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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, 2002
[ ] 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 of Incorporation) (I.R.S. Employer Identification No.)
1331 17th Street, Suite 720
Denver, Colorado 80202
(Address of principal executive offices)
Telephone number: (303) 298-8008
Securities registered pursuant to Section 12(b) of the Act:
Title of Class: Name of Exchange on Which Registered:
Common stock, $0.01 par value The American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Purchase Rights
(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. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Aggregate market value of voting stock held by nonaffiliates at March
31, 2002: $37,348,773.
Common stock outstanding at December 17, 2002: 72,092,667
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. Business........................................................... 3
ITEM 2. Properties........................................................ 37
ITEM 3. Legal Proceedings................................................. 38
ITEM 4. Submission of Matters to a Vote of Securities Holders............. 38
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................ 38
ITEM 6. Selected Financial Data............................................ 42
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 42
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk......... 64
ITEM 8. Financial Statements and Supplementary Data........................ 64
ITEM 9. Changes in and Disagreements With Accountants On
Accounting and Financial Disclosure................................ 65
PART III
ITEM 10. Directors and Executive Officers of the Registrant................. 65
ITEM 11. Executive Compensation............................................. 71
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters..................... 74
ITEM 13. Certain Relationships and Related Transactions..................... 77
PART IV
ITEM 14 Controls and Procedures............................................ 77
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 77
2
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," "might," "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. While there are no commercial-scale GTL
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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, combined
with large supplies of available feedstocks for our process.
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. In some
instances, we may invest with others to acquire equity interests in plants that
would use our technology. We might seek 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. It might be feasible to convert
these plants to use Rentech GTL Technology to produce liquid hydrocarbons.
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.
Chevron Texaco Technology Ventures, formerly 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.
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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. In pursuit of this strategy, we have acquired interests in
several other businesses that are 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 Inica Inc., formerly 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
Financial information about our business segments is given in Note 16
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 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.
5
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.
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
6
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 of 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 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 unique 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.
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.
7
Based on an independent study by Chem Systems, a division of IBM, 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. An abstract of the ChemSystems report is published at
WWW.CHEMSYSTEM.COM/STORE under methane refineries.
The Rentech GTL Technology uses an iron-based catalyst. While over 90%
of current GTL production depends on use of iron-based catalysts, as
demonstrated in Oil & Gas Investor, July 2002, our strongest competition now is
with owners of cobalt-based GTL technologies. We compete with them for contracts
with owners of feedstock who seek to evaluate the application of a particular
GTL technology with their source of feedstock. 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, including those that contain some sulphur. 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, enable the Rentech
GTL Technology to convert gases, liquids or solids that contain carbon materials
into liquid hydrocarbons. It is also less expensive than cobalt catalysts,
because the raw materials for the iron catalyst are readily available.
Our GTL technology uses a slurry reactor for the key Fischer-Tropsch
conversion step. A slurry reactor is less expensive to construct and operate
than the alternatives of fixed bed and fluidized bed reactors.
OUR GAS-TO-LIQUIDS PRODUCTS
Our synthetic 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.
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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.
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.
As reported in the Oil & Gas Investor for July 2002, and many other
publications, GTL technologies may provide a means of utilizing carbon-bearing
resources that are currently unmarketable, either because they are stranded in
remote locations or flared from oil field wells.
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 flared
or vented into the atmosphere or re-injected 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 for the Rentech GTL Technology include the heavy
high-sulphur residual fuels created at crude oil refineries. These petroleum
coke 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. If the residues are
gasified, that is, transformed into synthesis gas, they could be converted by
our process into GTL products. The synthesis gas resulting from refinery
residues is characterized by a low hydrogen-to-carbon monoxide ratio. That makes
it a suitable feedstock source for conversion into liquid hydrocarbons by the
application of our iron-based GTL technology.
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
9
and industrial off-gases. The liquid feedstocks include heavy crude oil and
refinery byproducts. The solid feedstocks include coal and petroleum coke. 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 higher-value products. Potential benefits to the refiner include
co-production of gas-to-liquids products, together with steam and electrical
power; and a reduction in waste disposal costs.
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 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 un-produced. 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.
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.
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.
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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.
We own a 50% interest in the Sand Creek methanol plant in the Denver
area. The plant is closed and not in operation. We 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. We and our
co-owner are seeking a buyer for the plant.
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 the following circumstances arising from
legislative and regulatory mandates and from changes in the energy arena:
o Increasingly stringent requirements to reduce tailpipe emissions and
strengthen clean-air standards.
11
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.
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.
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.
Petrie Parkman is an investment banker in the oil and gas industry. 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.
By September 30, 2001, Petrie Parkman had 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. We have received
no revenues from this relationship.
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
12
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.
In June 2001, we designated BC Projectos, Ltd., a Brazilian engineering
firm, as our exclusive engineering representative in Brazil. BC Projectos is a
large engineering firm with experience in the field of cogeneration plants,
thermoelectric power generation and energy optimization studies.
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. We have
received no revenues from this relationship.
o JACOBS ENGINEERING UK
In February 2000, we made an arrangement with Jacobs Engineering UK
Limited, an international engineering company, 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. We have received revenues totaling approximately
$61,148 as a result of feasibility studies we performed for potential licensees
introduced to us through Jacobs Engineering.
o POTENTIAL CUSTOMERS AND MARKETS
We are targeting customers and markets for our Rentech GTL Technology
that are diversified and worldwide. We have approached owners of energy sources
in the following industries:
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.
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.
13
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 re-injected 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.
We have granted Texaco Energy Systems, Inc. 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.
14
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.
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
15
particular field. The license also granted Texaco a non-exclusive license for
conversion of natural gas to liquids.
Under the license, Texaco Energy Systems, Inc. (Texaco or
ChevronTexaco) 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. We will share
with Texaco 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.
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" (EECP). 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
16
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 the coproduction of 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 by
Texaco through those contract funds that it receives from DOE. 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.
In the proposed EECP, approximately 1,235 short tons per day (stpd)
petroleum coke is used to produce 55 megawatts of net electric power for export,
approximately 617 barrels per day of Fischer-Tropsch (FT) products (finished
high-melt wax, finished low-melt wax, FT diesel and FT naphtha), steam, