentech GTL Technology could be
delayed by this situation.
OPERATION OF GAS PLANTS THAT USE THE RENTECH GTL TECHNOLOGY INVOLVES
RISKS OF MECHANICAL FAILURES AND FIRES AND EXPLOSIONS. FREQUENT OR SEVERE
ACCIDENTS OF THIS TYPE AND THE RESULTING DAMAGES COULD MATERIALLY AND ADVERSELY
AFFECT OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION.
We expect that use of the Rentech GTL Technology in some conversion
plants will require oxygen producing systems to convert the feedstock into
synthesis gas. This is the first step of the Fischer-Tropsch process, and it
occurs before our GTL Technology is applied. The oxygen producing systems, if
required, will involve risk of accidents. Personal injuries to workers at the
plant and property damage to the plant may result. The frequency and seriousness
of accidents, injuries and damages will impact the marketability of the Rentech
GTL Technology, and our licensees' operating costs and insurability. Significant
frequency or severity of such accidents could have a material adverse effect on
our business, operating results and financial condition.
34
Compliance with health and safety requirements is not expected to
require unusual capital expenditures by us or our licensees. Compliance with
governmental regulations is the responsibility of the owners and operators of
the plants, who will usually be our licensees. If we acquire a controlling
interest and operate a plant, we would have to comply with applicable
governmental regulations.
We believe that the Rentech GTL Technology does not present unusual
issues of environmental compliance. Because our iron-based catalyst is not a
hazardous or toxic material and is not regulated, we believe that the cost of
governmental compliance will not be significantly affected by regulations
governing hazardous materials. We also believe the non-hazardous nature of our
catalyst gives our technology some advantages over our competitors that use a
cobalt catalyst. To the extent that a cobalt catalyst is not reused and consumed
in the process, it is a regulated material.
OTHER BUSINESSES
o OKON, INC.
In March 1997, we entered into the business of manufacturing and
marketing water-based wood stains, concrete stains, block pluggers and other
water repellent sealers on a wholesale basis by purchasing the assets of OKON,
Inc. The coatings produced and sold by OKON are biodegradable and
environmentally clean.
OKON has been engaged in the business since 1973. OKON, located in
Denver, markets and sells its products nationwide through a variety of channels.
These include distribution through paint dealers, retailers who are primarily
not discount retailers, and mass merchandisers, industry users, and architects
and building contractors. The customers are primarily the construction industry
and architects who use the coatings on wood, concrete and masonry for their
construction projects. OKON has a one-person sales staff, but no distributors or
independent sales representatives. The brand names of the various products are
recognized throughout the industry. The formulas used by OKON for manufacturing
its products are proprietary.
OKON also markets nearly one-half of its products with the trade mark
of Goodyear Chemical. This company is a division of Goodyear Tire and Rubber.
Goodyear supports OKON's marketing in this way because these products use resins
manufactured by Goodyear Chemical. Goodyear's trade mark used by OKON shows
OKON's product is made with PILOTEC(R) resins, and the mark also shows the
Goodyear's registered mark for its blimp.
Starting in 2001, OKON's products have been stocked in approximately
seven Home Depot stores. If this market test demonstrates that customers
purchase OKON's environmentally clean stains, sealers and coatings in a volume
that satisfies Home Depot, OKON expects to sell its products through more of
Home Depot's outlets. There are approximately 1,200 Home Depot stores.
OKON primarily manufactures and markets standard products, but it also
prepares special products for large orders. OKON employs one person whose duties
are primarily related to marketing. Sales are generally made pursuant to
purchase orders, which are occasionally revised to reflect changes in the
customer's requirements or to establish special orders. Product deliveries are
scheduled upon OKON's receipt of purchase orders, and orders are typically
filled within one to two days. OKON had no significant backlog of orders.
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Historically, sales of stains and sealers have been seasonal in nature.
The heaviest concentration of sales have occurred in the spring and summer
months. Production schedules are timed to reflect these seasonal variations.
The coatings industry in which OKON conducts its business is highly
competitive and has historically been subject to intense price competition.
Other competitive factors in the coatings industry include the content of
volatile organic compounds (VOC) in the product, product quality, product
innovation, and distribution. There are five major competitors in this
nationwide market of environmentally sound paint products. Rentech believes that
OKON products are competitive. It bases this belief on the quality of OKON's
products and their unique properties, including reduced content of VOC
ingredients because the products are water-based and biodegradable.
The Environmental Protection Agency considers even small amounts of
VOCs to be harmful environmental contaminants. This is because many of them are
water soluble and persist in the environment. According to the EPA, ingestion of
VOCs over the lifetime of a person has been shown to cause adverse health
effects such as cancer, reproductive problems, and developmental effects. The
U.S. Geological Survey reported in 1999 that 47% of water wells in urban areas
contain VOCs, and 14% of water wells in rural areas produce water with VOCs. Of
these wells, the U.S. Geological Survey estimates that 2.5% of the urban wells
and 1.3% of the rural wells that provide drinking water have concentrations of
VOCs that exceed EPA standards for safe drinking water. VOCs also contribute to
ground-level ozone, according to the EPA, and irritate the lungs, eyes and
sinuses. The EPA believes VOCs also increase the risk of heart or respiratory
illnesses and aggravate asthma.
Unlike our products, the majority of wood stains, concrete stains and
concrete block pluggers currently on the market contain VOC 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 VOC contained in products. The restrictions have effectively
prohibited the sale and use of high VOC products in some states such as
California. The environmental advantages of the OKON products complement
Rentech's business philosophy of producing environmentally cleaner fuels and
products.
OKON's sales of products to some customers may constitute a significant
portion of our revenues. For the year ended September 30, 2001, one customer of
OKON accounted for 12% of our total revenues. For the year ended September 30,
2000, one customer of OKON accounted for 16% of our total revenues. For the year
ended September 30, 1999, two customers for OKON accounted for 29% and 12% of
our total revenues.
LOSS OF OKON'S LARGEST CUSTOMERS WOULD MATERIALLY REDUCE OUR TOTAL
REVENUES.
OKON has provided material portions of our total revenues. Loss of a
customer of this size would have an adverse economic and business impact upon
all of our operations. OKON sells to over 200 customers, and we expect that this
broad customer base would help soften the impact of the loss of any single
customer.
Revenues from our stains, sealers and coatings business segment
represented approximately 29%, 41%, and 68% of our revenues in the years ended
September 30, 2001, 2000, and 1999, respectively.
36
o PETROLEUM MUD LOGGING, INC.
In June 1999, we entered into the business of providing well logging
services to the oil and gas industry. This occurred through its purchase of the
assets of two established and related companies that have been providing
services in these fields since 1964. We are using the assets to continue these
businesses through our wholly-owned subsidiary, Petroleum Mud Logging, Inc.
(PML). The business is operated from Oklahoma City, Oklahoma. The services are
provided to customers located in Oklahoma, Texas, Kansas, Louisiana and Arkansas
and a few nearby states.
PML owns 25 mobile well logging units that are moved from well to well.
Through state of the art instruments, the logging equipment measures traces of
gases and water throughout the depth of a well hole by analyzing the drilling
mud recovered from the well as drilling progresses. The results are transmitted
to customers immediately by either land lines or satellite uplink. The mineral
owners use this information to detect the presence of oil and gas deposits in
underground formations and to direct their exploration and development drilling.
The assets of PML also include a comprehensive library of well logs
accumulated over the past 36 years. The well logs are available for examination
by customers for a charge.
In the last several years, PML has provided its logging services for
fewer oil wells and more for gas wells. We expect this trend to continue as
exploration for natural gas intensifies due to increasing demand for that energy
source.
Revenues provided by our mud logging business segment represented
approximately 37%, 36% and 10% of our revenues during the fiscal years ended
September 30, 2001, 2000 and 1999. We acquired the mud logging assets that we
use to provide our oil and gas field services in June 1999. PML's revenues from
some customers may constitute a significant portion of its revenues. For the
years ended September 30, 2001 and 2000, one customer of PML accounted for 12%
and 17% of our total revenues, respectively.
LOSS OF PML'S LARGEST CUSTOMERS WOULD MATERIALLY REDUCE OUR TOTAL
REVENUES.
PML has provided material portions of our total revenues. We have
experienced a growing demand for our oil and gas field services. If we lose a
significant customer, we anticipate that demand from other customers would use
most of our capabilities.
THE MARKET FOR PML'S SERVICES MAY NOT CONTINUE AT THE CURRENT LEVEL.
More companies may enter our business and offer well logging services
to the oil and gas industry. Our present competitors may expand their equipment
and provide more well logging services. The number of new natural gas wells that
are drilled may decline as the supply of natural gas increases or if market
demand for natural gas lessens. If these events occurred, the demand for PML's
services would decline and our total revenues could be significantly reduced.
37
Our competitors in oil and gas field services include approximately 50
other companies. Several of these companies are divisions or subsidiaries of
major oil and gas companies or other energy businesses. Those competitors have
substantially more financial assets and other resources than we do. We believe
we have been and will be able to favorably compete in this business because of
our advanced technological capabilities. Our mud logging units are well equipped
mobile laboratories. Our units receive and automatically test data on site from
the drill holes as a well is drilled. To our knowledge, we are the only company
that monitors and plots all parameters by computer, rather than by hand. The
units automatically analyze that information and rapidly communicate the results
to the mineral owner. These capabilities give us advantages over most of our
competitors by enabling the mineral owner and its geologists to exercise more
precise control over the drilling without being at the site.
o REN CORPORATION
As of August 1, 2001, we acquired 56% of the outstanding stock of REN
Corporation for approximately $1,400,000. REN is an Oklahoma corporation
organized in 1979 and located in Stillwater, Oklahoma. REN manufactures
computer-controlled testing equipment systems and sells them on a custom-order
basis to industrial manufacturers. The manufacturers use REN's industrial
automation systems for controlling quality control and increasing productivity
in the manufacture of their products. The customers' products include automatic
hydraulic pumps, valves and actuators; diesel fuel injection pumps;
transmissions; automatic hydraulic presses; and hydraulic hose assemblies. REN's
primary market has been automated test equipment for the fluid power industry.
REN intends to continue its business and expects to expand its
activities. REN will retain its present management. We anticipate REN will be
able to expand its business with minimum investments of capital, and will
develop a positive cash flow.
REN's customer base currently consists of some of the world's largest
heavy-equipment manufacturers. These include Caterpillar, USA; Eaton
Corporation, USA and Mexico; John Deere USA and Mexico; Daewoo Heavy Industries,
Korea; Bosch Rexroth Corporation USA and Germany; Parker Hanifen Corporation,
USA; and Sauer Danfoss, USA and Great Britain. Sales inside the U.S. were
$996,641, $833,802 and $1,699,645 during 2001, 2000 and 1999, respectively, and
sales outside the U.S. were $8,247, $4,311, and $423,003 during the same years.
REN has a backlog of orders in the approximate amount of $3,140,000 as
of September 30, 2001 as compared to a backlog of approximately $250,000 as of
September 30, 2000. The new orders will require development of enhancements to
REN's software and hardware to produce the test equipment that has been ordered.
REN anticipates increasing its number of employees from 15 to 20 to meet the
requirements of its new orders.
REN's competitors who manufacture and sell computerized test equipment
for use in manufacturing include approximately ten other companies. We have
approximately three principal competitors. Some of REN's competitors have
substantially more financial assets and other resources than REN. We believe
that REN will be able to compete favorably because its pioneering work in
applying computers and electrohydraulics to develop leading edge systems gives
REN certain advantages, especially for test equipment systems for the fluid
power industry.
REN MAY NOT BE ABLE TO READILY AND ECONOMICALLY DEVELOP THE
COMPUTERIZED TEST EQUIPMENT THAT HAS BEEN ORDERED.
38
Development of the specialized test equipment that REN sells requires a
period of development and specialized skills. If REN is not able to economically
and timely produce the equipment that has been ordered, the costs would be
increased and the anticipated revenues would be reduced.
We may not be able to obtain the financing that REN requires to expand
its business to meet its requirements for its new sales orders.
REN had fifteen employees as of September 30, 2001. REN anticipates
increasing its number of employees to 20 in order to meet the requirements of
its new orders.
ADVANCED TECHNOLOGIES
o INICA, Inc. (formerly ITN ENERGY SYSTEMS, INC.)
In 1998 Rentech acquired 10% of INICA, Inc. (formerly ITN Energy
Systems, Inc.), a privately owned Colorado corporation. INICA was founded in
1995 by a team of scientists and engineers from several major aerospace
corporations. INICA's business strategy is to develop and commercialize emerging
technologies for the aerospace, military and commercial markets. Its approach is
to form sponsorships and partnerships with corporations for the study and
development of specific products. After intensive testing of prototypes and
evaluation of the market, the successful products are introduced to the market.
INICA has grown from 10 employees when we made our investment decision to over
200 employees today, among all of its operating entities. INICA has two
offices/laboratories located in Jefferson County, Colorado and an interest in a
photovoltaic (PV) production facility in Tucson, Arizona.
In December 2000, we agreed in principle with INICA to exchange our 10%
ownership interest in INICA for an interest of approximately 3.5% in a holding
company that will own technologies developed by INICA. The holding company will
own 100% of Global Solar Energy, Inc. and 100% of Infinite Power Solutions, Inc.
In addition, the same holding company would own 100% of two other key advanced
technologies being developed by INICA, ceramic membranes and fuel cells. During
fiscal 2001, further discussions with INICA have revised the agreement to a
direct 3.5% ownership interest in Global Solar Energy and Infinite Power
Solutions, as well as a direct ownership interest in the ceramic membrane and
fuel cell entities. Based on these discussions, Rentech would not relinquish its
stock in INICA until Global Solar Energy and Infinite Power Solutions have
become publicly traded companies, at which time INICA is to purchase its stock
from Rentech at an amount to be negotiated at a later date. Management believes
that the exchange of investments is equitable for the Company.
INICA is actively pursuing its business strategy through its four
primary subsidiaries. The first is ITN/ES, Inc. (formerly New ITN), which was
formed to continue research and development activities under certain
governmental contracts and for related entities. INICA owns 51% of ITN/ES, and
Millennium Energy Holdings, Inc. owns 49%. Another subsidiary is MicroSat
Systems, Inc., which was organized to develop space technology. INICA owns 51%
of MicroSat and Millennium owns 49%. The third subsidiary is Global Solar
Holdings, LLC, which owns 100% of Global Solar Energy. Global Solar Energy owns
the technology and manufacturing facility for the photovoltaic panel systems.
INICA owns 33.33% of Global Solar Holdings and Millennium owns 66.66%. The
fourth subsidiary of INICA is Infinite Power Solutions, Inc. which was formed to
commercialize the thin-film battery technology. INICA owns 33.33% of Infinite
Power Solutions and Millennium owns 66.66%.
39
Millennium Energy Holdings, Inc. is a wholly owned subsidiary of
Unisource Energy Corporation. Unisource Energy is traded on the New York Stock
Exchange under the symbol UNS. As reported in Unisource Energy Corporation's
Form 10-Q for its nine months ended September 30, 2001, Unisource Energy has
provided $16 million in funding to the entities previously described. In
addition, Unisource Energy stated that Millennium expects to provide an
additional $7 million to these investments during the fourth quarter of 2001.
Based upon the Unisource Energy Corporation Annual Report for 2000, Unisource
Energy has also committed to provide an additional $20 million in funding for
production and expansion of Global Solar Energy over the next four years as well
as $20 million in funding to form MicroSat Systems, Inc. Unisource Energy
further stated that it expects these investments to move to profitability within
the next two years.
o ITN/ES, INC.
ITN/ES is a product development company that was formed to provide
research and development and other services to Global Solar Energy and other
related entities. ITN/ES recently initiated two research and development
contracts based on its ceramic membrane technology. The first is a $7 million
contract with Defense Advanced Research Projects Agency (DARPA) known as the
Palm Power Project. The goal is to produce a demonstration unit for a hand-held
solid oxide fuel cell to be used by military personnel that is capable of
producing 20 watts for 72 hours. Though being developed specifically for DARPA,
future applications could include remote commercial and recreational uses. Fuel
cells are clean and quiet devices that generate electricity through an
electrochemical process involving fuel and air. Similar to batteries, each
individual fuel cell produces approximately one-half volt, and multiple cells in
a"stack" configuration produce higher voltages and power. Fuel cells have higher
power densities than batteries, and continue to generate electricity as long as
fuel and air are supplied.
The second research and development contract was awarded by the
Advanced Technology Program Office of the National Institute of Standards and
technology (NIST) to develop important new types of electric generating systems.
ITN/ES received an initial $2 million contract for "Integrated Planar Solid
Oxide Fuel Cell Stack Development." The three-year program includes additional
investment for a total estimated project budget of $4 million dollars. Fuel
cells generate electricity through a non-combustion, environmentally friendly
process that produces only heat, water and electricity. Like a battery, each
fuel cell produces about one volt of electricity. Multiple fuel cells combined
in a "stack" configuration produce higher voltages and power.
o MICROSAT SYSTEMS, INC.
MicroSat Systems is a space systems company formed for the purpose of
developing and commercializing small-scale satellites. MicroSat has been
selected by the Air Force Research Laboratory to lead an industry team that will
develop "micro-satellite" spacecraft as part of a three-year, 435 million
demonstration program. Researchers at the Air Force Research Laboratory's (AFRL)
Space Vehicles Directorate, and those at the Air Force Office of Scientific
research in Arlington, VA have made plans for a new system of small satellites
that fly in a formation and can quickly adapt to rapidly changing mission
requirements. The ultimate goal of AFRL's "Technology Satellite of the 21st
Century," or the TechSat 21 program, envisions that collaborative clusters of
interdependent microsatellites, each weighing about 100 kilograms and flying in
close, bird-like formations, may eventually circle the earth, replacing many of
today's single, larger satellites. MicroSat plans to partner with Ball Aerospace
and Technologies Corp., Lockheed Martin Astronautics Operations, and Global
Solar Energy to develop new technologies and satellites intended to perform
space missions at much lower cost than conventional satellite systems.
40
o INFINITE POWER SOLUTIONS, INC.
The purpose of this company is to commercialize the thin-film battery
technology developed by ITN/ES. The thin-film batteries are solid state,
rechargeable lithium batteries. According to Infinite Power's projections, it
anticipates that an initial battery production level of 23 million batteries a
year by 2002. Thin film batteries are being produced by a pilot line. They are
being integrated into specific customer products for the first introductions of
this technology to the market. These initial products include smart cards, radio
frequency identification (RFID) tags and medical implants such as hearing aids.
Limited commercial production of the batteries is scheduled to occur by
mid-2002.
RISKS RELATING TO INICA, INC. AND ADVANCED TECHNOLOGIES
o PROFITABLE OPERATIONS OF ADVANCED TECHNOLOGY BUSINESSES ARE
SUBJECT TO GREATER RISK THAN FOR MORE CONVENTIONAL BUSINESSES.
The likelihood of successfully entering into new businesses involving
advanced technologies must be considered in view of the problems, expenses,
difficulties, complications and delays frequently encountered with starting up a
new business, especially one engaged in high technology. These factors include
the development of new technology, the marketing of new products, and adequate
controls to assure adherence to the special provisions and fine tolerances
required in manufacturing, assembling and installing high technology products.
We have little or no history of operations in these lines of advanced
technologies upon which to evaluate their prospects for future operating or
financial success. Success in these businesses is uncertain.
o THE VALUE OF OUR INTERESTS IN ADVANCED TECHNOLOGIES DEPENDS
UPON THE EFFORTS OF OTHERS. WE DO NOT CONTROL THEIR ACTIONS.
The advanced technologies in which we acquired an ownership interest
through INICA, Inc. are controlled by others. We have no influence over their
actions and are not involved in their operations. The success of the advanced
technologies in which we hold interests depends upon the controlling
shareholders, officers and managers of these businesses.
o THE ADVANCED TECHNOLOGIES IN WHICH WE HAVE AN INTEREST MAY NOT
BE APPLIED TO ADDITIONAL PRODUCTS OR ACCEPTED BY THE TARGET MARKETS.
The planned improvements to these technologies may not be completed,
and new products may not be developed. The products may not gain widespread
acceptance in the target marketplaces. If so, the value of our shares of common
stock in these companies could be limited.
41
o THE ADVANCED TECHNOLOGY BUSINESSES MAY NOT OPERATE AT A
PROFIT. IF THEY DO NOT, OUR ECONOMIC BENEFIT FROM OWNERSHIP OF INTERESTS IN THEM
WILL BE LIMITED AND MAY NOT MATERIALIZE.
Global Solar Energy and especially Infinite Power Solutions have only
recently attempted to market their products. Their products may not be purchased
by a broad group of customers. They may not obtain enough sales to meet their
business needs and operating expenses. If one or both of them do not achieve
high levels of sales and operate profitably, our investment in shares of their
common stock will be limited in value.
o WE DO NOT EXPECT THAT THE ADVANCED TECHNOLOGY BUSINESSES WILL
DISTRIBUTE DIVIDENDS TO SHAREHOLDERS. THERE IS NO MARKET FOR THE COMMON STOCK OF
THESE COMPANIES. WITHOUT DIVIDENDS, WE MAY NOT REALIZE REVENUE FOR OUR
INVESTMENT IN ADVANCED TECHNOLOGIES.
Unless the advanced technology companies declare dividends, which we do
not expect, our return on any value in these companies will depend upon the
value of our shares of their common stock. There is no market for the common
stock, and none may develop. If so, our ability to realize value from the common
shares will be limited. We may be required to hold the common stock for an
indefinite period of time without any economic return.
o DRESSER ENGINEERING
In 1999 we entered into an arrangement with Dresser Engineering Company
of Dallas, Texas, for joint marketing of our technology with the engineering
services of Dresser Engineering. Since 1926 Dresser Engineering has been
providing engineering, procurement and construction management services to the
gas processing and refining industries. The purpose of the marketing arrangement
was to allow our two companies to take advantage of each other's strengths for
marketing the Rentech GTL Technology on a worldwide basis. In 1999, Dresser
Engineering's parent company, Dresser Engineers & Constructors, Inc., and we
exchanged ownership of minority blocks of our shares on a tax-free exchange
basis. Dresser Engineers & Constructors acquired 3,680,168 shares of our common
stock in September 1999, and we acquired 5% of the common stock of privately
held Dresser Engineers & Constructors, Inc.
In 2000, Dresser Engineering prepared a preliminary cost study of the
feasibility of converting the Sand Creek methanol plant into a GTL plant that
would use our technology. We own a 50% interest in the Sand Creek plant. We
capitalized these costs as capitalized software. We are using this software
program as a generic model for conducting feasibility studies and providing data
for our engineering designs for plants.
As part of the stock exchange, we incurred $2,072 in acquisition costs.
We valued our investment in Dresser Engineers & Constructors based on the market
value of our common stock of $1,838,012 at the date of issuance. During March
200, we paid a deposit of $175,000 plus $2,051 in additional acquisition costs
to increase our ownership percentage in Dresser Engineers & Constructors to 10%.
During fiscal 2001, we reached an agreement with Dresser Engineers &
Constructors under which we agreed not to acquire the additional ownership
interest. Dresser Engineers & Constructors issued its $175,000 note receivable
to us, with a personal guarantee from the owner of Dresser Engineers &
Constructors for the repayment of this sum. The note receivable matures on
December 31, 2001.
42
As of September 30, 2001, we determined that our investment in the
shares of Dresser Engineers & Constructors was impaired. Dresser is a privately
owned company. We have not been able to obtain adequate information about its
current business to support the existing valuation. Based upon our inability to
determine Dresser Engineers' liquidity and the status of its business plans, we
have recognized a $1,842,135 loss on investment for the year ended September 30,
2001. We continue to own the 580,000 shares of the common stock of Dresser
Engineers & Constructors that represent this investment.
EMPLOYEES
At September 30, 2001, we had 111 employees. Among our subsidiaries,
Rentech Services Corporation had 10 employees who work at our development and
testing laboratory, OKON, Inc., had nine employees; Petroleum Mud Logging, Inc.
had 57 employees, three of whom are part-time employees; and REN Corporation had
15 employees.
ITEM 2. PROPERTIES
OFFICE LEASE
Our executive offices are located in Denver, Colorado and consist of
approximately 5,855 square feet of office space. The lease expires in October
2003 and includes an option to extend for another five-year term. The rent is
$119,328 per year. We believe that our existing space is adequate to meet our
current needs and to accommodate anticipated growth.
DEVELOPMENT AND TESTING LABORATORY
We own a development and testing laboratory located in Denver. The
facility consists of a 11,000 square foot laboratory located within our 20,000
square foot industrial building. The remainder of the building is rented to a
tenant and constitutes potential expansion space for the laboratory. We
renovated the building in fiscal 1999 to provide a state-of-the-art laboratory
and support facilities for Fischer-Tropsch technology. Our small scale reactor
is operated at the facility for continued development of Fischer-Tropsch
technology. Our lab equipment and the laboratory were upgraded in 1999 by
approximately $500,000 in capital expenditures. We believe that our laboratory
is one of the most comprehensive Fischer-Tropsch facilities in the field today.
43
SAND CREEK METHANOL PLANT FACILITY
We own a one-half interest in the Sand Creek methanol facility located
in the Denver metropolitan area. Republic Financial Corporation, based in the
Denver area, owns the other one-half interest. The facility includes a methanol
plant that was closed when we acquired our interest in 1999. The site consists
of 17 acres located in an industrial area adjacent to a rail line and an
interstate highway. Approximately 11 acres of the site are available for other
uses. Our studies indicate that this plant, if converted to use Rentech GTL
Technology, would not be large enough, given the relatively high costs of
natural gas from pipelines in the Denver area, to be economically operated on a
commercial basis for production of liquid hydrocarbons.
We have granted another company an option to purchase the equipment and
systems that comprise the Sand Creek plant. If the option is exercised, the
purchase price would be $2 million. The option extends to May 2002 and may be
extended to November 2002. If the right to purchase is exercised, we would
retain the site, with its railroad spur, buildings and other facilities. In the
event of a sale of the plant, we presently expect to sell or lease part or all
of the site and the remaining facilities.
OKON FACILITY
OKON, Inc., a wholly owned subsidiary, leases an industrial building
located in Denver Colorado, where its production facilities and offices are
located. The lease extends to March 2005. The rent is approximately $74,700 per
year. The building contains approximately 20,000 square feet of office and
warehouse space. The building is recently constructed and contains adequate
space for expansion of the business.
PETROLEUM MUD LOGGING PROPERTIES
Petroleum Mud Logging, Inc. owns a building in Oklahoma City, Oklahoma
that contains our shop facility as well as our offices. Personal property
includes 35 special vehicles equipped as mobile laboratories used for providing
well logging services. The subsidiary also owns an extensive library of well
logs that provide information about the results of previous oil and gas or
natural gas exploration wells. We believe that the existing shop space and well
logging units are adequate for our current needs and anticipated growth. The
shop facility is adequate for maintenance of the vehicles, and the well logging
units are in good condition.
REN CORPORATION
REN Corporation, in which we own a 56% interest, owns a building
located in Stillwater, Oklahoma on a site consisting of 6.6 acres. The buildings
contain 11,000 square feet. REN uses it for light manufacturing of its computer
software and hardware products. REN also owns plant machinery and computer
equipment. The building and the equipment are in adequate condition.
44
ITEM 3. LEGAL PROCEEDINGS
REN Corporation has brought a civil action against one of its customers
for collection of approximately $342,000. We have asserted that this sum is due
as the contract price payable to REN for test equipment that we developed for
the customer on its order. The customer is defending the claim on its assertion
that the test equipment was not delivered on a timely basis as required by the
terms of the contract. REN has asserted that this occurred as a result of change
orders requested by the customer. The customer has filed a counterclaim against
REN for approximately $298,000 plus attorney fees, costs and interest. REN is
defending vigorously against the counterclaim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Our annual meeting of shareholders was held on May 8, 2001. At the
meeting, Ronald C. Butz and Douglas L. Sheeran were elected to terms ending in
2004 as members of the board of directors. The terms of John J. Ball, John P.
Diesel, Erich W. Tiepel and Dennis L. Yakobson as directors continued after the
meeting.
The following tabulation shows the votes cast at the meeting on each
matter voted upon, including election of directors.
For Withheld/Against Not Voted
Election of Directors: ---------- ---------------- ---------
Ronald C. Butz 53,968,721 2,417,617 0
Douglas L. Sheeran 53,951,546 2,434,792 0
Adoption of 2001 Stock Option Plan: 51,067,052 4,900,873 418,413
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since April 5, 2000, Rentech's common stock has traded on The American
Stock Exchange(R) under the AMEX symbol RTK. Between then and August 18, 1999,
the stock traded on the OTC Bulletin Board under the symbol RNTK. Prior to
August 18, 1999 the stock traded on the NASDAQ SmallCap Market under the same
symbol. The following table sets forth the range of high and low closing prices
for the Company's common stock, as reported by AMEX or NASDAQ, for the quarters
presented. The quotations reflect inter-dealer prices, without adjustment for
retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
Fiscal Year Ended September 30, 2001 High Low
- ------------------------------------ ---- ---
1st Quarter, ended Dec. 31, 2000 $1.938 $1.063
2nd Quarter, ended Mar. 31, 2001 $1.50 $0.875
3rd Quarter, ended Jun. 30, 2001 $1.410 $1.00
4th Quarter, ended Sep. 30, 2001 $1.20 $0.62
45
Fiscal Year Ended September 30, 2000 High Low
---- ---
1st Quarter, ended Dec. 31, 1999 $.765625 $.4375
2nd Quarter, ended Mar. 31, 2000 $3.46875 $.609375
3rd Quarter, ended Jun. 30, 2000 $4.25 $1.75
4th Quarter, ended Sep. 30, 2000 $2.8125 $1.0625
The approximate number of shareholders of record of our common stock as
of November 30, 2001 was 527. We estimate the number of beneficial owners is not
less than 9,000.
We have declared no dividends with respect to the common stock during
the 12-month fiscal year ended September 30, 2001 We currently expect that we
will retain future earnings for use in the operation and expansion of our
business and do not anticipate paying any cash dividends in the foreseeable
future.
The following table shows information concerning all sales of our
unregistered securities made by us during the past three years and not
previously reported on Form 10-QSB.
No. Total Exemptions
Date of Security Securities Offering Total Class of From
Sale Sold Sold Price Commissions Purchasers Registration
- ------- -------- ---------- -------- ----------- ---------- ------------
Nov. 19, 1998 Common Stock 100,000 (1) 0 Accredited Rules 505, 506,
Investor Section 4(6)
June 1, 1999 Common Stock 100,000 (2) 0 Accredited Rules 505, 506,
Investors Section 4(2)
Jul. 13, 1999 Common Stock 1,514 (3) 0 Accredited Rules 505, 506,
Investor Section 4(6)
Jul. 27, 1999 Common Stock 100,000 (4) 0 Accredited Rules 505, 506,
Investor Section 4(6)
Sep. 30, 1999 Common Stock 3,680,168 (5) 0 Accredited Rules 505, 506,
Investor Section 4(6)
Jun. 18, 2000 Common Stock 200,000(6) $26,561 0 Accredited Rules 505, 506,
Investors Sections
4(2), 4(6)
Dec. 13, 2000 Common Stock 60,000 (3) 0 Accredited Rules 505, 506,
Investors Sections
4(2), 4(6)
Feb. 2, 2001 Common Stock 200,000 (6) 0 Accredited Rules 505, 506,
Investors Sections
4(2), 4(6)
(1) Shares issued for investment banking services.
(2) Shares issued as partial consideration for the purchase of o ur mud
logging assets.
(3) Shares issued in exchange for consulting services.
46
(4) 25,000 shares were issued to each of our outside directors, John J.
Ball, John P. Diesel, Douglas L. Sheeran and Dr. Erich W. Tiepel, in
lieu of directors' fees.
(5) The consideration received was 5% of the common stock of Dresser
Engineers & Constructors, Inc.
(6) Shares issued as an advance in partial consideration for the purchase
of 56% of the issued and outstanding stock of REN Corporation.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
thereto appearing in them elsewhere in this Annual Report on Form 10-K.
47
Year Ended September 30
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
CONSOLIDATED
STATEMENT OF
OPERATIONS DATA
Revenues $ 8,166,576 $ 5,066,607 $ 2,880,900 $ 1,987,586 $ 1,189,536
Cost of Sales $ 6,150,359 $ 3,134,396 $ 1,416,078 $ 944,068 $ 481,797
Gross Profit $ 2,016,217 $ 1,932,211 $ 1,464,822 $ 1,043,518 $ 707,739
Loss from Operations $ (4,577,579) $ (3,804,389) $ (3,442,392) $ (1,986,818) $ (1,077,783)
Net Loss $ (6,770,707) $ (4,099,395) $ (3,442,661) $ (2,180,855) $ (1,375,686)
Loss Applicable to
Common Stock $ (7,254,306) $ (4,189,006) $ (3,974,593) $ (3,345,847) $ (2,034,100)
BASIC AND DILUTED
LOSS PER SHARE(1)
Loss Before Extraordinary
Item $ (.11) $ (.07) $ (.09) $ (.10) $ (.10)
Loss Per Common Share $ (.11) $ (.07) $ (.09) $ (.10) $ (.10)
CONSOLIDATED
BALANCE SHEET DATA
Working Capital $ 1,412,195 $ 1,892,376 $ 115,457 $ 3,195,381 $ (675,630)
Total Assets $ 16,115,455 $ 16,462,592 $ 13,209,981 $ 10,715,250 $ 4,857,204
Total Long-Term
Liabilities $ 1,157,927 $ 999,355 $ 1,246,917 $ -- $ 125,000
Total Liabilities $ 4,069,123 $ 1,758,615 $ 2,149,183 $ 394,684 $ 1,502,867
Accumulated Deficit $(25,571,028) $(18,800,321) $(14,700,926) $(11,258,265) $ (9,077,410)
- --------------------
(1) The weighted average number of shares of common stock outstanding during the
years ended September 30, 2001, 2000, 1999, 1998, and 1997 were 64,807,168,
57,532,816, 43,838,417, 33,289,164, 19,603,265 and 10,401,922, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are the developer and owner of a proprietary and patented
gas-to-liquids (GTL) process that converts carbon-bearing gases, liquids and
solids into valuable liquid hydrocarbon products. The products include clean
burning diesel fuel, naphthas and specialty products such as waxes,
petrochemical feedstocks, fuel cell feedstocks and synthetic lubricant base
stock. We believe that the Rentech GTL Technology represents a major enhancement
of the Fischer-Tropsch technology developed in Germany in the 1920s. We have
successfully used the Rentech GTL Technology for a short period in a
commercial-scale plant and for longer periods in several pilot plants. No
commercial plant is now using the technology, and economic operation of the
technology has not been demonstrated. We believe that the advancements we have
made in Fischer-Tropsch technology will enable use of our GTL technology on a
cost-effective basis in some situations.
We are exploiting our Rentech GTL Technology by marketing licenses to
energy companies and owners of industrial gas plants, and owners of other
carbon-bearing sources of feedstock such as natural gas. We are discussing
proposals with several energy companies and owners of industrial gas plants for
use of the Rentech GTL Technology through licenses or other business ventures.
48
Our iron-based catalyst that is an integral part of the Rentech GTL
Technology is relatively inexpensive, and non-polluting, and works with a broad
range of feedstocks. We believe that our technology provides significant
opportunities to produce liquid hydrocarbon fuels and other valuable products
from the large worldwide resources of natural gas, industrial waste gas, heavy
crude oil, refinery byproducts, coal and petroleum coke, among other materials.
Our current licensees include Texaco Energy Systems, Inc., which we
have exclusively licensed to use the technology with liquid and solid sources of
feedstock that are not all natural gas. Texaco Energy Systems, Inc. (Texaco),
formerly a division of Texaco, Inc., became a division of ChevronTexaco
Corporation in 2001 after the merger of those two companies. Texaco is
conducting its own study of the technology and has contracted for us to do
research and development for integrating Texaco's gasification technology (which
produces synthesis gas from feedstocks in liquid and solid forms) with Rentech's
GTL Technology (which uses synthesis gas). Texaco is working on proposals to use
the combined technologies for a U.S. Department of Energy project and other
projects. We have granted licenses to several other licensees.
We are receiving royalty income as a result of our October 1998 license
of the Rentech GTL Technology to Texaco and revenues from a technical services
contract with Texaco. We are not receiving royalties on production of liquid
hydrocarbons from use of the Rentech GTL Technology, or license fees except on
an irregular basis. Revenues from the Rentech GTL Technology and the revenues
from our other businesses conducted through OKON, Inc., Petroleum Mud Logging,
Inc., and REN Corporation are not sufficient to cover our ongoing losses related
to our efforts to commercialize the Rentech GTL Technology at this time.
OPERATING REVENUES
BACKGROUND
During the fiscal periods discussed in this report, we realized
revenues from the stains, sealers and coatings business conducted by our
wholly-owned subsidiary, OKON, Inc.; from the oil and gas field services
provided by Petroleum Mud Logging, Inc., a wholly-owned subsidiary; from the
manufacture of complex microprocessor controlled industrial automation systems
by REN Corporation, a 56% owned subsidiary; and revenues associated with the
Rentech GTL Technology. These revenues included royalties earned under our
October 1998 license of the Rentech GTL Technology to Texaco, and contract
payments for technical engineering services provided to Texaco and certain other
companies. The goal of this work is to integrate Texaco's gasification
technology with our Rentech GTL Technology. In the future, we expect to receive
revenues associated with the Rentech GTL Technology from the following principal
sources:
o Contract payments for design studies. These are preliminary
feasibility studies for potential licensees. These payments are either due in
full upon execution of the design contract or in monthly installments as
services and materials are provided.
o License fees from licenses granted for use of the technology. We
typically expect license fees to be paid in three equal installments, one upon
grant of the license, another upon start of construction of a plant, and the
last upon start of continuous operations of the plant.
o Contract payments for construction engineering services. We provide
these services to licensees during construction or startup of the licensee's
plants. These payments are typically made in monthly installments as services
and materials are provided.
49
o Contract payments for supply of the synthesis gas reactors required
for use with the Rentech GTL Technology. We plan to subcontract this work to
fabricators. We expect to sell the reactors at our own cost plus a profit.
o Contract payments for supply of Rentech's catalyst required for use
with the Rentech GTL Technology. We plan to subcontract requirements for our
catalyst to specialists engaged in catalyst manufacturing. We plan to sell the
catalyst at our cost plus a profit.
o Royalties for production of liquid hydrocarbons produced by licensees
in their plants. We establish the royalty amounts in our licenses. Royalty
payments are typically due monthly from licensees for the liquid hydrocarbons
produced by a licensed plant, at a percentage of the current market value of
conventionally produced crude oil.
o Sales of liquid hydrocarbon products from process plants in which we
own an equity interest. We anticipate that we may be able to acquire partial
ownership interests in one or more plants that use the Rentech GTL Technology.
This is most likely to occur with existing industrial gas plants for which we
contribute capital or technology, in exchange for an equity interest, during the
conversion of a plant to use our technology.
We anticipate that we may receive increased contract payments for
design studies if interest by members of the energy industry in our technology
grows. We do not expect to realize significantly increased revenues from
exploitation of the Rentech GTL Technology until a commercial-scale plant using
the technology is in operation and has proved profitable. We are attempting to
obtain financing to retrofit an industrial gas plants to use the technology in
order to demonstrate economic use of Rentech GTL Technology in a commercial-size
plant. There are no assurances that adequate financing will be available or that
we will succeed in retrofitting and successfully operating a converted plant at
a profit. Our future operating revenues will depend primarily upon economic
success by us, followed by success by our licensees, in financing, constructing
and operating commercial-scale plants using the Rentech GTL Technology. Other
factors affecting our success include competition by other GTL technologies,
availability of low-cost feedstock, and market prices for conventional fuels and
hydrocarbon products with which synthetic liquid hydrocarbons produced by use of
our technology will compete. Our future operating revenues would also be
increased to the extent we are able to expand revenues of our other businesses.
OPERATING EXPENSES
Our operating expenses have historically been grouped primarily into
several categories of major expenses. These are development of the Rentech GTL
Technology through pilot plants and the Synhytech commercial-scale plant in
Pueblo, Colorado; acquiring and funding our other business segments to bring
them to profitable operations; investing in the advanced technologies of ITN
Energy Systems now INICA, Inc.; acquisition of a 56% interest in REN
Corporation; marketing our technology and other general and administrative
expenses; and the costs of financing our operations.
We have substantially increased our research and development expenses
with the enhancements of our development and testing laboratory and the
enlargement of our laboratory staff in 1999. We have also significantly
increased our general and administrative expenses as our salary expenses have
grown. We are incurring substantial costs associated with our one-half ownership
interest in Sand Creek Energy LLC, which owns the mothballed Sand Creek plant.
These include the maintenance and holding expenses for our one-half interest in
the plant.
50
We expect to incur large costs to start the retrofitting of any
industrial gas plants in which we may acquire an equity interest. We estimate
that these expenses will remain at significant levels for approximately 12 to 18
months of construction work and several weeks after startup of a particular
plant. When production is achieved, we anticipate incurring new expenses to
market and sell the products. Because of the substantial capital investments we
anticipate making in other plants in which we may acquire an equity interest, we
project that we will incur significant depreciation and amortization expenses in
the future.
RESULTS OF OPERATIONS
FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000
Revenues. We had revenues from product sales, service revenues and
royalty income of $8,166,576 in fiscal 2001 and $5,066,607 in fiscal 2000.
Product Sales. Our product sales were realized from sales of
water-based stains, sealers and coatings by our subsidiary, OKON, Inc. through
which we conduct this paint business segment. These sales produced revenues of
$2,367,689 in fiscal 2001. This compares to revenues from this segment of
$2,096,159 for the 2000 fiscal year. The increase of 13% in revenues from this
segment was primarily due to the addition of new customers, introduction of new
products and increased marketing activities.
Service Revenues. Service revenues are provided by three of our
business segments. The segments are the oil and gas field services segment, the
Rentech GTL Technology technical services portion of the alternative fuels
segment and the industrial automation systems segment. The technical services
are provided through the scientists and technicians who staff our development
and testing laboratory. In addition, the alternative fuels segment includes
rental income from the development and testing laboratory building.
Service revenues in the amount of $3,031,139 were derived from
contracts for the oil and gas field services provided by our subsidiary,
Petroleum Mud Logging, Inc., in fiscal 2001. Our oil and gas field service
revenues for fiscal year 2001 increased by $1,199,750 over the service revenues
of $1,831,389 in fiscal 2000. The increases in mud logging service revenues were
due primarily to increased demand for our mud logging services, particularly for
new wells drilled for natural gas. In response, we outfitted eight of our mud
log vehicles with new equipment and were thereby able to expand our services
while having more units in the field than during the corresponding period of
2000. In addition, we have purchased ten new units to increase our capacity in
order to meet increased demand for these services, and we increased the daily
rates for these services.
Service revenues also included payments received from Texaco Energy
Systems, Inc. and other customers for technical services provided related to the
Rentech GTL Technology. On October 8, 1998, we licensed exclusive rights to
Texaco to use our technology with liquid and solid carbon-bearing materials.
Effective in February 1999, we entered into an additional agreement that
produced these technical services revenues. Under that agreement, we are
providing our technical services to Texaco with the goal of integrating Texaco's
proprietary gasification technology, which produces synthesis gas from liquids
and solids, with our Rentech GTL Technology. Our technology would use the
51
synthesis gas to produce synthetic liquid hydrocarbons like clean-burning diesel
fuel, naphthas, waxes and specialty products. We started billing Texaco for our
technical services in April 1999. Subsequent to the technical services agreement
with Texaco, we have entered into several feasibility and engineering contracts
with other customers to provide technical services related to the Rentech GTL
Technology. Our service revenues for these technical services were $2,212,432
during fiscal 2001 as compared to $751,166 during fiscal 2000. The increase of
194% in revenue was primarily due to the addition of several new customers and
the increase in services provided to existing customers. These technical
services were provided at our development and testing laboratory.
Service revenues in the amount of $193,317 were derived from contracts
for the manufacture of complex microprocessor controlled industrial automation
systems by our 56% owned subsidiary, REN Corporation, for the two months ended
September 30, 2001. We had no service revenues for fiscal 2000 for this segment
as the acquisition of REN Corporation was completed on August 1, 2001.
Service revenues included rental income as well. We leased part of our
development and testing laboratory building in Denver, which was acquired in
February 1999, to two tenants. Rental income from these tenants contributed
$121,999 in revenue during fiscal 2001 as compared to $127,893 during fiscal
2000. Rental income is included in our alternative fuels segment.
Royalty Income. Royalty income consisted of royalties that we received
as a result of our October 1998 license of the Rentech GTL Technology to Texaco.
Under the license agreement, we earned $240,000 in royalties during fiscal 2001
as compared to $260,000 in royalties for the prior year. After Texaco is
producing liquid hydrocarbons through the use of our technology, it is allowed
by the license agreement to apply the royalty payments made after the initial
$100,000 payment against future royalty payments made on account of production.
Royalty income is included in our alternative fuels segment.
Costs of Sales. Our costs of sales include costs for our products as
well as for our oil and gas field services, technical services, which includes
research and development contract costs, and industrial automation services.
During the fiscal year ended September 30, 2001, the combined costs of sales
increased to $6,150,359 from $3,134,396 for the prior year. The increase of
$3,015,963 relates almost entirely to costs associated with the addition of new
revenues from these three business segments.
Costs of sales for product sales are the cost of sales of our paint
business segment for sales of stains, sealers and coatings. During fiscal 2001,
our cost of sales for the paint segment increased by $95,139 to $1,124,951, as
compared to fiscal 2000. This increase is almost entirely related to the
additional costs associated with the increased revenues from this business
segment.
Costs of sales for oil and gas field services were $2,099,703 for
fiscal 2001, up from $1,353,418 for fiscal 2000. This increase of $746,285 is
largely due to the increase in revenues of this segment as well as to the
addition of more mud logging vehicles and field employees to operate them as we
expanded to meet the growth in demand for mud logging for new natural gas wells.
Costs of sales for technical services were $2,207,521 during fiscal
2001, up from $751,166 for fiscal 2000. The $1,456,355 increase resulted
primarily from the increased technical services revenue as well as the
additional expansion of the range and extent of our technical services for
Texaco during the current year. We also added engineers and technicians to staff
our development and testing laboratory which increased the salaries and related
overhead expenditure costs for the technical services segment.
52
Costs of sales for technical services contracts also includes research
and development contract costs for fiscal 2001 of $560,608. We had no research
and development contract costs for fiscal 2000. These costs are made up of
engineering and labor costs incurred to date on the $800,000 Wyoming Business
Council (WBC) contract. The WBC contract provides for us to evaluate two
potential GTL projects utilizing Rentech GTL Technology. Phase I involves
studying the feasibility of retrofitting a portion of an existing methanol
facility in Wyoming. Phase II entails the study of the feasibility of
constructing a separate greenfield plant at the same site.
Costs of sales for the industrial automation systems segment were
$157,576 for the two months ended September 30, 2001. We had no costs of sales
for fiscal 2000 for this segment as the acquisition of REN Corporation was
completed on August 1, 2001.
Gross Profit. Our gross profit for the year ended September 30, 2001
was $2,016,217, as compared to $1,932,211 for the 2000 period. The increase of
$84,006 results from the combined contributions of additional revenues from
product sales by our paint segment (up 13%), and increased service revenues from
our oil and gas field services, technical services and industrial automation
systems segments (up 65%, 194% and 100%). These additions to gross profit were
offset by the increases in costs of sales of 9% for the paint segment, 55% for
our oil and gas field services segment, 193% for our technical services segment,
and 100% for our industrial automation systems segment, as well as a 100%
increase in research and development contract costs. Revenues from each segment
except for alternative fuels increased at a higher rate than the corresponding
cost of sales during the year as a result of more efficient operations within
each segment. Cost of sales for the alternative fuels segment increased at a
higher rate than that of revenues as a result of increased activity for research
and development contracts.
Operating Expenses. Operating expenses consist of general and
administrative expense, depreciation and amortization, write-off of deposits
related to acquisition and research and development.
General and Administrative Expenses. General and administrative
expenses were $5,591,046 for fiscal year 2001, up $814,615 from fiscal 2000 when
these expenses were $4,776,431. The increase for the current year is
attributable to an increase in business volume which includes expenses related
to the hiring of additional laboratory technicians for our technical services
segment, increased office staffing and the inflationary impact on existing
employee salaries, as well as the addition of the industrial automation systems
segment beginning August 1, 2001.
Depreciation and Amortization. Depreciation and amortization expense
for fiscal 2001 was $983,158. Of this amount, $190,180 was included in cost of
sales. Depreciation and amortization expense for fiscal 2000 was $611,987, of
which $167,079 was included in cost of sales. The increase in depreciation and
amortization expense is attributable to the additional equipment acquired for
our oil and gas field service segment as well as for the development and testing
laboratory, and the $236,429 in amortization from software capitalized at the
end of fiscal 2000.
Research and Development. Research and development expense was $204,583
for fiscal 2001, decreased by $310,678 from 2000, when this expense was
$515,261. This decrease is primarily due to the significant increase in billable
technical services work being performed at the development and testing
laboratory for customers, which in turn decreased the amount of cost related to
research and development.
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Total Operating Expenses. Total operating expenses for the year ended
September 30, 2001 were $6,593,796, as compared to $5,736,600 for fiscal 2000,
an increase of $857,196. The increase in total operating expenses is a result of
the factors, previously described, that relate to operating expenses.
Loss From Operations. Loss from operations for fiscal 2001 increased by
$773,190 to a loss of $4,577,579, as compared to a loss of $3,804,389 for fiscal
2000. The increased loss is primarily due to the $560,608 increase in research
and development contract costs as well as the $371,171 increase in depreciation
and amortization expenses. This is partially offset by an increase in gross
profit contributed by our operating segments.
Other Income (Expenses). Other income (expenses) include loss on
investment, equity in loss of investee, interest income, interest expense, and
loss on disposal of fixed assets.
Loss on Investment. As part of our year-end review of assets, we
determined that our investment in shares of Dresser Engineers & Constructors,
Inc. was impaired. Dresser is a privately owned company. We have not been able
to obtain adequate information about its current business to support the
existing valuation. Based upon our inability to determine Dresser Engineers'
liquidity and the status of its business plans, we have recognized a $1,842,135
asset impairment for the year ended September 30, 2001. We continue to own
580,000 shares of the common stock of Dresser Engineers & Constructors that
represent this investment.
Equity in Loss of Investee. In fiscal year 2001, we recognized $386,047
in equity in loss of investee, as compared to $276,585 in fiscal 2000. This
represents our 50% share of the loss incurred by our joint venture in Sand Creek
Energy LLC. The LLC is holding and maintaining the mothballed Sand Creek
methanol plant. The increase during fiscal 2001 is primarily due to the fact
that the facility was only owned for nine months during fiscal 2000.
Interest Income. Interest income in fiscal 2001 was $121,509, decreased
from $135,443 during fiscal 2000. The decreased interest income was due
primarily to having fewer funds invested in interest-bearing cash accounts.
Interest Expense. Interest expense in fiscal 2001 was $108,166,
decreased from $136,833 during fiscal 2000. The decrease in interest expense is
primarily the result of the pay-off during fiscal 2001 of our indebtedness
associated with purchase of the mud logging assets.
Loss on Disposal of Fixed Assets. Loss on disposal of fixed assets was
$17,031 during fiscal 2000, with no comparable amount in fiscal 2001. This loss
represents write-off of capitalized leasehold improvements in the former
facility upon relocation of our paint business segment to a larger facility.
This loss was offset by a gain from disposal of vehicle by the mud logging
segment.
Total Other Expenses. Total other expense increased to $2,214,839 for
fiscal 2001, an increase of $1,919,833 over total other expenses of $295,006 for
the comparable year ended September 30, 2000. The increase in total other
expenses resulted from the combination of the factors previously described as
other income (expense).
Minority Interest in Subsidiary's Net Loss. The minority interest in
subsidiary's net loss of $21,711 during fiscal 2001 results from the acquisition
of 56% of REN Corporation. This acquisition had not been completed during fiscal
2000.
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Net Loss. For fiscal 2001, we experienced a net loss of $6,770,707
compared to a $4,099,395 net loss in fiscal 2000. The $2,671,312 increase in net
loss resulted from a combination of the factors previously described.
Dividend Requirements on Convertible Preferred Stock. Dividend
requirements on convertible preferred stock is the imputed amount calculated
when there is a discount from fair market value when we issue our convertible
preferred stock, plus the 9% dividend that accrues on the convertible preferred
stock. The dividends are deducted from net loss in order to arrive at loss
applicable to common stock. In both fiscal 2001 and fiscal 2000, we issued
convertible preferred stock, and we were required to calculate a deemed dividend
in both years. In fiscal 2001, we recorded dividends of $483,599 compared to
$89,611 in fiscal 2000.
Loss Applicable to Common Stock. As a result of recording dividends on
convertible preferred stock as described above, the loss applicable to common
stock was $7,254,306 or $.11 per share in fiscal 2001 and $4,189,006 or $.07 per
share in fiscal 2000.
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Revenues. We had revenues from product sales, service revenues and
royalty income of $5,066,607 in fiscal 2000 and $2,880,900 in fiscal 1999.
Product Sales. Our product sales were realized from sales of
water-based stains, sealers and coatings by our subsidiary, OKON, Inc. through
which we conduct this paint business segment. These sales produced revenues of
$2,096,159 in fiscal 2000. This compares to revenues from this segment of
$1,960,764 for the 1999 fiscal year. The increase of 7% in revenues from this
segment was primarily due to new customers and the introduction of new products.
Service Revenues. Service revenues are provided by two of our business
segments. The segments are the oil and gas field services segment and the
Rentech GTL Technology technical services portion of the alternative fuels
segment. The technical services are provided through the scientists and
technicians who staff our development and testing laboratory. In addition, the
alternative fuels segment includes rental income from the development and
testing laboratory building.
Service revenues in the amount of $1,831,389 were derived from
contracts for the oil and gas field services provided by our subsidiary,
Petroleum Mud Logging, Inc., in fiscal 2000. Our oil and gas field service
revenues for fiscal year 2000 increased by $1,535,877 over the service revenues
of $295,512 in fiscal 1999. Our oil and gas field services were provided
throughout all twelve months of the 2000 fiscal year, and only for the last four
months of the 1999 fiscal year that followed our purchase of this business
segment in June 1999. Another significant portion of the increase in oil and gas
field service revenues was due to increased demand for our oil and gas field
services, particularly for new wells drilled for natural gas. In response, we
outfitted several of our unused mud log vehicles with new equipment and were
thereby able to expand our services.
Service revenues also included payments received from Texaco Energy
Systems, Inc. for our technical services related to the Rentech GTL Technology.
On October 8, 1998, we licensed exclusive rights to Texaco to use our technology
with liquid and solid carbon-bearing materials. Effective in February 1999, we
entered into an additional agreement that produced these service revenues. Under
that agreement, we are providing our technical services to Texaco with the goal
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of integrating Texaco's proprietary gasification technology, which produces
synthesis gas from liquids and solids, with our Rentech GTL Technology. Our
technology would use the synthesis gas to produce synthetic liquid hydrocarbons
like clean-burning diesel fuel, naphthas, waxes and specialty products. We
started billing Texaco for our technical services in April 1999. Our service
revenues for these technical services were $751,166 during the twelve months of
fiscal 2000 as compared to $211,246 during the six months in fiscal 1999.
Service revenues included rental income as well. We leased part of our
development and testing laboratory in Denver, which was acquired in February
1999, to two tenants. Rental income from this facility contributed $127,893 in
revenue for the twelve months of fiscal 2000 as compared to $73,378 for the
seven months we owned it in fiscal 1999. Rental income is included in our
alternative fuels segment.
Royalty Income. Royalty income consisted of royalties that we received
as the result of our October 1998 license of the Rentech GTL Technology to
Texaco. Under the license agreement, we earned $260,000 in royalties during
fiscal 2000 as compared to $340,000 in royalties for the prior year. Royalty
income for the 1999 fiscal year includes an initial payment of $100,000 that was
made upon signing the license. After Texaco is producing liquid hydrocarbons
through use of our technology, it is allowed by the license agreement to apply
the royalty payments made after the initial $100,000 payment against future
royalty payments made on account of production. Royalty income is included in
our alternative fuels segment.
Costs of Sales. Our costs of sales includes costs for our products as
well as for our oil and gas field services and technical services. During the
fiscal year ended September 30, 2000, the combined costs of sales increased to
$3,134,396 from $1,416,078 for the prior year. The increase of $1,718,318
relates almost entirely to costs associated with the addition of new revenues
from these three business segments.
Costs of sales for product sales are the cost of sales of our paint
business segment for sales of stains sealers and coatings. During fiscal 2000,
our cost of sales for the paint segment increased by $111,134 to $1,029,812, as
compared to fiscal 1999. This increase is almost entirely related to the
additional costs associated with the increased revenues from this business
segment.
Costs of sales for oil and gas field services were $1,353,418 for
fiscal 2000, up from $244,404 for fiscal 1999. This increase of $1,109,014 is
largely due to operating this business for twelve months in the 2000 year,
compared to four months in the 1999 year. Some of the increase also relates to
the addition of more mud logging vehicles and field employees to operate them as
we expanded to meet the growth in demand for mud logging for new natural gas
wells.
Costs of sales for technical services were $751,166 during fiscal 2000,
up from $252,996 for fiscal 1999. Of this $498,170 increase, approximately
one-half is due in part to providing these services for twelve months during the
2000 period, compared to six months during the 1999 period. We also expanded the
range and extent of our technical services for Texaco during fiscal 2000. We
added additional engineers and technicians to staff our development and testing
laboratory. Those additional salaries and the related overhead expenditures
amounted to approximately one-half of the total increase in costs for the
technical services segment.
Gross Profit. Our gross profit for the year ended September 30, 2000
was $1,932,211, as compared to $1,464,822 for the 1999 period. The increase of
$467,389 results from the combined contributions of additional revenues from
product sales by our paint segment (up 7%), and increased service revenues from
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our oil and gas field services and technical services segments. These additions
to gross profit were offset by a decrease in cost of sales of 2% for the paint
segment and increases of 453% for our oil and gas field services segment and
196% for our technical services segment. Revenues from each segment increased at
a higher rate than the corresponding cost of sales.
Operating Expenses. Operating expenses consist of general and
administrative expense, depreciation and amortization, write-off of deposits
related to acquisition, and research and development.
General and Administrative Expenses. General and administrative
expenses were $4,776,431 for fiscal year 2000, up $665,280 from fiscal 1999 when
these expenses were $4,111,151. The increase is attributable to approximately
$329,000 associated with a full year of operations of Petroleum Mud Logging,
$119,811 in maintenance and holding expenses associated with maintaining our
one-half interest in the mothballed Sand Creek plant which were not incurred in
the prior year, approximately $239,000 in expense for the hiring of additional
laboratory technicians for our technical services segment and more office staff
as well as higher salaries during fiscal 2000.
Depreciation and Amortization. Depreciation and amortization expense
for fiscal 2000 was $611,987. Of this amount, $167,079 was included in cost of
sales. Depreciation and amortization expense for fiscal 1999 was $488,713, of
which $121,395 was included in cost of sales. The increase in depreciation and
amortization expense for fiscal 2000 are attributable to the additional
equipment acquired during fiscal 2000 for our mud logging segment and
development and testing laboratory, a full twelve months of depreciation and
amortization on the assets acquired with the acquisition of the mug logging
segment during June 1999 compared to four months in 1999, and depreciation on
the rental property for twelve months in 2000, as compared to eight months in
1999.
Write-Off of Deposits Related to Acquisition. We had no write-off of
deposits related to a potential acquisition in fiscal 2000. This amount for
fiscal 1999 consisted of expensing our $233,279 non-refundable deposit related
to a potential acquisition. We expensed this deposit as we decided not to
acquire the business.
Research and Development. Research and development expense was $515,261
for fiscal 2000, increased by $319,795 over 1999, when this expense was
$195,466. This increase is primarily due to new research and development work
that we undertook in fiscal 2000 to accelerate our improvements to the Rentech
GTL Technology and ready it for commercial use.
Total Operating Expenses. Total operating expenses for the year ended
September 30, 2000 were $5,736,000, as compared to $4,907,214 for fiscal 1999,
an increase of $829,386. The increase in total operating expenses is a result of
the factors, previously described, that relate to operating expenses.
Loss From Operations. Loss from operations for fiscal 2000 increased by
$361,997 to a loss of $3,804,389, as compared to a loss of $3,442,392 for fiscal
1999. The increased loss is primarily due to increases in operating expenses,
partially offset by an increase in gross profit contributed by our operating
segments.
Other Income (Expenses). Other income (expenses) include equity in loss
of investee, interest income, interest expense, and loss on disposal of fixed
assets.
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Equity in Loss of Investee. In fiscal year 2000, we recognized $276,585
in equity in loss of investee. This represents our 50% share of the loss
incurred by our joint venture in Sand Creek Energy LLC. The LLC is holding and
maintaining the mothballed Sand Creek methanol plant. We are considering
retrofitting this plant to use it as a large pilot plant for continuing work
with the Rentech GTL Technology. There was no comparable loss in fiscal 1999
because we acquired our interest in the plant in fiscal 2000.
Interest Income. Interest income in fiscal 2000 was $135,443, increased
from $75,665 during fiscal 1999. The increased interest income was due to having
more funds invested in interest-bearing cash accounts in fiscal 2000, because of
the net proceeds from our private placement of our common stock in fiscal 2000,
as well as interest income of approximately $45,600 in notes receivable during
that period.
Interest Expense. Interest expense in fiscal 2000 was $136,833,
increased from $75,934 during fiscal 1999. The increase in interest expense is a
result of our indebtedness associated with purchase of the mud logging assets
and interest expense on the mortgage for purchase of our development and testing
laboratory. Both of these indebtednesses were outstanding for all twelve months
of fiscal 2000, but only for parts of fiscal 1999.
Loss on Disposal of Fixed Assets. Loss on disposal of fixed assets was
$17,031 during fiscal 2000. This loss represents write-off of capitalized
leasehold improvements in the former facility upon relocation of our paint
business segment to a larger facility. This loss was offset by a gain from
disposal of vehicle by the mud logging segment. There was no comparable amount
in 1999.
Total Other Expenses. Total other expense increased to $295,006 for
fiscal 2000, an increase of $294,737 over total other expenses of $269 for the
comparable year ended September 30, 1999. The increase in total other expenses
resulted from the combination of the factors previously described as other
income (expense).
Net Loss. For fiscal 2000, we experienced a net loss of $4,099,395
compared to a $3,442,661 net loss in fiscal 1999. The $656,734 increase in net
loss resulted from a combination of the factors previously described.
Dividend Requirements on Convertible Preferred Stock. Dividend
requirements on convertible preferred stock is the imputed amount calculated
when there is a discount from fair market value when we issue our convertible
preferred stock, plus the 9% dividend that accrues on the convertible preferred
stock. The dividends are deducted from net loss in order to arrive at loss
applicable to common stock. In both fiscal 2000 and fiscal 1999, we issued
convertible preferred stock, and we were required to calculate a deemed dividend
in both years. In fiscal 2000, we recorded dividends of $89,611 compared to
$531,932 in fiscal 1999.
Loss Applicable to Common Stock. As a result of recording dividends on
convertible preferred stock as described above, the loss applicable to common
stock was $4,189,006 or $.07 per share in fiscal 2000 and $3,974,593 or $.09 per
share in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, we had working capital of $1,412,195 as compared
to working capital of $1,892,376 at September 30, 2000. The decrease in working
capital is primarily due to the increase in accrued liabilities and billings in
excess of costs and estimated earnings with regard to the acquisition of 56% of
REN Corporation, as well as the contract liability recorded in relation to the
Wyoming Business Council contract. This decrease also resulted from the use of
cash for operations, investing activities and payments on long-term debt.
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As of September 30, 2001, we had $4,323,390 in current assets,
including accounts receivable of $1,745,838. At that time, our current
liabilities were $2,911,195. We had long-term liabilities of $1,157,927. Most of
our long-term liabilities relate to our mortgage on our laboratory facility
which we purchased in February 1999. The rental income from the facility is
adequate to fund the monthly mortgage payments. The mortgage is due on March 1,
2029.
The primary source of our liquidity has been equity capital
contributions. We added an additional source of liquidity in March 1997 by the
purchase of OKON, Inc., which conducts our paint business segment. We have
received royalties from granting Texaco a license for use of the Rentech GTL
Technology in October 1998. We have also had service revenues from Texaco since
we started billing it for technical services relating to the Rentech GTL
Technology, in April 1999. This work is being undertaken to integrate the Texaco
gasification technology with our Rentech GTL Technology. We added another source
of liquidity with the purchase in June 1999 of the mud logging assets that we
operate through Petroleum Mud Logging, Inc. Finally, we added another source of
liquidity with the purchase in August 2001 of 56% of REN Corporation, which
manufactures complex microprocessor controlled industrial automation systems.
Our principal needs for liquidity in the past have been to fund working
capital, pay for research and development of the Rentech GTL Technology, pay the
costs of acquiring and initially funding the paint, oil and gas field services
and industrial automation segments, invest in the advanced technologies of ITN
Energy Systems, Inc., now known as INICA, Inc., and acquiring a 56% interest in
REN Corporation.
We anticipate needs for substantial amounts of new capital for projects
for commercializing the Rentech GTL Technology, to purchase property and
equipment, and to continue significant research and development programs for the
GTL projects we are considering. We expect to undertake these types of
expenditures in efforts to commercialize the technology in one or more plants in
which we may acquire part ownership. Even if we succeed in obtaining
construction loans secured by such projects, we expect to need significant
amounts of capital as our required share of the total investment in these
projects. We may attempt to fund some of these project costs through sales of
some part of our ownership, if we have any, in any industrial gas plant that we
may attempt to retrofit. At this time, we own a one-half interest in one plant,
which is the mothballed Sand Creek methanol plant. We are not targeting it for
use as a commercial scale plant to use our technology and may sell the assets
associated with the plant.
From our inception on December 18, 1981 through September 30, 2001, we
have incurred losses in the amount of $25,571,028. For the year ended September
30, 2001, we recognized a $6,770,707 net loss. If we do not operate at a profit
in the future, we may be unable to continue operations at the present level. As
of September 30, 2001, we have a cash balance of $893,452.
We have been successful in the past in raising equity financing. For
the years ended September 30, 2001, 2000 and 1999, we received net cash proceeds
from the issuance of common stock of $2,332,005, $6,951,913 and $312,319. For
the years ended September 30, 2001, 2000 and 1999, we have received net cash
proceeds from the issuance of convertible preferred stock of $793,673, $150,000
and $1,834,844. Subsequent to fiscal 2001, we received net cash proceeds from
the issuance of Series B preferred stock of $475,000, and we received $63,750 in
cash proceeds from the exercise of stock options.
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To achieve our objectives as planned for fiscal 2002, we may issue
additional Series B convertible preferred stock to existing shareholders. We may
issue common stock in a private placement to fund any working capital
requirements should the need arise. In addition, we are in negotiations to sell
certain assets. Sand Creek Energy, LLC, a company in which we have a 50%
interest, has entered into an option agreement under which certain equipment and
inventory of the methanol plant could be sold for $2,000,000. We believe that
with our current available cash, revenues from operations, additional equity
financing and the potential sale of assets will be sufficient to meet our cash
operating requirements through September 30, 2002.
We are considering proposals to acquire ownership interests or
leasehold rights in one or more of industrial gas plants that are presently
under-utilized. Under these proposals, we would have to contribute capital,
either alone or possibly in a joint venture with a present owner, to retrofit a
plant to use the Rentech GTL Technology. Our goal is to have any converted plant
operate on a commercial basis and realize a new source of revenues for the
production and sale of liquid hydrocarbons.
If financing is available and we are able to retrofit and economically
operate one or more plants in which we have acquired a share of ownership, we
anticipate two types of benefits. One of these would be new revenues from our
share of sales of liquid hydrocarbons. We also anticipate that economic use of
the Rentech GTL Technology in one or more of these plants would lead to
commercial use of our technology by others and additional revenues from license
fees, engineering services, royalties and catalyst sales.
IF FINANCING IS NOT AVAILABLE, WE WILL NOT HAVE THE CAPITAL REQUIRED TO
ACQUIRE INTERESTS IN ONE OR MORE INDUSTRIAL GAS PLANTS.
Our opportunities to acquire ownership interests in some of the
industrial gas plants that we have targeted will only be available for a short
period. If we do not obtain adequate financing during this period, we expect
that these purchase and joint venture opportunities will cease to be available
to us.
IF WE ARE UNABLE TO OBTAIN FINANCING, OUR EFFORTS TO ACHIEVE COMMERCIAL
USE OF THE RENTECH GTL TECHNOLOGY BY OTHERS MAY BE DELAYED.
Without these funds, we could not acquire interests in the industrial
plants we have targeted or convert them to use our technology. We would lose
this opportunity to encourage others to use our technology on a commercial
business. We would have to depend upon their interest in building new plants
without the benefit of having at least one commercial-scale plant in operation.
WITHOUT THE PROCEEDS OF ADDITIONAL FINANCING, OUR PLAN TO GENERATE NEW
REVENUES FROM USE OF THE TECHNOLOGY WOULD BE HINDERED AND DELAYED.
We could not realize revenues from sales of liquid hydrocarbon products
produced by our own use of the Rentech GTL Technology without adequate capital
to acquire joint ownership interests and to retrofit existing plants. Our plan
to realize new revenues from license fees, engineering services, royalties and
catalyst sales would be delayed.
We are discussing other proposals made by several energy companies for
exploitation of the Rentech GTL Technology through licenses or other business
ventures. In October 1998, we entered into a license agreement with Texaco
Energy Systems, Inc. for commercialization of Rentech's GTL Technology through
its integration with Texaco's gasification technology. We have increased the
amount of our technical services work for Texaco. These additional services are
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focused on assisting Texaco with its performance under the DOE contract for the
Early Entrance Co-production Plant. Increased levels of technical services work
are expected to require us to further expand our testing and development staff.
This will increase our need for operating funds.
TEXACO COULD TERMINATE THE LICENSE AGREEMENT WE HAVE GRANTED TO IT. IN
ADDITION, TEXACO COULD END ITS CONTRACT FOR US TO PERFORM TECHNICAL SERVICES FOR
IT. TEXACO COULD ALSO ABANDON THE PROJECTS FOR THE DOE CO-PRODUCTION PLANT. LOSS
OF ANY ONE OR MORE OF THESE ARRANGEMENTS WOULD BE HARMFUL TO OUR PRESENT AND
ANTICIPATED BUSINESS REVENUES.
If we lose any one or more of our business arrangements with Texaco, we
would lose a substantial amount of our total revenues. Direct payments from
Texaco amounted to 21% of our total revenues in fiscal 2001 and 20% in fiscal
2000. We would be compelled to greatly reduce or close our testing and
development laboratory and sharply reduce our scientific and technical staff,
among other reductions in operating expenditures. We also anticipate that loss
of these arrangements would discourage or at least delay other licensees and
potential licensees who might use the technology.
Net Deferred Tax Asset. We had net deferred tax assets offset by a full
valuation allowance at September 30, 2001 and 2000. We are not able to determine
if it is more likely than not that the net deferred tax assets will be realized.
See Note 11 to the Consolidated Financial Statements.
ANALYSIS OF CASH FLOW
Operating Activities. Operating activities produced net losses of
$6,770,707, $4,099,395 and $3,442,661 for the fiscal years ended September 30,
2001, 2000 and 1999, respectively. The cash flows used in operations in fiscal
years 2001, 2000 and 1999 resulted from the following operating activities.
Depreciation. Depreciation is a non-cash expense. This expense
increased during fiscal 2001 by $103,183, compared to fiscal year 2000, and by
$112,234 during fiscal 2000, compared to fiscal 1999. The increases for these
periods are attributable to the additional equipment acquired for our oil and
gas field service segment as well as for the development and testing laboratory.
Amortization. Amortization is also a non-cash expense. This expense
increased during fiscal 2001 by $267,988, compared to fiscal year 2000, and by
$11,040 during fiscal 2000, compared to fiscal 1999. The increase for fiscal
2001 is attributable to the amortization of software capitalized at the end of
fiscal 2000.
Loss on Investment. As of September 30, 2001, we determined that our
investment in shares of Dresser Engineers & Constructors, Inc. was impaired.
Dresser is a privately owned company. We have not been able to obtain adequate
information about Dresser's current business to support the existing valuation.
Based upon our inability to determine Dresser Engineers' liquidity and the
status of its business plans, we have recognized a $1,842,135 asset impairment
for the year ended September 30, 2001. We continue to own 580,000 shares of the
common stock of Dresser Engineers & Constructors that represent this investment.
Deferred Offering Costs. During fiscal 2001, we expensed $123,642 in
deferred offering costs related to proposed private and public offerings.
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Interest Income. In fiscal 2001, interest income added back to
operations $70,814, with no comperable amounts during fiscal 2000 and 1999. This
amount relates to the interest earned on the note receivable from REN which was
subsequently applied to the purchase consideration when we acquired a 56%
interest in REN.
Loss on Disposal of Assets. Loss on disposal of assets is a non-cash
expense. Loss on disposal of assets decreased to $17,031 for fiscal year 2000
and increased to $233,279 for fiscal 1999. There was no comparable loss for
fiscal 2001. The loss for the 2000 period represents write-off of capitalized
leasehold improvements to the former building upon relocation of our paint
business segment to a larger facility. This loss was offset by a gain from
disposal of vehicles by the oil and gas field services segment. During fiscal
1999, we wrote off a $233,279 non-refundable deposit related to a potential
acquisition as we decided not to acquire the business.
Equity in Loss of Investee. We recognized equity in loss of investee in
the amount of $386,047 during fiscal 2001 and $276,585 during fiscal year 2000.
This represents our 50% share of the loss incurred by our joint venture in Sand
Creek Energy LLC. The LLC is holding and maintaining the mothballed Sand Creek
methanol plant. We acquired our investment in the plant during fiscal year 2000,
and therefore there was no comparable amount in fiscal year 1999. The increase
during fiscal 2001 is primarily due to the fact that the facility was only owned
for nine months during fiscal 2000.
Minority Interest in Net Loss of Subsidiary. The minority interest in
net loss of subsidiary of $21,711 during fiscal 2001 results from the
acquisition of 56% of REN Corporation. This acquisition had not been completed
during fiscal 2000.
Common Stock Issued for Services. We issued common stock for services
in the amounts of $53,120, $53,120 and $62,500 for fiscal 2001, 2000 and 1999.
These services consisted of shareholder relations provided by independent
contractors and compensation to our directors.
Stock Options and Warrants Issued for Services. We issued stock options
and warrants for services in the amounts of $185,837, $351,998 and $7,152 for
fiscal 2001, 2000 and 1999. These options and warrants were issued in lieu of
cash to our non-employee directors and independent contractor consultants for
their services.
Changes in Operating Assets and Liabilities. The changes in operating
assets and liabilities, net of business combination, result from the following
factors.
Accounts Receivable. Accounts receivable increased by $919,072,
$372,921 and $149,750 for the years ending September 30, 2001, 2000 and 1999.
Accounts receivable increased in fiscal 2001, as compared to fiscal 2000, due to
the increased sales of our paint business segment, oil and gas field services
business segment, technical services segment and our industrial automation
systems business segment. Accounts receivable increased in fiscal 2000, as
compared to fiscal 1999, due to the increased sales of our paint business
segment and our mud logging business segment.
Costs and Estimated Earnings in Excess of Billings. Costs and estimated
earnings in excess of billings increased $203,736 as a result of contracts
within the industrial automation systems segment which are accounted for under
the percentage of completion method of accounting. This segment began operations
during fiscal 2001.
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Inventories. Inventories increased by $101,534 during fiscal 2001
primarily as a result of the inventories acquired with the acquisition of REN
Corporation.
Accounts Payable. Accounts payable increased by $459,780, $14,910 and
$29,580 during the years ended September 30, 2001, 2000 and 1999. The increase
in fiscal 2001 as compared to fiscal 2000 resulted from increased activity
within each business segment, including the industrial automation system segment
acquired in fiscal 2001, as well as efforts to maximize cash investments during
the year.
Accrued Liabilities and Accrued Payroll. Accrued liabilities and
accrued payroll increased during fiscal 2001 primarily as a result of payroll
and sales commissions and related liabilities assumed with the acquisition of
REN Corporation.
Net Cash Used in Operating Activities. The total net cash used in
operations increased to $3,218,907, $3,065,942 and $2,651,686 during the years
ended September 30, 2001, 2000 and 1999. The increases reflect increased cash
costs for general and administrative expenses, including those of our industrial
automation systems subsidiary acquired in August 2001. These increases are
partially offset by rental income as well as by increases in gross profits from
each of our operating segments.
Investing Activities. Investing activities during the years ended
September 30, 2001 and 2000 included purchases of $676,379 and $470,361,
primarily in facilities for our development and testing research laboratory and
for mud logging vehicles, which were specially equipped for our oil and gas
field business segment. Investing activities during the year ended September 30,
1999 included purchases of $1,054,646 in building and equipment, primarily in
laboratory facilities.
We received proceeds from disposal of vehicles in the fiscal years
ending September 30, 2000 and 1999 of $24,068 and $13,791. There were no
comparable proceeds in the 2001 period.
We used $597,812 in cash during the year ended September 30, 1999 to
acquire some assets related to the acquisition of the oil and gas field service
segment. There was no comparable acquisition in fiscal 2001 or fiscal 2000.
During fiscal 2001, we used $59,013 in net cash to acquire a 56% interest in
REN.
In the year ended September 30, 2000, we used $851,610 in cash to
purchase an engineering study for conversion of the Sand Creek methanol plant.
We believe that this study can be used as a generic model for all industrial gas
plants to be converted to use the Rentech GTL Technology. There were no
comparable expenditures in fiscal 2001 or fiscal 1999.
We used $372,794 and $287,169 to fund our 50% share of expenses of Sand
Creek Energy, LLC during the years ended September 30, 2001 and 2000 as compared
to no investment in that LLC during fiscal 1999. In addition, we used $177,051
as a deposit on an additional 5% interest in Dresser Engineers & Constructors,
Inc. during the year ended September 30, 2000 as compared to using $2,072 in
fiscal 1999. There was no comparable investment in fiscal 2001.
We invested $273,899 in deposits for a future acquisition during fiscal
2000, as compared to $477,615 in fiscal 1999.
63
Financing Activities. Financing activities during the year ended
September 30, 2001 provided $2,332,005 in cash from the issuance of common stock
compared to $6,951,913 during the year ended September 30, 2000 and $312,319
during the year ended September 30, 1999. During the year ended September 30,
2001, we received net proceeds of $793,673 from the issuance of convertible
preferred stock as compared to net proceeds of $150,000 during the year ended
September 30, 2000, and $1,834,844 during the year ended September 30, 1999. We
redeemed warrants to purchase common stock during the year ended September 30,
2001in the amount of $2,084. We redeemed 23,832 shares of convertible preferred
stock for $285,000 in cash during the year ended September 30, 2000, as compared
to no cash redemption in fiscal 1999. In the 1999 fiscal year, we entered into a
mortgage to finance the purchase of land and building in February 1999, and
entered into two notes payable and assumed long-term debt in connection with the
acquisition during June 1999 of the assets now held by our oil and gas field
services business segment. During the year ended September 30, 2000, we acquired
additional notes associated with the purchase of vehicles for our oil and gas
field service segment. During the year ended September 30, 2001, we acquired
additional notes associated with the purchase of vehicles for our oil and gas
field service segment, for the refinance of the development and testing
laboratory land and building and for the purchase of computer software. During
fiscal 2001, we had $444,951 in additional borrowings. During the year ended
September 30, 2001, we received proceeds from a contract liability of $750,000,
and we repaid $624,846 on these debt obligations net of additional borrowings as
compared to $448,037 during the year ended September 30, 2000 and $66,657 during
the year ended September 30, 1999. The net cash provided by financing activities
during the year ended September 30, 2001 was $3,617,719, compared to $6,321,214
in cash provided by financing activities during the year ended September 30,
2000 and $2,080,506 during the year ended September 30, 1999.
WE HAVE A HISTORY OF OPERATING LOSSES, AND HAVE NEVER OPERATED AT A
PROFIT.
From our inception on December 18, 1981 through September 30, 2001, we
have incurred losses in the amount of $25,571,028. For the year ending September
30, 2001, our net loss was $6,770,707. If we do not operate at a profit in the
future, we may be unable to continue our operations at the present level.
Ultimately, our ability to maintain our present level of business will depend
upon earning a profit from operation of the Rentech GTL Technology. Our ability
to do so has not been demonstrated.
WE NEED ADDITIONAL CAPITAL OR FINANCING ARRANGEMENTS TO CARRY OUT OUR
PLANS. WITHOUT THESE SOURCES OF CAPITAL, WE WILL NOT BE ABLE TO ACQUIRE AND
CONVERT INDUSTRIAL GAS PLANTS TO USE THE RENTECH GTL TECHNOLOGY.
We intend to seek project financing, that is acquisition and
construction financing, to acquire and retrofit one or more industrial gas
plants. We also hope to obtain additional debt and equity financing in the
capital markets or through collaborative arrangements with potential co-owners
of these plants. Additional financing may not be available to us. If so, we
would have to defer or terminate our present expenditures, especially those
intended to achieve commercialization of the Rentech GTL Technology as soon as
possible. Our ability to implement our business plans and to achieve an
operating profit would be delayed or prevented. We might have to transfer some
aspects of our technology to others and allow them to develop markets for its
use. If so, our revenues from the technology would be substantially reduced. If
we raise additional capital by issuing equity securities, the ownership
interests of our shareholders could be diluted. We could also issue preferred
stock, without shareholder approval, to raise capital. The terms of our
preferred stock could include dividends, conversion voting rights and
liquidation preferences that are more favorable than those of the holders of our
common stock.
64
THE REVENUES THAT WE EXPECT FROM OPERATING USE OF THE RENTECH GTL
TECHNOLOGY MAY NOT BE REALIZED AS QUICKLY AS WE ANTICIPATE OR AT ALL. IF SO, THE
EQUITY SOURCES OF FINANCING THAT WE HAVE PRIMARILY RELIED UPON IN THE PAST MAY
NOT BE AVAILABLE.
We may experience long delays in realizing revenues from additional
license fees, royalties and engineering services related to the Rentech GTL
Technology. We may not receive substantial additional revenues from these
sources at all. If so, our dependency upon obtaining working capital from
financing activities will increase at times when our ability to do so will be
decreased.
OUR BUSINESS IN FOREIGN NATIONS WILL BE SUBJECT TO RISKS INVOLVING
CURRENCY EXCHANGE AND EXPROPRIATION OF FUNDS.
We expect that a substantial part of the use of our Rentech GTL
Technology will occur in foreign countries. This could result in payments to us
in foreign currencies. The exchange of foreign currencies into U.S. dollars will
subject us to the risk of unfavorable exchange rates that could reduce the value
of our foreign revenues by a significant amount. We plan to seek to be paid at
rates based on an exchange rate formula related to U.S. dollars. We may also
experience delays and costs in expropriating any foreign revenues that we may
earn to the United States. If we own property in foreign nations, we may have to
present our related assets and liabilities on our financial statements at the
current exchange rates.
WE HAVE NOT PAID DIVIDENDS ON OUR COMMON STOCK, AND WE DO NOT EXPECT TO
DO SO IN THE FUTURE.
We have paid no dividends on our common stock since inception in 1981.
We currently intend to retain any earnings for the future operation and
development of our business. We do not anticipate paying dividends in the
foreseeable future. Any future dividends may be restricted by the terms of
outstanding preferred stock and other financing arrangements then in effect.
WE EXPECT OUR QUARTERLY AND ANNUAL FINANCIAL OPERATING RESULTS TO
DIFFER FROM PERIOD TO PERIOD.
We have in the past, and expect in the future, to experience
significant fluctuations in quarterly and annual operating results caused by the
unpredictability of many factors. These variations may include differences in
actual results of operations from results expected by financial analysts and
investors, the demand for licenses of the Rentech GTL Technology, timing of
construction and completion of plants by licensees, their ability to operate
plants as intended, receipt of license fees and engineering fees and royalties,
improvements or enhancements of gas-to-liquids technology by us and our
competitors, economic use of our technology in commercial plants, changes in oil
and gas market prices, the impact of competition by other technologies and
energy sources, and general economic conditions. We believe that
period-to-period comparisons of our results of operations may not necessarily be
meaningful and should not be relied upon as indications of future performance.
Some or all of these factors may cause our operating results in future fiscal
quarters or years to be below the expectations of public market analysts and
investors. In such event, the price of our common stock is likely to be
materially adversely affected.
65
RECENT ACCOUNTING PRONOUNCEMENTS FROM FINANCIAL STATEMENT DISCLOSURES
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value,
less cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, are to be applied
prospectively. We believe that the adoption of this statement will have no
material impact on our consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective June 30, 2003 for the Company. We
believe the adoption of this statement will have no material impact on our
consolidated financial statements.
In June 2001, the FASB finalized SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
the use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires that companies recognize
acquired intangible assets apart from goodwill if the acquired intangible assets
meet certain criteria and, upon adoption of SFAS No. 142, that companies
reclassify the carrying amounts of intangible assets and goodwill based on the
criteria in SFAS No. 141.
Our previous business combinations were accounted for using the
purchase method. As of September 30, 2001 the net carrying amount of goodwill is
$1,511,368 and other intangible assets is $2,761,737. Amortization expense
during the year ended September 30, 2001 was $618,340. In accordance with the
provisions of SFAS No. 142, we have not amortized goodwill for the acquisition
of REN Corporation completed in August 2001. We have determined that our
reportable units are also our four business segments as discussed in this
report. Currently, we are assessing but have not yet determined how the adoption
of SFAS No. 141 and SFAS No. 142 will impact our financial position and results
of operations.
SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that companies identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. This statement is effective
October 1, 2001 for the company as the company intends to early adopt this
statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," amended by SFAS No. 137 and SFAS No. 138,
which requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair market value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. The
Company adopted SFAS No. 133, as amended by SFAS No. 137 and 138, as of October
1, 2000. The adoption of these statements has had no material impact on our
consolidated financial statements.
66
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements" which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101
was effective as of the fourth quarter of fiscal year ended September 30, 2001.
The adoption of this bulletin had no material impact on our financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk through interest rates related to our
investment of current cash and cash equivalents. These funds are generally
highly liquid with short-term maturities, and the related market risk is not
considered material. Our long-term debt is at fixed rates of interest. We
believe that fluctuations in interest rates in the near term will not materially
affect our consolidated operating results, financial position or cash flow.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Results. The following table presents unaudited consolidated
operating results for each quarter within the two most recent fiscal years. We
believe that all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the following quarterly results when read in conjunction with our consolidated
financial statements included elsewhere in this report. Results of operations
for any particular quarter are not necessarily indicative of results of
operations for a full fiscal year.
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Fiscal 2001
Revenues $ 1,512,817 $ 1,853,450 $ 2,408,816 $ 2,391,493
Gross Profit $ 469,620 $ 848,532 $ 652,398 $ 45,667
Loss before extraordinary item $(1,255,938) $ (569,209) $ (591,577) $(2,160,855)
Net Loss $(1,341,274) $ (642,892) $ (692,873) $(4,093,668)
Loss Per share $ (.02) $ (.02) $ (.01) $ (.06)
Fiscal 2000
Revenues $ 1,045,244 $ 984,062 $ 1,375,674 $ 1,651,627
Gross Profit $ 463,636 $ 322,671 $ 571,873 $ 574,031
Loss before extraordinary item $ (641,799) $ (983,198) $(1,523,280) $ (656,112)
Net Loss $ (674,905) $(1,056,214) $(1,731,160) $ (637,116)
Loss Per Share $ (.02) $ (.02) $ (.03) $ (.01)
The financial statements identified in Item 13 are filed as part of
this Annual Report on Form 10-K.
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have not had a change of independent auditors during our two most
recent fiscal years or subsequent interim period. We have not reported a
disagreement with our auditors on any matter of accounting principles or
practices or financial statement disclosure.
PART III
ITEM 10..DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning our
directors and executive officers:
Term of
Service Term as
as an Officer Director
Name Positions Held or Director Expires
- ------------------ -------------- ----------- -------
John J. Ball(1) Director. 1998 to date 2003
Charles B. Benham Vice President - Research and Development 1981 to date ---
Mark S. Bohn Vice President - Engineering 1998 to date ---
Ronald C. Butz(2) Vice President, Chief Operating Officer,
Secretary & Director 1984 to date 2004
Jack P. Diesel(1) Director 1998 to date 2002
Jim D. Fletcher General Manager, Petroleum Mud Logging, Inc. 1999 to date ---
Frank L. Livingston Vice President and General Manager,
OKON, Inc. 1997 to date ---
Gary A. Roberts President, REN Corporation 2001 to date ---
James P. Samuels Vice President - Finance, Treasurer,
Chief Financial Officer 1996 to date ---
Douglas L. Sheeran(3) Director. 1998 to date 2004
Erich W. Tiepel(1)(3) Director. 1983 to date 2003
Dennis L. Yakobson(4) President, Chief Executive Officer, & Chairman
of the Board 1981 to date 2002
- ---------------
(1) Member of audit committee.
(2) Director since 1984 and officer since 1989.
(3) Member of stock option committee.
(4) President since 1983.
John J. Ball, Director--
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Mr. Ball, age 58, has served as a director of Rentech since 1998. He
formed the law firm, Broadhurst & Ball, Mississauga, Ontario, and was a partner
from 1975 to 1984. He subsequently formed Keyser Mason Ball, Mississauga, as a
senior partner from 1984 to present. Upon his admission to the Bar he joined the
firm of McMillan Binch, Toronto, as an associate from 1971 to 1975. He received
a Bachelor of Education and Arts Degree from Mount Allison University in 1966
and a Bachelor of Laws Degree from Dalhousie University in 1969. He was admitted
to the Nova Scotia Bar in 1970 and the Ontario Bar in 1971. He is presently a
director of The Mississauga Hospital, Chair of its Bio-Ethics Committee, and a
member of the Board Merger Committee in connection with the amalgamation of The
Mississauga Hospital and The Queensway Hospital. Mr. Ball is past member of the
Board and Executive Committees of Mount Allison University. He is a past Chair
of the Vanier Cup, which sponsors the Canadian National University Football
Championship.
Charles B. Benham, Vice President-Research and Development--
Dr. Benham, age 65, was a founder of Rentech and has been an officer of
Rentech since its inception in 1981. He served as president until 1983 and as a
director from inception until 1996. 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. He was employed
at the Naval Weapons Center, China Lake, California, from 1958 through 1977.
There, he performed 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. Dr. Benham has published several articles in the fields of
liquid fuel production from organic waste, catalyst pellet behavior and rocket
propulsion. He 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. in Engineering (energy and kinetics) in 1970,
both from the University of California at Los Angeles.
Mark S. Bohn, Vice President-Engineering--
Dr. Bohn, age 51, a founder of Rentech, served as a director from its
organization in 1981 to June 1998. Since November 9, 1998 he has been employed
by Rentech as Vice President-Engineering. He became president of Rentech
Services Corporation upon its organization as a wholly-owned subsidiary in 1999.
From 1978 to November 1998 he was employed by Midwest Research Institute at the
Solar Energy Research Institute (now National Renewable Energy Laboratory) in
Golden, Colorado. He was employed from 1976 through 1978 at the General Motors
Research Laboratories in Warren, Michigan. Dr. Bohn is a registered Professional
Engineer in Colorado and a Member of the American Society of Mechanical
Engineers and the American Institute of Chemical Engineers. He has published
numerous 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 (Brooks Cole Publishing). He 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.
Ronald C. Butz, Vice President, Chief Operating Officer, Secretary and
Director--
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Mr. Butz, age 64, has served as a director of Rentech since 1984. In
October 1989, Mr. Butz was appointed vice president of Rentech, in June 1990 he
was appointed secretary, and in May 1998 he became chief operating officer. From
1984 to 1989, Mr. Butz was employed as president of Capital Growth, Inc., a
privately-held Colorado corporation providing investment services and venture
capital consulting. From 1982 to 1983, Mr. Butz was 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. From 1966 to 1982, Mr. Butz was a practicing
attorney in Denver, Colorado with the firm of Grant, McHendrie, Haines and
Crouse, P.C. He 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.
John P. Diesel, Director--
Mr. Diesel, age 75, has served as a director of Rentech since 1998. In
1972 he became President of Newport News Shipbuilding, a wholly-owned subsidiary
of Tenneco. There for 5 years he was responsible for, among other projects, the
design and construction of the nuclear powered aircraft carriers Nimitz class
and Los Angeles class submarines. In 1977 he moved to the position of Executive
Vice President of Tenneco, Inc., with responsibility for its automotive, farm
and construction equipment and packaging businesses. In 1978 he became President
and a director of Tenneco. Mr. Diesel was employed by McQuay-Norris
Manufacturing Co. from 1951 to 1957 in the production of proximity fuses. He
joined Booz Allen and Hamilton in 1957, remaining there until 1961, and being
elected to the partnership in that time. Mr. Diesel joined A.O. Smith
Corporation as Vice President of Planning, and held a series of manufacturing
officer positions, including group vice president. During his tenure at Tenneco,
and after retiring, Mr. Diesel served on numerous boards of directors. These
directorships included the Aluminum Company of America, Brunswick Corp., Allied
Stores, Pullman Corporation, Cooper Industries and Financial Institutions
Reinsurance Group, Fansteel Inc., and Telepad Corporation. He received a
Bachelor of Science degree in Industrial Engineering from Washington University
in 1951. Prior to attending the university he served in the United States Navy
as an aviator in the Western Pacific.
Jim D. Fletcher, General Manager, Petroleum Mud Logging, Inc.--
Mr. Jim D. Fletcher, age 56, has been general manager of Petroleum Mud
Logging, Inc. since August 1999. Mr. Fletcher has been employed in the mud
logging services industry since 1973. From 1995 to August 1999, Mr. Fletcher was
employed by Penson Well Logging as its general manager and marketing officer.
From 1988 through 1994, Mr. Fletcher worked for Petroleum Mud Logging, Inc., an
Oklahoma corporation, of Oklahoma City, as a mud logging technician. From 1981
to 1988, Mr. Fletcher was employed by OFT Exploration in Oklahoma City as a well
site geologist, and also worked as a consulting geologist. His first work
experience was with Dresser Industries in 1973 to 1974 as a mud logger. Mr.
Fletcher obtained a B.S. in Business Administration and a minor in Geology and
Economics from Southwestern State College of Oklahoma in 1974.
Frank L. Livingston, Vice President and General Manager, OKON, Inc.--
Mr. Frank L. Livingston, age 59, has served as Vice President and
general manager of OKON, Inc. since Rentech acquired that subsidiary in March
1997. Mr. Livingston joined OKON in 1975 as sales manager and was promoted to
Vice President of Sales in 1984. Mr. Livingston also became a 24% owner of OKON
at that time. In addition to his sales and marketing responsibilities, he was
also responsible for manufacturing and research and development for OKON. Mr.
70
Livingston also served on OKON's board of directors. With the sale of OKON to
Rentech in 1997, Mr. Livingston continues to serve on its board of directors.
From 1971 to 1975 Mr. Livingston was employed by Gates Rubber Co. in Denver,
Colorado as a sales and marketing manager for a specialty chemical venture
start-up business within the company. He also worked as a research market
analyst for the venture group. Projects of the venture group included specialty
chemicals and lead-acid battery technology, as well as rubber products made by
the company for off-shore oil exploration and production. He was employed by
Mallinckrodt Chemical Co. from 1965 to 1971. While with it, he worked as a
process research chemist and formulator prior to becoming a specialty marketing
manager for the industrial chemical division. He received a Bachelor of Science
Degree in Chemistry from Colorado State University in 1965.
Gary A. Roberts, President, REN Corporation
Mr. Gary A. Roberts, age 63, has been President of REN Corporation
since founding the company in 1979. Prior to starting REN, Mr. Roberts was a
Research Engineer in the School of Mechanical Engineering at Oklahoma State
University. As a Program Manager at the Fluid Power Research Center, he was
responsible for projects to develop testing concepts and equipment for the U.S.
Army and numerous industrial sponsors. Mr. Roberts was a United States delegate
to ISO TC131, the International Standards body which developed standard testing
procedures for the fluid power industry. From 1963 to 1970, he served as Manager
of Quality Engineering for Cessna Fluid Power Division, Hutchinson, Kansas. Mr.
Roberts is a Registered Professional Engineer in California. He holds an
Associate Degree in Business Administration from the Hutchinson Community
College as well as Bachelor of Science and Master of Science Degrees in
Engineering from Oklahoma State University.
71
James P. Samuels, Vice President-Finance, Treasurer, and Chief
Financial Officer--
Mr. James P. Samuels, age 54, has served as Vice President-Finance,
Treasurer and Chief Financial Officer of Rentech since May 1, 1996. He has
executive experience in general corporate management, finance, sales and
marketing, information technologies, and consulting for both large companies and
development stage businesses. From December 1995 through April 1998, 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; a director of marketing from 1984 to 1985; and director of
business development and planning during 1983 for the Rahway, New Jersey 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. 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.
Douglas L. Sheeran, Director--
Mr. Sheeran, age 63, has served as a director of Rentech since 1998.
Mr. Sheeran is managing director of FCI, Inc., which he founded in 1986. FCI
Inc., is a human resource consulting firm located in Shrewsbury, New Jersey
which specializes in executive staffing, merger planning and organizational
effectiveness. FCI's client base includes Fortune 500 and start-up firms in
technology, pharmaceutical, automotive and consumer durable industries. From
1973 until 1986 Mr. Sheeran was employed by Purolator Automotive Group and
became Vice President, Human Resources, with responsibilities for multiple North
American business units. He held a number of human resource positions of
increasing scope and responsibility with Home Life Insurance Company, from 1960
to 1962, Kraft Foods from 1962 to 1965, Electronic Associates Inc. from 1965 to
1968, and Celanese Corporation from 1968 to 1973. These positions covered a
range of labor relations, organizational development, compensation and benefit
responsibilities at both operating sites and corporate staff. He received a
Bachelor of Arts degree in Industrial Psychology from Miami University, Oxford,
Ohio, in 1960.
72
Erich W. Tiepel, Director--
Dr. Tiepel, age 58, has served as a director of Rentech since 1983. Dr.
Tiepel has 23 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. He 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.
Dennis L. Yakobson, President, Chief Executive Officer, and Chairman of
the Board--
Mr. Yakobson, age 65, is Chief Executive Officer of Rentech. He has
served as a director of Rentech and chairman of the board since 1983. He was
employed as vice president of administration and finance of Nova Petroleum
Corporation, Denver, Colorado, from 1981 to 1983. From 1979 to 1983, he served
as a director and secretary of Nova Petroleum Corporation, Denver, Colorado. He
resigned those positions in November 1983 to become a director and assume the
presidency of Rentech. From 1976 to 1981 he served as a director, secretary and
treasurer of Power Resources Corporation, Denver, a mineral exploration company,
and was employed by it as vice president-land. From 1975 to 1976 he was employed
by Wyoming Mineral Corporation in Denver as a contract administrator. From 1971
through 1975 he was employed by Martin Marietta Corporation, Denver, as
marketing engineer in space systems. From 1969 to 1971 he was employed by Martin
Marietta (now Lockheed Martin Corporation) in a similar position. From 1960 to
1969 he was employed by Grumman Aerospace Corporation, his final position with
it being contract administrator with responsibility for negotiation of prime
contracts with governmental agencies. He 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.
There are no family relationships among the directors. There are no
arrangements or understandings between any director and any other person
pursuant to which that director was elected. 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 in
this report.
We have adopted a 401(k) retirement plan. We also have stock option
plans. We provide a medical reimbursement plan and life insurance coverage to
officers and directors and may provide other benefits to officers and employees
in the future. We may also compensate non-employee directors for attendance at
board and committee meetings at a per diem rate to be determined plus
reimbursement of actual expenses incurred in attending such meetings.
73
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon our review of Securities and Exchange Commission
Forms 3 and 4 and amendments to those forms submitted to it during the most
recent fiscal year, we have identified no persons who were at any time during
the fiscal year a director, officer, or beneficial owner of more than 10% of any
class of equity securities and who failed to file such forms on a timely basis
with the SEC, as required by Section 16(a) of the Securities Exchange Act during
the most recent fiscal year or prior fiscal years.
ITEM 11. EXECUTIVE COMPENSATION
CASH COMPENSATION
The following tables show the compensation paid by us or any of our
subsidiaries during the fiscal years indicated, to our chief executive officer
and our four most highly compensated executive officers other than the chief
executive officer. Summary Compensation Table
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
-------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name and Annual Restricted Securities All Other
Principal Compen- Stock Underlying LTIP Compen-
Position Year Salary Bonus sation Award(s) Options/SARs Payouts sation
- -------- ---- ------ ----- ------- ---------- ------------ ------- ---------
($) ($) ($) ($) (#) ($) ($)
Dennis L. Yakobson 2001 $244,437 -- $ 3,233 -- $ 60,000
Chief Executive 2000 $191,356 $120,147 $ 1,465 -- -- -- --
Officer 1999 $161,676 -- -- -- 35,000 -- --
Ronald C. Butz 2001 $217,683 -- $ 4,665 $ 60,000
Chief Operating 2000 $177,003 $ 88,147 $ 2,596 -- -- -- --
Officer 1999 $150,972 -- -- -- 35,000 -- --
Charles B. Benham 2001 $158,083 -- -- -- $ 50,000
Vice President - 2000 $151,442 $ 43,046 $ 1,984 -- -- -- --
Research & 1999 $134,308 -- -- -- 30,000 -- --
Development
Mark S. Bohn 2001 $158,083 -- -- -- $ 50,000
Vice President - 2000 $151,442 $ 43,046 -- -- -- -- --
Engineering 1999 $122,609 -- -- -- 30,000 -- --
James P. Samuels 2001 $157,013 $ 1,083 -- $ 40,000
Chief Financial 2000 $150,419 $ 52,884 $ 592 -- -- -- --
Officer 1999 $133,144 -- -- -- 30,000 -- --
74
OPTION/SAR EXERCISES AND HOLDINGS
The following table sets forth information with respect to the named
executives, concerning the exercise of options and/or limited SARs during the
last fiscal year and unexercised options and limited SARs held as of the end of
the last fiscal year.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values:
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End(#) at FY-End
Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized ($) Unexercisable Unexercisable ($)
- ------------------ -------------- ------------ ------------- -----------------
Dennis L. Yakobson 0 $ 0 245,000(1) $ 49,575
Ronald C. Butz 0 $ 0 185,000(1) 22,400
Charles B. Benham 0 $ 0 230,000(1) 46,475
Mark S. Bohn 0 $ 0 180,000(1) 30,475
James P. Samuels 0 $ 0 380,000(1) 113,100
- --------------
(1) Exercisable.
EMPLOYMENT CONTRACTS
Executive officers generally are elected at the annual director meeting
immediately following the annual stockholder meeting. Any officer or agent
elected or appointed by the Board of Directors may be removed by the Board
whenever in its judgment our best interests will be served thereby, without
prejudice to contractual rights, if any, of the person so removed.
There are no family relationships among the executive officers. There
are no arrangements or understandings between any officer and any other person
pursuant to which that officer was elected.
We employ Messrs. Yakobson, Benham, Bohn and Butz pursuant to
employment contracts that extend through March 31, 2002. Mr. Samuels is employed
pursuant to an employment contract that extends to January 1, 2002. Mr.
Livingston and Mr. Fletcher are employed according to contracts that extend to
March 31, 2002. Mr. Roberts is employed according to a contract the extends to
August 31, 2004.
The contracts provide that the individuals will serve in their present
capacities as officers, together with such duties, responsibilities and powers
as the board of directors may reasonably specify. The contracts provide for
annual cost of living adjustments. If the Company terminates employment early
without cause, the contracts provide for continuation of salary for the
remainder of the term or one year, whichever is more, as severance pay. 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.
75
Our success with our technology and in implementing our business plan
to develop advanced technology businesses are both substantially dependent upon
the contributions of our executive officers, scientists and key employees. At
this stage of our development, economic success of the Rentech GTL Technology
depends upon design of conversion plants and their startup to achieve optimal
plant operations. That effort and establishment of our advanced technology
businesses both require knowledge, skills, and relationships unique to our key
personnel. Moreover, to successfully compete with its Rentech GTL Technology and
advanced technologies, we will be required to engage in continuous research and
development regarding processes, products, markets and costs. Loss of the
services of the executive officers or other key employees could have a material
adverse effect on our business, operating results and financial condition. We do
not have key man life insurance. We believe our employment contracts with our
key personnel will be extended.
401(k) PLAN
We have a 401(k) plan. Employees who are at least 21 years of age are
eligible to participate in the plan and share in the employer matching
contribution. The employer is currently matching 75% of the first 6% of the
participant's salary deferrals. All participants who have completed 1,000 hours
of service and who are employed on the last day of the plan year are eligible to
share in the non-matching employer contributions. Employer matching and
non-matching contributions vest immediately in years in which the plan is not
top heavy. During years in which the plan is top heavy, employer matching and
non-matching contributions vest 100% after three years of service. We
contributed $120,238, $26,421, and $35,265 to the plan for the years ended
September 30, 2001, 2000, and 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 30,
2001 by (i) all persons who own of record or are known to the Company to
beneficially own more than 5% of the issued and outstanding shares of Common
Stock and (ii) by each director, each director nominee, each of the executive
officers named in the tables under "Executive Compensation" and by all executive
officers and directors as a group:
Amount and Nature of Percent
Name(1)(2) Beneficial Ownership(3) of Class
- ---- -------------------- --------
John J. Ball (4) 167,000 *
Charles B. Benham 826,320 1.2%
Mark S. Bohn 815,523 1.2%
Ronald C. Butz(5) 762,031 1.1%
John P. Diesel 165,000 *
James P. Samuels 743,500 *
Douglas L. Sheeran 140,000 *
Erich W. Tiepel 387,627 *
Dennis L. Yakobson(6) 874,754 1.3%
All Directors and Executive
Officers as a Group (10 persons) 4,881,755 7.3%
C. David Callaham(7) 3,734,840 5.5%
- ---------------
*Less than 1%.
76
(1) Except as otherwise noted and subject to applicable community property
laws, each stockholder has sole voting and investment power with
respect to the shares beneficially owned. The business address of each
director and executive officer is c/o Rentech, Inc., 1331 17th Street,
Suite 720, Denver, CO 80202.
(2) Shares of common stock subject to options that are exercisable within
60 days of the date of this Annual Report on Form 10-K are deemed
outstanding for purposes of computing the percentage ownership of such
person, but are not deemed outstanding for purposes of computing the
percentage ownership of any other person. The following shares of
common stock subject to stock options are included in the table: John
J. Ball - 90,000; Charles B. Benham - 230,000; Mark S. Bohn - 180,000;
Ronald C. Butz - 185,000; John P. Diesel - 90,000; James P. Samuels -
380,000; Douglas L. Sheeran - 90,000; Erich W. Tiepel - 180,000; Dennis
L. Yakobson - 245,000.
(3) Information with respect to beneficial ownership is based upon
information furnished by each stockholder or contained in filings with
the Securities and Exchange Commission.
(4) Includes 2,000 shares of common stock held by Mr. Ball's wife, as to
which Mr. Ball disclaims beneficial ownership.
(5) Does not include 237,432 shares of common stock held by Mr. Butz's
wife, as to which Mr. Butz disclaims beneficial ownership.
(6) Includes 8,000 shares of common stock held by Mr. Yakobson's wife, as
to which Mr. Yakobson disclaims beneficial ownership.
(7) Includes 440,003 shares of common stock underlying stock purchase
warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the year ended September 30, 2001, we incurred $26,995 in
consulting services which were paid to a director of the Company. As of
September 30, 2001 we owe an officer of the Company $30,600. This payable does
not bear interest and is due on demand.
On January 7, 2000, we and Republic Financial Corporation, through Sand
Creek Energy, LLC (SCE), purchased the Sand Creek methanol plant. The owner of
the facility is SCE, which is 50 percent owned by our subsidiary, Rentech
Development Corporation, and 50 percent owned by RFC Sand Creek Development,
LLC., a wholly-owned subsidiary of Republic. In connection with the acquisition
of the Sand Creek plant, SCE assumed certain commitments with third parties. We
and Republic jointly and severally guarantee the full and punctual performance
and payment by SCE of all SCE's obligations with respect to the Sand Creek
plant. Our aggregate liability under this guaranty is not to exceed $4,000,000.
For the year ended September 30, 2001 and 2000, we contributed $372,794
and $287,169 to SCE and have recognized $386,047 and $276,585 related to our
equity in SCE's loss. Also, as of September 30, 2001 and 2000, we have a
receivable due from SCE in the amount of $69,293 and $64,246.
During fiscal 2000, we paid Dresser Engineering $851,610 for software
development. We have capitalized these amounts as of September 30, 2000.
77
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Summary of Accounting Policies
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
None.
(3) Exhibits:
The following exhibits are filed as part of this Annual Report on Form
10-K:
EX-2.1 Stock Purchase Agreement dated August 1, 2001 between Rentech
and REN Corporation
EX-3.1 Restated and Amended Articles of Incorporation, dated January
4, 1991 (incorporated by reference from the exhibits to
Amendment No. 2 to Registrant's Form S-18 Registration
Statement No. 33-378150-D.
EX-3.2 Articles of Amendment dated April 5, 1991 to the Restated and
Amended Articles of Incorporation (incorporated 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-3.3 Articles of Amendment dated January 26, 1998 to Articles of
Incorporation-Preferences, Limitations and Relative Rights of
Convertible Stock, Series 1998-B of Rentech, Inc.
(incorporated by reference from Exhibit No. 3.(I).2 to
Registrant's Form 10-KSB filed with the SEC on January 13,
1999).
EX-3.4 Articles of Amendment dated December 4, 1998 to Articles of
Incorporation-Designation, Preferences and Rights of Series
1998-C Participating Cumulative Preference Stock of Rentech,
Inc. pertaining to Rentech's Shareholder Rights Plan
(incorporated by reference from Exhibit No. 3.(I).4 to
Registrant's Form 10-KSB filed with the Securities and
Exchange Commission on January 13, 1999).
78
EX-3.5 Bylaws dated January 19, 1999 (incorporated by reference from
Exhibit No. EX-3.(ii) to Registrant's Form 10-KSB filed with
the Securities and Exchange Commission on January 12, 2000).
EX-4.1 Shareholder Rights Plan dated November 10, 1998 (incorporated
by reference from the exhibits to Current Report on Form 8-K
filed with the Securities and Exchange Commission on November
19, 1998).
EX-4.2 Form of Warrant issued to investors in the 1999 private
placement of securities (incorporated by reference from
Exhibit No. 4.2 to Registrant's Form 10-KSB filed with the
Securities and Exchange Commission on January 12, 2000).
EX-10.2 1990 Stock Option Plan (incorporated by reference from the
exhibits to the Company's Registration Statement No.
33-37150-D on Form S-18.
EX-10.3 1994 Stock Option Plan (incorporated 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.
EX-10.4 1996 Stock Option Plan (incorporated by reference from the
exhibits to Registrant's Current Report on Form 8-K dated
December 18, 1996.
EX-10.5 Form of Employment Contracts with certain executive officers
(incorporated by reference from the exhibits to Registrant's
Report on Form 8-K dated November 14, 1994).
EX-10.6 Employment Contract with executive officer of subsidiary.
EX-10-7 Technical Services Agreement dated June 14, 1999 between
Rentech and Texaco Energy Systems, Inc.
EX-23.1 Consent of Independent Certified Public Accountants.
EX-99.1 Letter of Intent between Rentech, Inc. and ITN Energy Systems,
Inc. dated October 17, 1996 (incorporated by reference from
the exhibits to Registrant's Current Report on Form 8-K/A
dated November 7, 1996).
(b) The following reports on Form 8-K have been filed during the last
quarter of the period covered by this report.
o Form 8-K filed July 5, 2001 reporting an item under Item 5,
Other Events, and Regulation FD Disclosure.
o Form 8-K filed July 6, 2001 reporting an item under Item 5,
Other Events, and Regulation FD Disclosure.
o Form 8-K filed July 25, 2001 reporting an item under Item 5,
Other Events, and Regulation FD Disclosure.
79
Signatures
Pursuant to 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.
/s/ Dennis L. Yakobson
------------------------------
Date: December __, 2001 Dennis L. Yakobson, President
Pursuant to 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.
/s/ Dennis L. Yakobson
----------------------------------
Date: December 26, 2001 Dennis L. Yakobson, President,
-- Chief Executive Officer
and Director
/s/ Ronald C. Butz
----------------------------------
Date: December 26, 2001 Ronald C. Butz, Chief Operating
-- Officer, Vice President, Secretary
and Director
/s/ James P. Samuels
----------------------------------
Date: December 26, 2001 James P. Samuels, Vice President -
-- Finance, Chief Financial Officer
Date: December 26, 2001 /s/ John J. Ball
-- ----------------------------------
John J. Ball, Director
/s/ John P. Diesel
----------------------------------
Date: December 26, 2001 John P. Diesel, Director
--
/s/ Douglas L. Sheeran
----------------------------------
Date: December 26, 2001 Douglas L. Sheeran, Director
--
/s/ Erich W. Tiepel
----------------------------------
Date: December 26, 2001 Erich W. Tiepel, Director
--
80
Rentech, Inc. and Subsidiaries
Contents
- --------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F-2
Financial Statements:
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6 - F-11
Consolidated Statements of Cash Flows F-12 - F-13
Summary of Accounting Policies F-14 - F-24
Notes to Consolidated Financial Statements F-25 - F-58
F-1
Report of Independent Certified Public Accountants
Stockholders and Board of Directors
Rentech, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Rentech, Inc.
and Subsidiaries (the "Company") as of September 30, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 2001. 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 auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 2001 and 2000 and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ BDO Seidman, LLP
December 12, 2001
Denver, Colorado
F-2
Rentech, Inc. and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
September 30, 2001 2000
- -------------------------------------------------------------------------- ------------- -----------
Assets (Note 7)
Current:
Cash $ 893,452 $ 1,516,815
Accounts receivable, net of $7,325 and $4,400 allowance for doubtful
accounts (Note 14) 1,745,838 745,204
Costs and estimated earnings in excess of billings (Note 10) 73,020 --
Stock subscription receivable (Note 8) 250,000 --
Note receivable (Note 5) 191,779 --
Other receivables 52,706 101,025
Receivable from related party (Note 6) 69,293 64,246
Inventories (Note 2) 738,238 117,866
Prepaid expenses and other current assets 309,064 106,480
- -------------------------------------------------------------------------- ----------- -----------
Total current assets 4,323,390 2,651,636
- -------------------------------------------------------------------------- ----------- -----------
Property and equipment, net (Note 3) 4,388,776 3,583,548
- -------------------------------------------------------------------------- ----------- -----------
Other:
Licensed technology, net of accumulated amortization of
$1,848,747 and $1,630,437 1,582,402 1,800,711
Capitalized software costs, net of accumulated amortization of
$236,429 and $0 711,263 851,610
Goodwill, net of accumulated amortization of $400,599 and $302,248 1,511,368 1,104,905
Production backlog, net of accumulated amortization of $27,762 and
$0 (Note 1) 138,355 --
Non-compete agreement, net of accumulated amortization of $5,432 and
$0 (Note 1) 157,069 --
Investment in INICA, Inc. (Note 4) 3,079,107 3,079,107
Investment in Dresser (Note 5) -- 1,842,135
Investment in Sand Creek (Note 6) -- 10,584
Technology rights, net of accumulated amortization of
$115,098 and $83,039 172,648 204,707
Deposit for acquisition (Note 1) -- 973,899
Deposits and other assets, net of $167,206 allowance for doubtful
accounts as of September, 30, 2000 51,077 359,750
- -------------------------------------------------------------------------- ----------- -----------
Total other assets 7,403,289 10,227,408
- -------------------------------------------------------------------------- ----------- -----------
$16,115,455 $16,462,592
- -------------------------------------------------------------------------- ----------- -----------
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-3
Rentech, Inc. and Subsidiaries
Consolidated Balance Sheets
(Continued)
- --------------------------------------------------------------------------------
September 30, 2001 2000
- -------------------------------------------------------------------------- ------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 883,255 $ 358,885
Billings in excess of costs and estimated earnings (Note 10) 130,930 --
Payable to related party (Note 17) 30,600 --
Accrued payroll 536,530 78,005
Accrued liabilities 436,017 78,817
Contract liability (Note 16) 750,000 --
Current portion of long-term debt (Note 7) 143,863 243,553
- -------------------------------------------------------------------------- ------------ ------------
Total current liabilities 2,911,195 759,260
- -------------------------------------------------------------------------- ------------ ------------
Long-term liabilities:
Long-term debt, net of current portion (Note 7) 1,147,773 990,107
Lessee deposits 7,485 9,248
Investment in Sand Creek (Note 6) 2,669 --
- -------------------------------------------------------------------------- ------------ ------------
Total long-term liabilities 1,157,927 999,355
- -------------------------------------------------------------------------- ------------ ------------
Total liabilities 4,069,122 1,758,615
- -------------------------------------------------------------------------- ------------ ------------
Minority interest (Note 1) 309,632 --
Commitments and Contingencies (Notes 6 and 9)
Stockholders' equity (Note 8)
Series A convertible preferred stock - $10 par value; 200,000 shares
authorized; 200,000 shares issued and no shares outstanding; $10
per share liquidation value -- --
Series B convertible preferred stock - $10 par value; 800,000 shares
authorized; 641,664 and 524,998 shares issued and 27,778 and no
shares outstanding; $10 per share liquidation value ($277,780 in
the aggregate) 277,780 --
Series C participating cumulative preferred stock - $10 par value;
500,000 shares authorized; no shares issued and outstanding -- --
Common stock - $.01 par value; 100,000,000 shares authorized;
66,665,631 and 62,824,228 shares issued and outstanding 666,653 628,240
Additional paid-in capital 36,384,562 32,925,887
Unearned compensation (21,266) (49,829)
Accumulated deficit (25,571,028) (18,800,321)
- -------------------------------------------------------------------------- ------------ ------------
Total stockholders' equity 11,736,701 14,703,977
- -------------------------------------------------------------------------- ------------ ------------
$ 16,115,455 $ 16,462,592
- -------------------------------------------------------------------------- ------------ ------------
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-4
Rentech, Inc. and Subsidiaries
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
Year Ended September 30, 2001 2000 1999
- ---------------------------------------------------------------------- ------------ ------------ ------------
Revenues: (Notes 13 and 14)
Product sales $ 2,367,689 $ 2,096,159 $ 1,960,764
Service revenues 5,558,887 2,710,448 580,136
Royalty income 240,000 260,000 340,000
- ---------------------------------------------------------------------- ------------ ------------ ------------
Total revenues 8,166,576 5,066,607 2,880,900
Cost of sales:
Product costs 1,124,951 1,029,812 918,678
Service costs 4,464,800 2,104,584 497,400
Research and development contract costs (Note 16) 560,608 -- --
- ---------------------------------------------------------------------- ------------ ------------ ------------
Total costs of sales 6,150,359 3,134,396 1,416,078
- ---------------------------------------------------------------------- ------------ ------------ ------------
Gross profit 2,016,217 1,932,211 1,464,822
Operating expenses:
General and administrative expense 5,591,046 4,776,431 4,111,151
Depreciation and amortization 798,167 444,908 367,318
Write-off of deposits related to acquisition -- -- 233,279
Research and development 204,583 515,261 195,466
- ---------------------------------------------------------------------- ------------ ------------ ------------
Total operating expenses 6,593,796 5,736,600 4,907,214
- ---------------------------------------------------------------------- ------------ ------------ ------------
Loss from operations (4,577,579) (3,804,389) (3,442,392)
Other income (expenses):
Loss on investment (Note 5) (1,842,135) -- --
Equity in loss of investee (Note 6) (386,047) (276,585) --
Interest income 121,509 135,443 75,665
Interest expense (108,166) (136,833) (75,934)
Loss on disposal of fixed assets -- (17,031) --
- ---------------------------------------------------------------------- ------------ ------------ ------------
Total other expenses (2,214,839) (295,006) (269)
- ---------------------------------------------------------------------- ------------ ------------ ------------
Minority interest in subsidiary's net loss 21,711 -- --
- ---------------------------------------------------------------------- ------------ ------------ ------------
Net loss (6,770,707) (4,099,395) (3,442,661)
Dividend requirements on convertible preferred stock (Note 8) 483,599 89,611 531,932
- ---------------------------------------------------------------------- ------------ ------------ ------------
Loss applicable to common stockholders $ (7,254,306) $ (4,189,006) $ (3,974,593)
- ---------------------------------------------------------------------- ------------ ------------ ------------
Basic and diluted loss per common share $ (.11) $ (.07) $ (.09)
- ---------------------------------------------------------------------- ------------ ------------ ------------
Basic and diluted weighted-average number of common shares
outstanding 64,807,168 57,532,816 43,838,417
- ---------------------------------------------------------------------- ------------ ------------ ------------
See accompanying, summary of accounting policies and
notes to consolidated financial statements.
F-5
Rentech, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
Convertible Preferred Stock
------------------------------------------------------------
Series A Series B
Years Ended September 30, 2001, 2000, and 1999 Shares Amount Shares Amount
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Balance October 1, 1998 50,000 $ 500,000 107,500 $ 1,075,000
Common stock issued for cash (Note 8) -- -- -- --
Common stock issued for cash on options and
warrants exercised (Note 8) -- -- -- --
Common stock issued for acquisition (Note 8) -- -- -- --
Common stock issued for investment (Note 5) -- -- -- --
Common stock issued for services (Note 8) -- -- -- --
Preferred stock issued for cash, net of offering
costs of $248,476 (Note 8) -- -- 208,332 2,083,320
Common stock issued for conversion of
preferred stock and $91,899 in dividends (Note 8) (50,000) (500,000) (182,500) (1,825,000)
Stock warrants granted for prepaid expenses (Note 8) -- -- -- --
Stock options granted for services (Note 8) -- -- -- --
Deemed dividends on convertible preferred stock of
$440,033 (Note 8) -- -- -- --
Net loss -- -- -- --
- ------------------------------------------------------- ------------ ------------ ------------ ------------
See accompanying summary of accounting policies and
notes to consolidated financial statements
F-6
Rentech, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
Common Stock Additional
--------------------------- Paid-In Unearned Accumulated
Years Ended September 30, 2001, 2000, and 1999 Shares Amount Capital Compensation Deficit
- ------------------------------------------------------- ------------ ------------ ------------ --------------- ------------
Balance October 1, 1998 40,075,292 $ 400,750 $ 19,603,081 $ -- $(11,258,265)
Common stock issued for cash (Note 8) 150,000 1,500 48,500 -- --
Common stock issued for cash on options and
warrants exercised (Note 8) 940,110 9,401 252,918 -- --
Common stock issued for acquisition (Note 8) 100,000 1,000 49,000 -- --
Common stock issued for investment (Note 5) 3,680,168 36,802 1,801,210 -- --
Common stock issued for services (Note 8) 100,000 1,000 61,500 -- --
Preferred stock issued for cash, net of offering
costs of $248,476 (Note 8) -- -- (248,476) -- --
Common stock issued for conversion of
preferred stock and $91,899 in dividends (Note 8) 4,227,177 42,272 2,279,651 -- --
Stock warrants granted for prepaid expenses (Note 8) -- -- 81,143 -- --
Stock options granted for services (Note 8) -- -- 7,152 -- --
Deemed dividends on convertible preferred stock of
$440,033 (Note 8) -- -- -- -- --
Net loss -- -- -- -- (3,442,661)
------------ ------------ ------------ --------------- ------------
See accompanying summary of accounting policies and
notes to consolidated financial statements
F-7
Rentech, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Continued)
- --------------------------------------------------------------------------------
Convertible Preferred Stock
------------------------------------------------------------
Series A Series B
Years Ended September 30, 2001, 2000, and 1999 Shares Amount Shares Amount
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Balance, September 30, 1999 -- $ -- 133,332 $ 1,333,320
Common stock and stock options issued for cash, net
of offering costs of $603,049 (Note 8) -- -- -- --
Common stock issued for cash on options and
warrants exercised (Note 8) -- -- -- --
Common stock issued for deposit on
business acquisition (Notes 1 and 8) -- -- -- --
Common stock issued for services (Note 8) -- -- -- --
Common stock issued for prepaid expenses (Note 8) -- -- -- --
Common stock issued for commissions on
business acquisition (Note 8) -- -- -- --
Preferred stock issued for cash, net of offering costs
of $16,660 (Note 8) -- -- 16,666 166,660
Preferred stock and $46,680 in dividends
redeemed for cash (Note 8) -- -- (23,832) (238,320)
Common stock issued for conversion of preferred
stock and $22,731 in dividends (Note 8) -- -- (126,166) (1,261,660)
Stock options granted for services (Note 8) -- -- -- --
Stock options granted to employees for services -- -- -- --
Deemed dividends on preferred stock of $20,200 (Note 8) -- -- -- --
Net loss -- -- -- --
- ------------------------------------------------------- ------------ ------------ ------------ ------------
See accompanying summary of accounting policies and
notes to consolidated financial statements
F-8
Consolidated Statements of Stockholders' Equity
(Continued)
- --------------------------------------------------------------------------------
Common Stock Additional
--------------------------- Paid-In Unearned Accumulated
Years Ended September 30, 2001, 2000, and 1999 Shares Amount Capital Compensation Deficit
- ------------------------------------------------------ ------------ ------------ ------------ --------------- ------------
Balance, September 30, 1999 49,272,747 $ 492,725 $ 23,935,679 $ -- $(14,700,926)
Common stock and stock options issued for cash, net
of offering costs of $603,049 (Note 8) 8,428,334 84,283 5,844,668 -- --
Common stock issued for cash on options and
warrants exercised (Note 8) 2,324,527 23,245 999,717 -- --
Common stock issued for deposit on
business acquisition (Notes 1 and 8) 200,000 2,000 398,000 -- --
Common stock issued for services (Note 8) 100,000 1,000 52,120 -- --
Common stock issued for prepaid expenses (Note 8) 100,000 1,000 52,120 -- --
Common stock issued for commissions on
business acquisition (Note 8) 60,000 600 29,400 -- --
Preferred stock issued for cash, net of offering costs
of $16,660 (Note 8) -- -- (16,660) -- --
Preferred stock and $46,680 in dividends
redeemed for cash (Note 8) -- -- (46,680) -- --
Common stock issued for conversion of preferred
stock and $22,731 in dividends (Note 8) 2,338,620 23,387 1,275,696 -- --
Stock options granted for services (Note 8) -- -- 351,998 -- --
Stock options granted to employees for services -- -- 49,829 (49,829) --
Deemed dividends on preferred stock of $20,200 (Note 8) -- -- -- -- --
Net loss -- -- -- -- (4,099,395)
- ----------------------------------------------------- ------------ ------------ ------------ --------------- ------------
See accompanying summary of accounting policies and
notes to consolidated financial statements
F-9
Consolidated Statements of Stockholders' Equity
(Continued)
- --------------------------------------------------------------------------------
Convertible Preferred Stock
------------------------------------------------------------
Series A Series B
Years Ended September 30, 2001, 2000, and 1999 Shares Amount Shares Amount
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Balance, September 30, 2000 -- $ -- -- $ --
Common stock issued for cash, net
of offering costs of $103,995 (Note 8) -- -- -- --
Common stock issued for cash on options and
warrants exercised (Note 8) -- -- -- --
Common stock issued for deposit on
business acquisition (Notes 1 and 8) -- -- -- --
Preferred stock issued for cash and a $250,000 stock
subscription receivable, net of offering costs
of $122,995 (Note 8) -- -- 116,666 1,166,668
Common stock issued for conversion of preferred
stock (Note 8) -- -- (88,888) (888,888)
Stock options granted for services (Note 8) -- -- -- --
Warrants for convertible preferred stock redeemed
for cash -- -- -- --
Deemed dividends on preferred stock of $483,599
(Note 8) -- -- -- --
Net loss -- -- -- --
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Balance September 30, 2001 -- $ -- 27,778 $ 277,780
- ------------------------------------------------------- ------------ ------------ ------------ ------------
See accompanying summary of accounting policies and
notes to consolidated financial statements
F-10
Consolidated Statements of Stockholders' Equity
(Continued)
- --------------------------------------------------------------------------------
Common Stock Additional
--------------------------- Paid-In Unearned Accumulated
Years Ended September 30, 2001, 2000, and 1999 Shares Amount Capital Compensation Deficit
- ------------------------------------------------------ ------------ ------------ ------------ --------------- ------------
Balance, September 30, 2000 62,824,228 $ 628,240 $ 32,925,887 $ (49,829) $(18,800,321)
Common stock issued for cash, net
of offering costs of $103,995 (Note 8) 2,000,000 20,000 1,776,005 -- --
Common stock issued for cash on options and
warrants exercised (Note 8) 518,027 5,180 530,820 -- --
Common stock issued for deposit on
business acquisition (Notes 1 and 8) 200,000 2,000 242,000 -- --
Preferred stock issued for cash and a $250,000 stock
subscription receivable, net of offering costs
of $122,995 (Note 8) -- -- (122,995) -- --
Common stock issued for conversion of preferred
stock (Note 8) 1,123,376 11,233 877,655 -- --
Stock options granted for services (Note 8) -- -- 157,274 28,563 --
Warrants for convertible preferred stock redeemed
for cash -- -- (2,084) -- --
Deemed dividends on preferred stock of $483,599
(Note 8) -- -- -- -- --
Net loss -- -- -- -- (6,770,707)
- ------------------------------------------------------ ------------ ------------ ------------ ----------- ------------
Balance September 30, 2001 66,665,631 $ 666,653 $ 36,384,562 $ (21,266) $(25,571,028)
- ------------------------------------------------------- ------------ ------------ ------------ ----------- ------------
See accompanying summary of accounting policies and
notes to consolidated financial statements
F-11
Rentech, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash
Year Ended September 30, 2001 2000 1999
- --------------------------------------------------------------------------- ----------- ----------- -----------
Operating activities:
Net loss $(6,770,707) $(4,099,395) $(3,442,661)
Adjustments to reconcile net loss to net cash
used in operating activities:
Increase in allowance for doubtful accounts 2,925 2,400 200
Depreciation 364,818 261,635 149,401
Amortization 618,340 350,352 339,312
Loss on investment 1,842,135 -- --
Write-off of deferred offering costs 123,642 -- --
Interest income (70,814) -- --
Loss on disposal of assets -- 17,031 233,279
Equity in loss of investee 386,047 276,585 --
Minority interest in net loss of subsidiary (21,711) -- --
Common stock issued for services 53,120 53,120 62,500
Stock options and warrants issued for services 185,837 351,998 7,152
Changes in operating assets and liabilities, net of business
combination:
Accounts receivable (919,072) (372,921) (149,950)
Costs and estimated earnings in excess
of billings 203,736 -- --
Other receivables and receivable from related
party 31,361 (105,893) (59,378)
Inventories (101,534) (27,384) 9,092
Prepaid expenses and other current assets (20,749) 131,638 129,638
Accounts payable 459,780 14,190 29,580
Billings in excess of costs and
estimated earnings 37,033 -- --
Accrued liabilities and accrued payroll 378,669 80,702 30,901
Lessee deposits (1,763) -- 9,248
- --------------------------------------------------------------------------- ----------- ----------- -----------
Net cash used in operating activities (3,218,907) (3,065,942) (2,651,686)
- --------------------------------------------------------------------------- ----------- ----------- -----------
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-12
Rentech, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Continued)
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash
Year Ended September 30, 2001 2000 1999
- ----------------------------------------------------------- ----------- ----------- -----------
Investing activities:
Purchase of property and equipment $ (676,379) $ (470,361) $(1,054,646)
Proceeds from disposal of vehicles -- 24,068 13,791
Cash used in purchase of business -- -- (597,812)
Net cash used in purchase of business (59,013) -- --
Purchase of capitalized software -- (851,610) --
Cash used in purchase of investments (372,794) (464,220) (2,072)
Increase in deposits for acquisitions -- (273,899) (477,615)
Increase in deposits and other assets 86,011 (10,617) (58,663)
- ----------------------------------------------------------- ----------- ----------- -----------
Net cash used in investing activities (1,022,175) (2,046,639) (2,177,017)
- ----------------------------------------------------------- ----------- ----------- -----------
Financing activities:
Proceeds from issuance of common stock, net of
offering costs 2,332,005 6,951,913 312,319
Proceeds from issuance of convertible preferred
stock, net of offering costs 793,673 150,000 1,834,844
Deferred offering costs (75,980) (47,662) --
Redemption of convertible preferred stock (2,084) (285,000) --
Proceeds from contract liability 750,000 -- --
Borrowings on long-term debt 444,951 -- --
Payments on long-term debt and notes payable (624,846) (448,037) (66,657)
- ----------------------------------------------------------- ----------- ----------- -----------
Net cash provided by financing activities 3,617,719 6,321,214 2,080,506
- ----------------------------------------------------------- ----------- ----------- -----------
Increase (decrease) in cash (623,363) 1,208,633 (2,748,197)
Cash, beginning of year 1,516,815 308,182 3,056,379
- ----------------------------------------------------------- ----------- ----------- -----------
Cash, end of year $ 893,452 $ 1,516,815 $ 308,182
- ----------------------------------------------------------- ----------- ----------- -----------
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-13
Rentech, Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Basis of Rentech, Inc. (the "Company" or "Rentech") was
Presentation 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
GTL 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. In March 1997
with the acquisition of the assets of Okon, Inc.
("Okon"), the Company entered into the business of
manufacturing and selling water-based stains, sealers
and coatings. In June 1999 with the acquisition of
the assets of Petroleum Mud Logging, Inc. and
Petroleum Well Logging, Inc. ("PML"), the Company
entered into the oil and gas field services business
of logging the progress of drilling operations for
the oil and gas industry. In August 2001 with the
acquisition of 56% of Ren Corporation ("Ren"), the
Company entered into the business of manufacturing
complex microprocessor controlled industrial
automation systems primarily for the fluid power
industry.
Management's Plans From the Company's inception on December 18, 1981
through September 30, 2001, the Company has incurred
losses in the amount of $25,571,028. For the year
ended September 30, 2001, the Company recognized a
$6,770,707 net loss. If the Company does not operate
at a profit in the future, the Company may be unable
to continue its operations at the present level. As
of September 30, 2001, the Company has a cash balance
of $893,452.
The Company has been successful in the past in
raising equity financing. For the years ended
September 30, 2001, 2000 and 1999, the Company
received net cash proceeds from the issuance of
common stock of $2,332,005, $6,951,913 and $312,319.
For the years ended September 30, 2001, 2000 and
1999, the Company has received net cash proceeds from
$793,673, $150,000 and $1,834,844. Subsequent to
fiscal 2001, the Company received net cash proceeds
from the issuance of Series B preferred stock of
$475,000, and the Company received $63,750 in cash
proceeds from the exercise of stock options (See Note
18).
F-14
Rentech, Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
In achieving its objectives as planned for fiscal
2002, the Company may issue additional Series B
convertible preferred stock to existing stockholders.
The Company may issues its common stock in a private
placement to fund any working capital requirements
should the need arise. In addition, the Company is in
negotiations to sell certain assets. As discussed in
Note 18, Sand Creek Energy, LLC, a company for which
Rentech has a 50% interest in, has entered into an
option agreement under which certain equipment and
inventory of the facility could be sold for
$2,000,000. The Company believes that with its
current available cash, revenues from operations, the
additional equity financing and the sale of assets
will be sufficient to meet its cash operating
requirements through September 30, 2002.
Principles of The accompanying consolidated financial statements
Consolidation include the accounts of the Company and its wholly
owned and majority owned subsidiaries. All
significant intercompany accounts and transactions
have been eliminated in consolidation.
Cash The Company considers highly liquid investments
Equivalents purchased with original maturities of three months or
less and money market accounts to be cash
equivalents.
Inventories Inventories consist of raw materials, work-in-process
and finished goods and are valued at the lower of
cost (first-in, first-out) or market.
Capitalized Software The Company has capitalized its internal use software
in accordance with Statement of Position 98-1.
Capitalized software costs include fees paid to
Dresser Engineering Company for software development
in the amount of $851,611, net of accumulated
amortization of $236,429 and $96,081 in capitalized
software costs acquired from the acquisition of Ren
(See Note 1.). The Company has a 5% interest in
Dresser Engineering and Constructors, Inc., which is
the parent company of Dresser Engineering Company
(see Note 5). The capitalized software costs are
being amortized over a three-year period using the
straight-line method.
F-15
Rentech, Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Licensed Licensed technology represent costs incurred by the
Technology 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.
Goodwill Goodwill, which relates to the acquisition of Okon in
1997 and the acquisition of PML in 1999, is being
amortized over a 15-year period using the
straight-line method. Goodwill relating to the
acquisition of Ren Corporation in fiscal 2001 (see
Note 1) is not being amortized in accordance with
Statement of Financial Accounting Standards ("SFAS")
142, Goodwill and Other Intangible Assets.
Production In connection with the acquisition of Ren Corporation
Backlog in fiscal 2001 (see Note 1), the Company acquired
certain production backlog arising from existing
sales contracts. The production backlog is being
amortized over one year, the term of the contracts.
Non-Compete In connection with the acquisition of Ren Corporation
Agreement in fiscal 2001 (see Note 1), the Company entered into
non-compete agreements with certain employees of Ren
Corporation. The non-compete agreements are being
amortized over the term of the non-compete agreements
of five years.
Property, Property and equipment is stated at cost.
Equipment, Depreciation and amortization expense , are computed
Depreciation and using the straight-line method over the estimated
Amorization useful lives of the assets, which range from three to
thirty years, except for leasehold improvements,
which are amortized over the shorter of the useful
life or the remaining lease term. Maintenance and
repairs are expensed as incurred.
Major renewals and improvements are capitalized. When
property and equipment is retired or otherwise
disposed of, the asset and accumulated depreciation
or amortizations are removed from the accounts and
the resulting profit or loss is reflected in
operations.
F-16
Rentech, Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Investment in The Company has a 10% investment in INICA, Inc.
INICA, Inc. (formerly ITN Energy Systems, Inc.). The investment
is stated at cost. The investment is evaluated
periodically and is carried at the lower of cost or
estimated net realizable value.
Investment in The Company has a 5% investment in Dresser Engineers
Dresser & Constructors, Inc. The investment is stated at net
realizable value. The investment is evaluated
periodically and is carried at the lower of cost or
estimated net realizable value. As discussed in Note
5, the Company recognized a $1,842,135 loss on this
investment for fiscal 2001.
Investment in The Company has a 50% investment in Sand Creek, LLC.
Sand Creek The investment is accounted for using the equity
method of accounting. Under such method, the
Company's proportionate share of net income (loss) is
included as a separate item in the statement of
operations.
Technology Technology rights are recorded at cost and are being
Rights amortized on a straight-line method over a 10-year
estimated life.
Deferred Deferred offering costs include professional fees and
Offering Costs other direct costs related to the Company's proposed
private and public offerings. If the offerings are
successful, costs incurred will be offset against
proceeds of the offerings. If the offerings are
unsuccessful, such costs will be expensed. During
fiscal 2001, the Company expensed $123,642 in
deferred offering costs. As of September 30, 2001 and
2000, the Company has no deferred offering costs.
Long-Lived Long-lived assets, identifiable intangibles, and
Assets associated goodwill are reviewed for impairment
whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If
the expected future cash flow from the use of the
asset and its eventual disposition is less than the
carrying amount of the asset, an impairment loss is
recognized and measured using the asset's fair value.
F-17
Rentech, Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Accounting for Fixed Revenues from fixed price contracts are recognized on
Price Contracts the percentage-of-completion method for projects in
which reliable estimates of the degree of completion
are possible. If reliable estimates are not
available, the completed contract method is used. For
contracts accounted for under the
percentage-of-completion method, the amount of
revenue recognized is the percentage of the total
contract price that the cost expended to date bears
to the anticipated final total cost, based upon
current estimates of the cost to complete the
contract. Contract cost includes all labor and
benefits, materials unique to or installed in the
project, subcontract costs and allocations of
indirect costs. General and administrative costs are
charged to expense. Provisions for estimated losses
on uncompleted contracts are provided for when
determined, regardless of the completion percentage.
As contracts can extend over one or more accounting
periods, revisions in costs and earnings estimated
during the course of the work are reflected during
the accounting period in which the facts that require
such revisions become known.
Project managers make significant assumptions
concerning cost estimates for labor hours, consultant
hours and other project costs. Due to the
uncertainties inherent in the estimation process, and
the potential changes in customer needs as projects
progress, it is at least reasonably possible that
completion costs for some uncompleted projects may be
further revised in the near-term and that such
revisions could be material.
F-18
Rentech, Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Revenue Sales of water-based stains sealers and coatings are
Recognition recognized when the goods are shipped to the
customers.
Revenues from oil and gas field services are
recognized at the completion of the service.
Laboratory research revenues are recognized upon
completion of a project.
Revenue from the manufacture of industrial automation
systems is recognized based upon the percentage of
completion method of accounting and per the terms of
customer contracts.
Royalty fees are recognized when the revenue earning
activities that are to be provided by the Company has
been performed and no future obligation to perform
services exist.
Income The Company accounts for income taxes under the
Taxes liability method, which requires an entity to
recognize, deferred tax assets and liabilities.
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 Statement of Financial Accounting Standards No. 128,
Per Common "Earnings Per Share" ("SFAS No. 128") provides for
Share the calculation of "Basic" and "Diluted" earnings per
share. Basic earnings per share includes no dilution
and is computed by dividing income (loss) applicable
to common stock by the weighted average number of
common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution of
securities that could share in the earnings of an
entity, similar to fully diluted earnings per share.
F-19
Rentech, Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
For the years ended September 30, 2001, 2000, and
1999, total stock options of 8,394,300, 7,724,300 and
3,265,700, total stock warrants of 3,992,977,
4,452,671 and 1,163,347 and total Series B
convertible preferred stock of 505,560 and 0 in both
fiscal 2001 and 2000 were not included in the
computation of diluted loss per share because their
effect was anti-dilutive.
Concentrations The Company's financial instruments that are exposed
Credit Risk to concentrations of credit of risk consist primarily
of cash and accounts receivable.
The Company's cash is in demand deposit accounts
placed with federally insured financial institutions.
Such deposit accounts at times may exceed federally
insured limits. The Company has not experienced any
losses on such accounts.
Concentrations of credit risk with respect to
accounts receivable are higher due to a few customers
dispersed across geographic areas. The Company
reviews a customer's credit history before extending
credit and establishes an allowance for doubtful
accounts based upon the credit risk of specific
customers, historical trends and other information.
Generally, the Company does not require collateral
from its customers.
Use of The preparation of financial statements in conformity
Estimates with accounting principles generally accepted in the
United States of America 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.
F-20
Rentech, Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Fair Value of The following methods and assumptions were used to
Financial estimate the fair value of each class of financial
Instruments instruments for which it is practicable to estimate
that value:
Accounts Receivable, Other Current Assets, Accounts
Payable, Accrued Liabilities
and Other Current Liabilities
Fair values of accounts receivables, other current
assets, accounts payable, accrued liabilities and
other current liabilities are assumed to approximate
carrying values for these financial instruments since
they are short term in nature and their carrying
amounts approximate fair value or they are receivable
or payable on demand.
Mortgages and Notes Payable
Substantially all of these mortgages and notes bear
interest at rates of interest, which approximate
current lending rates. These interest rates are
between 5.9% and 9.5%.
Stock Option The Company applies Accounting Principles Board
Plan ("APB") Opinion 25, "Accounting for Stock Issued to
Employees", and related Interpretations in accounting
for all stock option plans. Under APB Opinion 25,
compensation cost is recognized for stock options
issued to employees when the exercise price of the
Company's stock options granted is less than the
market price of the underlying common stock on the
date of grant.
Statement of Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," requires
the Company to provide pro forma information
regarding net loss as if compensation cost for the
Company's stock options plans had been determined in
accordance with the fair value based method
prescribed in SFAS No. 123. To provide the required
pro forma information, the Company estimates the fair
value of each stock option at the grant date by using
the Black-Scholes option-pricing model.
F-21
Rentech, Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
The Company applies Financial Accounting Standards
Board ("FASB") Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation
("FIN 44"). FIN 44 clarifies the application of APB
Opinion 25 for certain issues related to stock issued
to employees.
Comprehensive Comprehensive loss is comprised of net loss and all
Loss changes to the consolidated statement of
stockholders' equity, except those changes made due
to investments by stockholders, changes in paid-in
capital and distributions to stockholders. For the
years ended September 30, 2001, 2000, and 1999, the
Company had no items of comprehensive loss other than
net loss; therefore, a separate statement of
comprehensive loss has not been presented for these
periods.
Recent In June 1998, the FASB issued SFAS No. 133,
Accounting "Accounting for Derivative Instruments and Hedging
Pronouncements Activities", amended by SFAS No. 137 and SFAS No.
138, which requires companies to record derivatives
on the balance sheet as assets or liabilities,
measured at fair market value. Gains or losses
resulting from changes in the values of those
derivatives would be accounted for depending on the
use of the derivative and whether it qualifies for
hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in
fair value or cash flows. The Company adopted SFAS
No. 133, as amended by SFAS No. 137 and 138, as of
October 1, 2000. The adoption of these statements has
had no material impact on the Company's consolidated
financial statements.
In December 1999, the Securities and Exchange
Commission (the "SEC") issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements" which provides additional
guidance in applying generally accepted accounting
principles to revenue recognition in financial
statements. SAB 101 was effective as of the fourth
quarter of fiscal year ended September 30, 2001. The
adoption of this bulletin had no material impact on
the Company's financial statements.
F-22
Rentech, Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
In June 2001, the FASB finalized SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 requires the
use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method
of accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires that
companies recognize acquired intangible assets apart
from goodwill if the acquired intangible assets meet
certain criteria and, upon adoption of SFAS No. 142,
that companies reclassify the carrying amounts of
intangible assets and goodwill based on the criteria
in SFAS No. 141.
SFAS No. 142 requires, among other things, that
companies no longer amortize goodwill, but instead
test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that companies
identify reporting units for the purposes of
assessing potential future impairments of goodwill,
reassess the useful lives of other existing
recognized intangible assets and cease amortization
of intangible assets with an indefinite useful life.
An intangible asset with an indefinite useful life
should be tested for impairment in accordance with
the guidance in SFAS No. 142. This Statement is
effective October 1, 2001 for the Company as the
Company intends to early adopt this statement.
The Company's previous business combinations were
accounted for using the purchase method. As of
September 30, 2001, the net carrying amount of
goodwill is $1,511,368 and other intangible assets is
$2,761,737. Amortization expense during the year
ended September 30, 2001 was $618,340. In accordance
with the provisions of SFAS No. 142, the Company has
not amortized goodwill for the acquisition of Ren
Corporation completed in August 2001 (see Note 1).
The Company has determined that its reportable units
are also its four business segments as discussed at
Note 13. Currently, the Company is assessing but has
not yet determined how the adoption of SFAS No. 141
and SFAS No. 142 will impact its financial position
and results of operations.
F-23
Rentech, Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
In August 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS
No. 143 requires the fair value of a liability for an
asset retirement obligation to be recognized in the
period in which it is incurred if a reasonable
estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143
is effective June 30, 2003 for the Company. The
Company believes the adoption of this statement will
have no material impact on its consolidated financial
statements.
In October 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS 144 requires that those
long-lived assets be measured at the lower of
carrying amount or fair value, less cost to sell,
whether reported in continuing operations or in
discontinued operations. Therefore, discontinued
operations will no longer be measured at net
realizable value or include amounts for operating
losses that have not yet occurred. SFAS 144 is
effective for financial statements issued for fiscal
years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The
Company believes that the adoption of this statement
will have no material impact on its consolidated
financial statements.
Reclassifications Certain reclassifications have been made to the 2000
and 1999 financial statements in order for them to
conform to the 2001 presentation. Such
reclassifications have no impact on the Company's
financial position or results of operations.
F-24
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Business On August 1, 2001, the Company received 7,127 shares
Acquisition of common stock in Ren for a 56% majority interest in
Ren for a total purchase price of $1,414,716. Ren is
in the business of manufacturing complex
microprocesser controlled industrial automation
systems primarily for the fluid power industry. As a
result of the acquisition, Ren is expected to provide
continued support to the strategy of the development
of solidly profitable counter-cyclical non-GTL
businesses. In satisfaction for the 56% interest in
Ren, the Company applied its $573,899 note receivable
plus $116,705 in interest receivable due from Ren to
the purchase, issued 400,000 shares of its common
stock valued at $644,000 to Ren, paid $50,000 to Ren
and incurred $30,112 in acquisition costs.
Originally, the Company issued $644,000 of common
stock as a deposit on the business acquisition. The
Company issued 200,000 shares of common stock to Ren
at a market price of $2 per share during fiscal 2000,
and the Company issued an additional 200,000 shares
of common stock to Ren at a market price of $1.22 per
share during fiscal 2001. As of September 30, 2000,
the Company had recorded a $973,899 deposit for this
acquisition. This deposit consisted of the $400,000
shares of common stock issued to Ren during fiscal
2000 and $573,899 in cash. The $973,899 deposit would
have been repaid by Ren in a form of a note
receivable in the event that the Company did not
complete the acquisition. At the date of the
acquisition, Ren had not satisfied certain
obligations as originally contemplated by the
parties. As a result, the original shareholders of
Ren have agreed to assign to the Company their rights
to an allocation of profits from Ren until an amount
of profits are allocated to the Company equal to
$224,424 plus 6% accrued interest on the outstanding
balance accruing on August 1, 2001. In accordance
with the stock purchase agreement, this amount will
be paid out of future dividends that Ren declares.
F-25
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The acquisition was recorded using the purchase
method of accounting by which the assets were valued
at fair market value at the date of acquisition. The
operating results of the acquisition have been
included in the accompanying consolidated financial
statements from the date of acquisition. The
allocation of the purchase price was as follows:
-----------------------------------------------------
Current assets $ 1,186,894
Property and equipment 378,429
Capitalized software 96,081
Goodwill 504,814
Production backlog 166,117
Non-compete agreement 162,500
Current liabilities (595,543)
Acquired debt (153,234)
Minority interest (331,342)
-----------------------------------------------------
Total purchase price $ 1,414,716
-----------------------------------------------------
The production backlog, non-compete agreement and the
capitalized software have a weighted-average useful
life of approximately 3 years. The $504,814 of
goodwill was assigned to the industrial automation
systems segment. For tax purposes, none of the
goodwill is expected to be tax deductible.
F-26
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following unaudited pro forma information
presents the consolidated results of operations of
the Company as if the acquisition of Ren occurred at
the beginning of fiscal year 2000. The unaudited pro
forma financial data does not purport to be
indicative of the results which actually would have
been obtained had the purchase been effected on the
dates indicated or of the results which may be
obtained in the future.
Years Ended September 30, 2001 2000
----------------------------------------------------------------
Revenues $ 8,978,147 $ 5,904,720
Net loss $(7,084,188) $(4,548,105)
Dividend requirements on preferred
stock $ 483,599 $ 89,611
Loss applicable to common stock $(7,567,787) $(4,637,716)
Basic and diluted loss per common
share from operations $ (.11) $ (.08)
Basis and diluted weighted-average
number of common shares
outstanding adjusted for
acquisition 64,883,332 57,932,816
----------------------------------------------------------------
2. Inventories Inventories consist of the following:
September 30, 2001 2000
-----------------------------------------------------------------
Finished goods $ 86,647 $ 45,549
Work in process 384,563 -
Raw materials 267,028 72,317
-----------------------------------------------------------------
$ 738,238 $ 117,866
-----------------------------------------------------------------
F-27
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. Property and Property and equipment consist of the following:
Equipment
September 30, 2001 2000
--------------------------------------------------------
Land and buildings $1,792,134 $1,507,513
Machinery and equipment 2,317,278 1,423,215
Office furniture and equipment 689,916 441,783
Construction-in-progress 90,961 369,291
Vehicles 113,394 94,009
Leasehold improvements 316,423 314,249
--------------------------------------------------------
5,320,106 4,150,060
Less accumulated depreciation
and amortization 931,330 566,512
--------------------------------------------------------
$4,388,776 $3,583,548
--------------------------------------------------------
4. Investment On May 6, 1998, the Company and INICA, Inc. ("INICA")
in INICA, Inc. agreed to form a venture to design, develop and
manufacture active and passive Radio Frequency
Identification tags (RFID tags), which have a wide
range of applications. This opportunity utilizes
thin-film deposition technology developed by INICA.
On May 29, 1998, the Company acquired a 10% ownership
in INICA for $3,079,107. The Company's 10% ownership
in INICA includes a 10% ownership interest in the 33%
ownership interest of INICA in Global Solar Energy
LLC. The other 67% owner of Global Solar Energy LLC
is Millennium Energy Holdings, Inc. ("Millennium"), a
wholly owned subsidiary of UniSource Energy
Corporation. Global Solar Energy LLC was established
to manufacture and market flexible photovoltaic (PV)
modules. The Company's investment with INICA also
enabled the Company to acquire interests in other
technology ventures with INICA, all of which are
owned by Infinite Power Solutions, Inc. INICA owns
33% of Infinite Power Solutions and Millennium owns
the other 67%.
F-28
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Investment On September 28, 1999, the Company issued 3,680,168
in Dresser shares of its common stock for a 5% ownership in the
common stock of a privately held company called
Dresser Engineers & Constructors, Inc. ("Dresser"),
and incurred $2,072 in acquisition costs. The Company
valued its investment in Dresser based on the
Company's common stock market value of $1,838,012 at
the date of issuance. During March 2000, the Company
paid a deposit of $175,000 plus $2,051 in additional
acquisition costs to increase its ownership
percentage to 10%. On September 28, 2001, the Company
and Dresser reached an agreement under which the
Company would not acquire the additional ownership
interest as the Company would not enter into a
license agreement that was both acceptable to Dresser
and the Company. The Company and Dresser entered into
a $175,000 note receivable along with a personal
guarantee from the owner of Dresser for the repayment
of the deposit. In addition, Dresser agreed to repay
a $16,779 accounts receivable due to the Company. The
Company and Dresser entered into a $16,779 note
receivable along with a personal guarantee from the
owner of Dresser for the repayment of this amount.
The note receivables mature on December 31, 2001 and
accrues interest at 10% per annum.
As of September 30, 2001, the Company determined that
its investment in shares of Dresser was impaired.
Dresser is a privately owned company. The Company has
not been able to obtain adequate information about
Dresser's current business to support the existing
valuation. Based upon this circumstance and our
inability to determine Dresser's liquidity and the
state of its progress on its business plans, the
Company has recognized a $1,842,135 loss on
investment for the year ended September 30, 2001. The
Company continues to own the 580,000 shares of the
common stock of Dresser, which represent this
investment.
6. Investment On January 7, 2000, the Company and Republic
in Sand Creek Financial Corporation ("Republic") through Sand Creek
Energy, LLC (SCE) purchased the "Sand Creek" methanol
facility and all the supporting infrastructure,
buildings and the underlying 17-acre site. The
Company and Republic do not expect to use the Sand
Creek plant for commercial production of liquid
hydrocarbons. Instead, the Company may use it as a
large pilot plant for continuing work with the
Rentech GTL Technology, or we may sell some of the
assets of SCE (See Note 18).
F-29
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The new owner of the facility is SCE, which is 50
percent owned by Rentech Development Corp., a wholly
owned subsidiary of the Company, and 50 percent owned
by RFC-Sand Creek Development, LLC, a wholly-owned
subsidiary of Republic Financial Corporation. In
connection with the acquisition of the facility, SCE
assumed certain commitments with third parties. The
Company and Republic jointly and severally guarantee
the full and punctual performance and payment by SCE
of all SCE's obligations with respect to this
facility. The aggregate liability of the Company
under this guaranty shall not exceed $4,000,000.
For the years ended September 30, 2001 and 2000, the
Company has contributed $372,794 and $287,169 to SCE
and has recognized $386,047 and $276,585 related to
its equity in SCE's losses. As of September 30, 2001
and 2000, the Company had a $69,293 and a $64,246
receivable due from SCE.
F-30
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Long-Term Long-term debt consists of the following:
Debt
September 30, 2001 2000
----------------------------------------------------------------------------------
Mortgage dated February 8, 1999; monthly
principal and interest payments of $7,517
with interest of 8.25% unpaid principal and
accrued interest due March 1, 2029;
collateralized by land and building. $1,064,181 $ 977,014
Promissory notes dated June 1, 1999; monthly
principal and interest payments of $18,590
with interest of 9.75%, unpaid principal and
accrued interest was due July 1, 2001;
collateralized by assets of PML and
guaranteed by the Company. -- 162,108
Mortgages dated August 1, 1997; monthly
principal and interest payments of $988 with
interest of 9.00%, unpaid principal and
accrued interest due August 1, 2001;
collateralized by land and building. -- 62,999
Various promissory notes; monthly principal and
interest payments of $12,638 with interest of
5.9% to 24%, unpaid principal and interest due
from March 2, 1997 to July 1, 2005;
collateralized by certain fixed assets
of the Company. 227,455 31,539
----------------------------------------------------------------------------------
Total long-term debt 1,291,636 1,233,660
Less current maturities 143,863 243,553
------------------------------------------------------------------------------------
Long-term debt, less current maturities $1,147,773 $ 990,107
------------------------------------------------------------------------------------
F-31
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Future maturities of long-term debt as of September
30, 2001 are as follows:
Year Ending September 30,
-----------------------------------------------------
2002 $ 143,863
2003 66,425
2004 41,444
2005 23,380
2006 14,670
Thereafter 1,001,854
-----------------------------------------------------
$ 1,291,636
-----------------------------------------------------
8. Stockholders' Stockholder Rights Plan
Equity
On October 28, 1998, the Company announced the
adoption of a Stockholder Rights Plan, intended to
protect from unfair or coercive takeover attempts.
The Rights become exercisable only if a tender offer
is made. The grant of the rights was made to
stockholders of records on November 10, 1999.
Preferred Stock
During fiscal 1998, the Company amended its articles
of incorporation authorizing the issuance of 200,000
shares of Series A Convertible Preferred Stock and
800,000 shares of Series B Convertible Preferred
Stock.
During fiscal 1999, the Company amended its articles
of incorporation authorizing the issuance of 500,000
shares of Series 1998-C Participating Cumulative
Preferred Stock ("Series C Preferred Stock"). The
holders of the Series C Preferred Stock are entitled
to dividends in the event that the Company declares a
dividend or distribution on the common stock. The
holders of Series C Preferred Stock are entitled to
vote on all matters submitted to a vote of the
stockholders of the Company. Whenever dividends on
the Series C Preferred Stock are in arrears for six
quarterly dividends, the holders of such stock
(voting as a class) have the right to elect two
directors of the Company until all cumulative
dividends have been paid in full.
F-32
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
During fiscal 1998, the Company issued 200,000 shares
of convertible Series A Preferred Stock at $10.00 per
share together with warrants to purchase 200,000
shares of Series B Preferred stock and, at the option
of the Company, up to an additional 600,000 shares of
Series B Preferred Stock at $10.00 per share. The
warrants issued to the Series A Preferred
stockholders were deemed to be nominal in value. The
Company received $2,000,000 in cash before offering
costs of $336,083. The Series A Preferred Stock pays
a dividend of 9% per year and is convertible over 18
months into common stock at the lesser of the average
closing bid price of the common stock for the five
trading days preceding the purchase of the preferred
shares; average closing bid price of the common stock
for the five days preceding the date of the final
sale of the preferred shares by the Company; or at
82.5% of the average closing bid for the five trading
days preceding the conversion of the Series A
Preferred Stock into common stock. During fiscal
1999, certain holders of the Series A Preferred Stock
converted their remaining 50,000 shares plus $55,761
in accrued dividends into 782,617 common shares of
the Company.
The warrants provide for the purchasers of the Series
A Preferred Stock, during the 18 months after
purchase of the Series A Preferred Stock, to purchase
200,000 shares of the Series B Preferred Stock at $10
per share and provide the Company during the same
period the option to sell to the purchasers an
additional 600,000 shares of the Series B Preferred
Stock at $10.00 per share. The Company has no
obligation to sell any of the 600,000 shares of the
Series B Preferred Stock to the purchasers. The
Company does not have to sell any of the 800,000
shares of the Series B Preferred Stock to the
purchasers if certain conditions occur, primarily
related to volume and the price of the common stock
in the market. The Company has no obligation to sell
any of the 800,000 shares of the Series B Preferred
Stock if the average daily share price for the common
stock for the 10 trading days prior to the sale is
less than $1.00 per share. The Series B Preferred
Stock pays a dividend of 9% per year and is
convertible into common stock at 82.5% of the average
closing bid for the five trading days preceding the
date of conversion.
F-33
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
During fiscal 1999, the Company issued 208,332 shares
of Series B Preferred Stock for $2,083,320 in cash
before offering costs of $248,476. The Company
recorded a deemed dividend of $440,033 when it issued
the Series B Preferred Stock. During fiscal 1999,
certain holders of the Series B Preferred Stock
converted 182,500 of their shares plus $33,063 in
accrued dividends into 3,444,560 common shares of the
Company.
During fiscal 2000, the Company issued 16,666 shares
of its Series B Preferred Stock for $166,660 in cash
before offering costs of $16,660. The Company
recorded a deemed dividend of $20,200 when it issued
the Series B Preferred Stock. During fiscal 2000,
certain holders of the Series B Preferred Stock
converted 126,166 of their shares plus $60,154 in
dividends, of which $37,423 were accrued as of
September 30, 1999, into 2,338,620 common shares of
the Company.
During fiscal 2001, the Company issued 116,666 shares
of its Series B Preferred Stock for $1,166,668 in
cash before offering costs of $122,995. The Company
recorded a deemed dividend of $483,599 when it issued
the Series B Preferred Stock. During fiscal 2001,
certain holders of the Series B Preferred Stock
converted 88,888 of their shares plus $33 in
dividends into 1,123,376 common shares of the
Company.
As of September 30, 2001, the 200,000 warrants to
purchase Series B Preferred Stock issued in
conjunction with the Series A Preferred Stock had all
been exercised in accordance with the warrant. Of the
additional 600,000 warrants available to the Company,
441,664 had been exercised as of September 30, 2001,
leaving 158,336 warrants available for issuance at
the option of the Company.
The Series B Preferred Stock were not redeemable
prior to September 30, 1999. Thereafter, the Company
under the sole authority of its board of directors
may elect to redeem the Series B Preferred Stock, in
whole or in part, for cash equal to $11.50 per share
plus any accumulated and unpaid dividends. During
fiscal 2000, the Company paid $285,000 in cash in
order to redeem 23,832 shares of its Series B
Preferred Stock and $46,680 in dividends.
F-34
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Common Stock
During fiscal 1999, the Company issued 940,110 shares
of its common stock upon exercise of 120,500 in stock
options and 819,610 in stock warrants for cash
proceeds of $262,319.
During fiscal 1999, the Company issued 100,000 shares
of its common stock with a market value of $50,000 as
partial consideration to acquire the net assets of
PML.
During fiscal 1999, the Company recorded the issuance
of 150,000 of its common stock for cash proceeds of
$50,000 in recognition of settlement of a legal
action in favor of the Company pertaining to a
misrepresentation of services during 1996, in which a
consultant did not perform the agreed upon services.
During fiscal 1999, the Company issued 100,000 shares
of its common stock with a market value of $62,500 in
payment for director's fees.
On October 12, 1999, the Company began offering for
sale its common stock in a private placement
memorandum for the purpose of raising $7,500,000.
First Union Securities was the placement agent for
this offering. The Company offered for sale Units
consisting of four shares of its $.01 par value
common stock and one redeemable stock purchase
warrant for the purchase of one share of common
stock. The purchase price was $2.40 per Unit. The
warrants entitle investors to purchase one share of
the Company's common stock at an exercise price of
$1.20 for a period of five years from the date of
this memorandum. The warrants may be redeemed for
$.05 per warrant by the Company at any time prior to
their expiration date upon written notice 30 days in
advance to the holders of the warrants if the market
price of the common stock exceeds 120% of the
exercise price of the warrants for a period of 20
consecutive trading days prior to a call for
redemption by the Company, and if the holders do not
exercise their warrant during the 30-day period. The
holders of shares of common stock, the additional
shares of common stock to be issued upon exercise of
the warrants and any over-allotment shares were
entitled to piggyback registration rights and the
provisions of the Company's Stockholder Rights Plan.
F-35
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company completed its private placement under
this memorandum on January 17, 2000. The Company
issued 4,136,667 shares of its common stock for
$2,482,000 before offering costs of $328,049.
On March 18, 2000, the Company sold 1,000,000 shares
of its common stock to Anschutz Investment Company
and 1,000,000 additional shares of common stock to
Forest Oil Corporation at a price of $.60 per share.
In addition, Anschutz Investment and Forest Oil
separately purchased options to acquire an additional
3,000,000 shares each, 2,000,000 shares at $1.25 per
share exercisable until December 31, 2001, and
1,000,000 shares at $5.00 exercisable until December
31, 2004. The Company received $1,300,000 in cash
proceeds from the issuance of common stock and
options. Additionally, on March 29, 2000 Anschutz
Investment and Forest Oil each received 44,650 in
additional options pursuant to an anti-dilution
clause included in the option agreement.
The Company and Forest Oil also signed a memorandum
of understanding that entitles Forest Oil to obtain
one or more licenses to use the Company's GTL
technology. The Company and Forest Oil are evaluating
several potential opportunities for use of the
technology at sites of Forest Oil's natural gas
reserves as well as at existing industrial gas
plants.
On March 29, 2000, the Company sold 2,291,667 shares
of its common stock to Azure Energy Fund with
warrants to purchase 2,291,667 more shares of common
stock. The sales price was $2,750,000 before offering
costs of $275,000. The warrants are exercisable at a
price of $2.64 per share until March 29, 2003.
During fiscal 2000, the Company issued 2,324,527
shares of its common stock upon the exercise of
2,252,700 in stock options and 71,827 in stock
warrants for cash proceeds of $1,022,962.
During fiscal 2000, the Company issued 200,000 shares
of its common stock with a market value of $400,000
as a part of a deposit, which was used to acquire a
majority interest in Ren (see Note 1).
F-36
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
During fiscal 2000, the Company issued 200,000 shares
of its common stock with a market value of $106,240
in payment for director's fees for the fiscal years
of 2000 and 2001. For the years ended September 30,
2001 and 2000, the Company has charged $53,120 in
both years to expense.
During fiscal 2000, the Company issued 60,000 shares
of its common stock with a market value of $30,000 as
a commission on the acquisition of PML in 1999.
During fiscal 2001, the Company issued 2,000,000
shares of its common stock for cash proceeds of
$1,900,000, net of $103,995 in offering costs.
During fiscal 2001, the Company issued 518,027 shares
of its common stock upon the exercise of 100,000 in
stock options and 418,027 in stock warrants for cash
proceeds of $536,000.
During fiscal 2001, the Company issued 200,000 shares
of its common stock with a market value of $244,000
as a part of a deposit, which was used to acquire a
majority interest in REN (see Note 1).
Stock Options and Stock Warrants
At September 30, 2001, the Company has five stock
option plans, which are described below.
The Company's board of directors adopted the 1990
Stock Option Plan which allows for the issuance of
incentive stock options, within the meaning of the
Internal Revenue Code, and other options issued
pursuant to the plan that constitute nonstatutory
options. Options granted under the 1990 Stock Option
Plan are for shares of the Company's $0.01 par value
common stock. The Company has reserved 742,280 shares
for the 1990 Stock Option Plan and the 1988 Stock
Option Plan, which has been rolled into the 1990
plan. At September 30, 2001 and 2000, 570,000 stock
options were outstanding under this plan.
F-37
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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. The Company has
reserved 300,000 shares of the Company's $0.01 par
value common stock for issuance under the plan. At
September 30, 2001 and 2000, 180,000 stock options
were outstanding under this plan.
During 1996, the Company's board of directors adopted
the 1996 Stock Option Plan which allows the issuance
of incentive stock options, within the meaning of the
Internal Revenue Code, and other options pursuant to
the plan that constitute nonstatutory options. The
Company has reserved 500,000 shares of the Company's
$0.01 par value common stock for issuance under the
plan. At September 30, 2001 and 2000, 340,000 stock
options were outstanding under this plan.
During 1998, the Company's board of directors adopted
the 1998 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. At September 30, 2001 and 2000, 448,000 and
348,000 stock options were outstanding under this
plan.
During 2001, the Company's board of directors adopted
the 2001 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. At September 30, 2001, 320,000 stock options
were outstanding under this plan.
F-38
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In March 1999, warrants to purchase 750,000 shares
were issued as partial consideration for public
relations services to be provided to the Company. The
warrants can be exercised at $1.00 per share through
March 20, 2002. The Company recorded the $81,143 fair
value of the warrants to public relations expense.
In July 1999, the Company issued options to purchase
25,000 of the Company's $.01 par value common shares
in connection with consulting services. These options
may be exercised at $.625 per share through July 11,
2004. The Company recorded the $7,152 fair value of
the options to consulting expense.
During February 2000, the Company entered into a
consulting agreement with DSN Enterprises Ltd.
("DSN") under which options to purchase 480,000 of
the Company's $.01 par value common shares were
granted. These options may be exercised between $.575
and $.90 per share through October 9, 2002. The
Company recorded the $351,998 fair value of the
options to consulting expense in fiscal 2000, and the
$114,828 fair value of the options to consulting
expense in fiscal 2001.
During fiscal 2001, the Company issued options to
purchase 55,000 of the Company's $.01 par value
common shares in connection with consulting services.
These options may be exercised between $1.05 and
$1.0625 per share through May 16, 2006. The Company
recorded the $42,446 fair value of the options to
consulting expense.
F-39
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following tables summarizes information on stock
option and warrant activity:
Options Warrants
-------------------------------------------------
Shares Weighted Shares Weighted
Average Average
Exercise Exercise
Price Price
---------------------------------------------------------------------------------
Outstanding, October 1, 1998 3,106,200 $ .27 2,336,007 $ .43
Granted 280,000 .63 750,000 1.00
Exercised (120,500) .23 (819,610) .28
Cancelled -- -- (1,103,050) .29
---------------------------------------------------------------------------------
Outstanding, September 30, 1999 3,265,700 .31 1,163,347 1.04
Granted 6,711,300 2.36 3,572,200 2.07
Exercised (2,252,700) .45 (71,827) .26
Cancelled -- -- (211,049) .96
---------------------------------------------------------------------------------
Outstanding, September 30, 2000 7,724,300 2.05 4,452,671 1.90
Granted 770,000 1.05 -- --
Exercised (100,000) .80 (418,027) 1.09
Cancelled -- -- (41,667) 1.20
---------------------------------------------------------------------------------
Outstanding, September 30, 2001 8,394,300 $ 1.97 3,992,977 $ 2.00
---------------------------------------------------------------------------------
Exercisable, September 30, 2001 8,343,300 $ 1.97 3,992,977 $ 2.00
Exercisable, September 30, 2000 7,652,300 $ 2.03 4,452,671 $ 1.90
Exercisable, September 30, 1999 3,265,700 $ .31 1,163,347 $ 1.04
F-40
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Options Warrants
-----------------------------------------------------
Weighted average fair value of
options and warrants granted
during 2001 $ .86 $ --
Weighted average fair value of
options and warrants granted
during 2000 $ 1.68 $ 1.49
Weighted average fair value of
options and warrants granted
during 1999 $ .52 $ .11
-----------------------------------------------------
The Company applies APB Opinion 25, "Accounting for
Stock Issued to Employees," and related
Interpretations in accounting for the plans. Under
APB Opinion 25, when the exercise price of the
Company's employee stock options is less than the
market price of the underlying stock on the date of
grant, compensation cost is recognized.
FASB Statement 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), requires the Company
to provide pro forma information regarding net loss
and net loss per share as if compensation costs for
the Company's stock option plans and other stock
awards had been determined in accordance with the
fair value based method prescribed in SFAS No. 123.
The Company estimates the fair value of each stock
award at the grant date by using the Black-Scholes
option-pricing model with the following
weighted-average assumptions used for grants in 2001,
2000 and 1999, respectively; dividend yield of 0
percent for all years; expected volatility of 90 to
154 percent in 2001, 90 to 99 percent in 2000, and 39
to 43 percent in 1999; risk-free interest rates of
4.72 to 6.61 percent in 2001, 5.62 to 6.71 percent in
2000, and 5.16 to 5.62 percent in 1999; and expected
lives of 1.63 to 5 years in 2001, 1.79 to 5 years in
2000, and 3 to 5 years in 1999 for the Plans and
stock awards.
F-41
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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:
Year Ended September 30, 2001 2000 1999
------------------------------------------------------------------------------------
Loss applicable to common stock:
As reported $ (7,254,306) $ (4,189,006) $ (3,974,593)
Pro forma $ (7,735,772) $ (4,275,273) $ (4,112,355)
Loss per common share:
As reported $ (.11) $ (.07) $ (.09)
Pro forma $ (.12) $ (.07) $ (.09)
------------------------------------------------------------------------------------
F-42
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following information summarizes stock options
outstanding and exercisable at September 30, 2001:
Outstanding Exercisable
----------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life in Exercise Number Exercise
Prices Outstanding Years Price Exercisable Price
--------------------------------------------------------------------------
$.19-$.25 602,000 .38 $ .21 602,000 $ .21
$.30 466,000 .97 .30 466,000 .30
$.63-$.90 795,000 2.04 .71 795,000 .71
$1.05-$1.09 670,000 4.46 1.07 670,000 1.07
$1.25-$1.78 3,789,534 .30 1.26 3,759,534 1.25
$1.93 42,000 3.65 1.93 21,000 1.93
$5.00 2,029,766 1.25 5.00 2,029,766 5.00
--------------------------------------------------------------------------
$.19-$5.00 8,394,300 1.08 $ 1.97 8,343,300 $ 1.97
----------------------------------------------------------------------------
F-43
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following information summarizes stock warrants
outstanding and exercisable at September 30, 2001:
Outstanding Exercisable
----------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life in Exercise Number Exercise
Prices Outstanding Years Price Exercisable Price
--------------------------------------------------------------------------
$.30 104,944 .43 $ .30 104,944 $ 0.30
$.66 71,366 3.29 .66 71,366 0.66
$1.00-$1.25 1,375,000 .37 1.16 1,375,000 1.16
$1.64-$2.64 2,441,667 1.51 2.58 2,441,667 2.58
--------------------------------------------------------------------------
$.30-$2.64 3,992,977 1.12 $ 2.00 3,992,977 $ 2.00
--------------------------------------------------------------------------
F-44
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. Commitments Employment Agreements
and Contingencies
The Company has entered into various employment
agreements with four of its officers that extend from
January 1, 2002 to March 31, 2002. In the event that
the Company terminates an officer's employment for
any other reason other than for cause, the Company
shall pay the officer his compensation for the
remainder of the term or one year which ever is more.
In addition, the Company has employment agreements
with three other officers with expiration dates from
March 31, 2002 through August 31, 2004. These three
employment agreements with the other officers provide
for various settlements upon terminate of employment.
One employment agreement indicates that no additional
obligation exists upon termination of employment
unless it is related to the event of death, then the
Company shall continue to pay the employee's estate
the employee's salary for the remainder of the term.
The second employment agreement indicates that in the
event that the Company terminates the officer's
employment for any other reason other than for cause,
the Company shall pay the officer his compensation
for the remainder of the term. The third employment
agreement indicates that if the officer's employment
with the Company terminates for any reason, the
officer will receive twelve months of compensation in
addition to any accrued vacation. The employment
agreements set forth annual compensation to the eight
officers of between $52,000 and $190,000 each.
Compensation is adjusted annually based on the cost
of living index.
Retirement Plans
During 1990, the Company adopted a non-qualified
profit sharing plan for the benefit of all employees.
The profit sharing plan was administered by a
committee appointed by the Company's board of
directors. The profit sharing plan allowed for
current year bonuses of up to five percent of audited
pre-tax earnings before depreciation, amortization
and extraordinary income, if adjusted earnings for
the preceding year exceeds $500,000. No distributions
have been granted since the inception of the plan. In
March 2001, the board of directors terminated this
plan.
F-45
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On January 1, 1998, the Company established a 401(k)
plan. Employees who are at least 21 years of age are
eligible to participate in the plan and share in the
employer matching contribution. The employer is
currently matching 75% of the first 6% of the
participant's salary deferrals. All participants who
have completed 1,000 hours of service and who are
employed on the last day of the plan year are
eligible to share in the non-matching employer
contributions. Employer matching and non-matching
contributions vest immediately in years in which the
plan is not top heavy. During years in which the plan
is top heavy, employer matching and non-matching
contributions vest 100% after three years of service.
The Company contributed $120,238, $26,421 and $35,265
to the plan for the years ended September 30, 2001,
2000, and 1999.
Operating Leases
The Company leases office space under a
noncancellable operating lease, which expires October
31, 2003, with a renewal option for an additional
five years. The Company also leases office and
warehouse space for its Okon operation, under a
lease, which expires during March 2005. The Company
also has various operating leases, which expire
through August 2004.
Future minimum lease payments as of September 30,
2001 are as follows:
Year Ending September 30,
-----------------------------------------------------
2002 $ 253,600
2003 226,900
2004 104,500
2005 40,000
-----------------------------------------------------
Total $ 625,000
-----------------------------------------------------
F-46
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Total lease expense for the years ended September 30,
2001, 2000, and 1999 was approximately $267,000,
$259,000, and $156,000.
The Company leases a portion of its building located
in Denver, Colorado, to a third party. The Company
accounts for this lease as an operating lease. The
lease expires on April 30, 2003. The future minimum
lease payment receivable under this non-cancelable
leasing arrangement as of September 30, 2001 is as
follows:
Year Ending September 30,
-----------------------------------------------------
2002 $ 86,000
2003 51,000
-----------------------------------------------------
Total $ 137,000
-----------------------------------------------------
Litigation
The Company's subsidiary, Ren, is involved in a
lawsuit with a customer. In the opinion of management
the outcome of that lawsuit will not materially
affect the financial position, results of operations,
or cash flows of the Company.
F-47
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. Costs and The costs and estimated earnings relating to
Estimated uncompleted contracts are summarized as follows:
Earnings on
Uncompleted September 30, 2001
Contracts -----------------------------------------------------
Costs incurred on uncompleted
contracts $ 484,065
Estimated earnings 164,488
-----------------------------------------------------
Total costs incurred and
estimated earnings 648,553
Less billings to date 706,463
-----------------------------------------------------
$ (57,910)
----------------------------------------------------
Included in the accompanying balance sheet as of
September 30, 2001 under the following captions:
September 30, 2001
-----------------------------------------------------
Costs and estimated earnings $ 73,020
in excess of billings on
uncompleted contracts
Billings in excess of costs and
estimated earnings on
uncompleted contracts (130,930)
-----------------------------------------------------
$ (57,910)
-----------------------------------------------------
There were no amounts included in accounts receivable
at September 30, 2001 for amounts billed but not
collected in accordance with retainage provisions of
contracts.
F-48
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. Income There was no provision for income taxes required for
Taxes the years ended September 30, 2001, 2000, and 1999
due to operating losses in those years. At September
30, 2001, the Company had available net operating
loss carry forwards of approximately $20,280,000 for
tax reporting purposes. The operating loss carry
forwards expire through 2021. These carry forwards
are subject to various limitations imposed by the
rules and regulations of the Internal Revenue
Service.
There were no tax benefits 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 carry forwards. 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, 2001 and 2000. The tax
effect on the components is as follows:
September 30, 2001 2000
-----------------------------------------------------------------
Net operating loss carry forwards $ 7,613,000 $ 5,866,000
Capital loss carry forwards -- 57,000
Acruals for financial statement
purposes not allowed for income
taxes - cash basis 201,000 11,000
Basis difference in investment
in dresser 691,000 --
Basis difference in capitalized
software (267,000) --
Basis difference in other intangible
assets 163,000 --
Basis difference relating to
licensed technology 444,000 396,000
Basis difference in property and
equipment (218,000) (115,000)
Basis difference in other assets 3,000 (28,000)
Basis difference in goodwill 213,000 18,000
Basis difference in technology
rights 16,000 11,000
Basis difference relating to
Synhytech plant held for sale 75,000 75,000
Basis difference in other accruals -- 9,000
Basis difference in investment in
Sand Creek 84,000 31,000
-----------------------------------------------------------------
9,018,000 6,331,000
Valuation allowance (9,018,000) (6,331,000)
------------------------------------------------------------------
$ -- $ --
------------------------------------------------------------------
F-49
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A reconciliation of the income taxes at the federal
statutory rate to the effective tax rate is as
follows:
Year Ended September 30, 2001 2000 1999
------------------------------------------------------------------------------
Federal income tax benefit
computed at the Federal
statutory rate $(2,281,000) $(1,394,000) $(1,171,000)
State income tax benefit net of
Federal benefit (235,000) (143,000) (59,000)
Purchase price adjustment
not effecting net loss (359,000) -- --
Other - permanent differences 188,000 83,000 10,000
Change in valuation allowance 2,687,000 1,454,000 1,220,000
-----------
Income tax benefit $ -- $ -- $ --
------------------------------------------------------------------------------
12. Supplemental Year Ended September 30, 2001 2000 1999
Data to ------------------------------------------------------------------------------
Statements of
Cash Flows Cash payments for interest $ 107,628 $ 136,833 $ 75,934
------------------------------------------------------------------------------
F-50
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following tables summarize the purchase price and
the cash used as well as the non-cash activity to
acquire the 56% interest in Ren (see Note 1).
Working capital other than cash acquired $ 591,351
Property and equipment 378,429
Capitalized software 96,081
Goodwill 504,814
Production backlog 166,117
Non-compete agreement 162,500
Acquired debt (153,234)
Minority interest (331,342)
-----------------------------------------------------
Total purchase price 1,414,716
Less cash acquired (21,099)
-----------------------------------------------------
Total purchase price net of cash acquired $1,393,617
-----------------------------------------------------
The Company incurred the following in satisfaction of
the $1,414,716 purchase price:
Issued 200,000 shares of its common
stock in fiscal 2000 at a
market price of $2 per share
for a deposit on business
acquisition $ 400,000
Issued 200,000 shares of its common
stock in fiscal 2001 at a
market price of $1.22 per share
for a deposit on business
acquisition 244,000
Converted notes receivable and interest
receivable due from Ren 690,604
Paid cash 50,000
Incurred acquisition costs 30,112
----------
Total purchase price $1,414,716
----------
F-51
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Excluded from the statements of cash flows for the
years ended September 30, 2001, 2000, and 1999 were
the effects of certain noncash investing and
financing activities as follows:
Year Ended September 30, 2001 2000 1999
-----------------------------------------------------------------------
Issuance of common stock from
conversion of preferred
stock and dividends $ 888,888 $1,261,660 $2,359,345
Issuance of common stock for
deposit on potential
business acquisition $ 244,000 $ 400,000 $ --
Purchase of fixed assets
financed with long-term debt $ 115,237 $ -- $ --
Issuance of convertible
preferred stock for stock
subscription receivable $ 250,000 $ -- $ --
Decrease in other receivables in
consideration of a note
receivable $ 16,779 $ -- $ --
Decrease in deposit for an
additional investment in
Dresser in consideration of
a note receivable $ 175,000 $ -- $ --
Decrease in interest receivable
on the note receivable due
from Ren in consideration
for the business acquisition
of Ren $ 45,891 $ -- $ --
F-52
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Year Ended September 30, 2001 2000 1999
--------------------------------------------------------------------------
Issuance of common stock for
unearned compensation $ -- $ 49,829 $ --
Issuance of common stock for
prepaid expense and services $ -- $ 53,120 $ 62,500
Issuance of common stock for
Investment in Dresser $ -- $ -- $1,838,012
Issuance of common stock for
acquisition of business $ -- $ 30,000 $ 50,000
Issuance of stock warrants for
prepaid expenses $ -- $ -- $ 81,143
Issuance of stock options for
services $ -- $ 351,998 $ 7,152
Increase in accrued dividends $ -- $ -- $ 3,075
Purchase of land and building
financed with mortgage
payable $ -- $ -- $ 989,100
Long-term debt issued in
connection with the business
acquisition $ -- $ -- $ 605,000
Long-term debt issued in
connection with the business
acquisition $ -- $ -- $ 154,250
--------------------------------------------------------------------------
F-53
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. Segment The Company operates in four business segments as
Information follows:
o Alternative fuels - The Company
develops and markets processes for
conversion of low-value,
carbon-bearing solids or gases into
valuable liquid hydrocarbons.
o Paints - The Company manufactures
and distributes water-based stains,
sealers and coatings.
o Oil and gas field services - The
Company is in the business of
logging the progress of drilling
operations for the oil and gas
industry.
o Industrial automation systems - The
Company is in the business of
manufacturing complex
microprocessor controlled
industrial automation systems
primarily for the fluid power
industry.
The Company's reportable operating segments have been
determined in accordance with the Company's internal
management structure, which is organized based on
operating activities. The accounting policies of the
operating segments are the same as those described in
the summary of accounting policies. The Company
evaluates performance based upon several factors, of
which the primary financial measure is
segment-operating income.
F-54
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
September 30, 2001 2000 1999
--------------------------------------------------------------------------------------------
Revenues:
Alternative fuels $ 2,574,431 $ 1,139,059 $ 624,624
Paints 2,367,689 2,096,159 1,960,764
Oil and gas field services 3,031,139 1,831,389 295,512
Industrial automation systems 193,317 -- --
--------------------------------------------------------------------------------------------
$ 8,166,576 $ 5,066,607 $ 2,880,900
--------------------------------------------------------------------------------------------
Operating income (loss):
Alternative fuels $(4,940,020) $(4,047,295) $(3,556,908)
Paints 66,387 232,685 195,018
Oil and gas field services 378,036 10,221 (80,502)
Industrial automation systems (81,982) -- --
--------------------------------------------------------------------------------------------
$(4,577,579) $(3,804,389) $(3,442,392)
--------------------------------------------------------------------------------------------
Depreciation and amortization:
Alternative fuels $ 710,366 $ 390,827 $ 348,002
Paints 115,309 108,151 105,594
Oil and gas field services 122,322 113,009 35,117
Industrial automation systems 35,161 -- --
--------------------------------------------------------------------------------------------
$ 983,158 $ 611,987 $ 488,713
--------------------------------------------------------------------------------------------
Equity in net loss of investees-
Alternative fuels $ 386,047 $ 276,585 $ --
--------------------------------------------------------------------------------------------
Expenditures for additions of long-lived assets:
Alternative fuels $ 355,016 $ 1,158,997 $ 2,031,828
Paints 18,291 46,603 9,481
Oil and gas field services 404,167 146,371 1,385,185
Industrial automation systems 1,322,083 -- --
--------------------------------------------------------------------------------------------
$ 2,099,557 $ 1,351,971 $ 3,426,494
--------------------------------------------------------------------------------------------
F-55
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
September 30, 2001 2000 1999
------------------------------------------------------------------------------------
Investment in equity method investees-
Alternative fuels $ (2,669) $ 10,584 $ --
------------------------------------------------------------------------------------
Total assets:
Alternative fuels $ 9,828,467 $ 13,328,647 $ 10,232,431
Paints 1,518,186 1,474,744 1,489,599
Oil and gas field services 2,267,524 1,659,201 1,487,951
Industrial automation systems 2,501,278 -- --
------------------------------------------------------------------------------------
$ 16,115,455 $ 16,462,592 $ 13,209,981
------------------------------------------------------------------------------------
14. Significant As of September 30, 2001, two customers accounted for
Customers 19% and 15% of total accounts receivable and for the
year ended September 30, 2001, three customers
accounted for 21%, 13% and 12% of total revenues. As
of September 30, 2000, two customers accounted for
31% and 15% of total accounts receivable and for the
year ended September 30, 2000, three customers
accounted for 20%, 17% and 16% of total revenues. As
of September 30, 1999, two customers accounted for
26% and 12% of accounts receivable and for the year
ended September 30, 1999, three customers accounted
for 29%, 19% and 17% of total revenues.
F-56
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. Valuation and Balance at Deductions
Qualifying Beginning of Charged to and Write- Balance at End
Accounts Period Expense Offs of Period
--------------------------------------------------------------------------------------------------
Year Ended September 30, 2001
Allowance for doubtful accounts $ 171,606 2,925 (167,206) $ 7,325
Deferred tax valuation account $6,331,000 2,687,000 -- $9,018,000
Year Ended September 30, 2000
Allowance for doubtful accounts $ 169,206 2,400 -- $ 171,606
Deferred tax valuation account $4,877,000 1,454,000 -- $6,331,000
Year Ended September 30, 1999
Allowance for doubtful accounts $ 169,006 3,016 (2,816) $ 169,006
Deferred tax valuation account $3,657,000 1,220,000 -- $4,877,000
--------------------------------------------------------------------------------------------------
16. Contract On January 18, 2001, the Company was granted a
Liability services contract by the Wyoming Business Council,
Energy Section, Investment Ready Communities Division
("WBC"). Under the contract, Rentech will receive
$800,000 to finance a Gas-to-Liquids ("GTL")
feasibility study within the State. The WBC funding
will be used to evaluate two potential GTL projects
utilizing Rentech's patented and proprietary
Fischer-Tropsch Gas-to-Liquids technology. Phase I
involves studying the feasibility of retrofitting a
portion of an existing methanol facility in Wyoming.
Phase II entails the study of the feasibility of
constructing a separate greenfield plant at the same
site. Rentech estimates that it will take
approximately six to nine months to complete the
study. If the Company determines that it is not
feasible to proceed with the conversation of the
facility, the Company will repay the grant at the
rate of 120% of the original $800,000 for a total of
$960,000 over a period of time not to exceed six
years. The repayment will be from a 5% share of
royalties from the conversion of methanol facilities
to Rentech GTL technology worldwide any time in the
future. If the Company chooses to proceed with the
conversation and/or purchase of the methanol facility
in Wyoming, the Company will repay WBC the $800,000
at financing for conversion of the facility. In
addition, the Company will provide to WBC a royalty
of $.15/barrel of Rentech Fisher Tropsch liquid
produced from the facility after conversion is
complete using the Rentech GTL technology. The
royalty will be paid for the first four years of
F-57
Rentech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
commercial operation of the facility. On February 9,
2001, the Company received the first $750,000 payment
as per the terms of the contract. The payment is
recorded as a current contract liability. For the
year ended September 30, 2001, the Company incurred
$560,608 in research and development costs under this
contract. These costs are reflected in cost of sales
on the consolidated statement of operations.
17. Related Party For the year ended September 30, 2001, the Company
Transactions incurred $26,995 in consulting services, which were
paid to a director of the Company.
As of September 30, 2001, the Company owes an officer
of the Company $30,600. This payable does not bear
interest and is due upon demand.
18. Subsequent On October 23, 2001, the Company received approval
Events for a $1,000,000 line of credit with Premier Bank for
use to fund the Caterpillar, Inc. sales orders of Ren
Corporation. The line of credit bears interest at the
Wall Street Journal prime rate plus 1.5% and
repayments of principal are tied to the receipt of
accounts receivable from Caterpillar, Inc. The line
of credit will be collateralized by $500,000 of cash
to be held on deposit with the bank.
During October and November 2001, the Company issued
50,000 shares of its Series B Preferred Stock for
$500,000 in cash before offering costs of $25,000.
The Company recorded a deemed dividend of $136,932
when it issued the Series B Preferred Stock.
During October and November 2001, certain holders of
the Series B Preferred Stock converted 77,778 of
their shares plus dividends into 1,591,593 common
shares of the Company.
During December 2001, the Company issued 340,000
shares of its common stock upon exercise of stock
options for cash proceeds of $63,750.
On November 9, 2001, SCE entered into an option
agreement under which certain equipment and systems
of the facility would be sold for $2,000,000. SCE
received $10,000 in consideration of the option,
which expires in May 2002, and can be extended to
November 2002. If the right to purchase is exercised,
the Company would retain the site, with its railroad
spur, buildings and other facilities. In the event of
a sale of the plant, the Company presently expect to
sell or lease all or part of the site and the
remaining facilities.
F-58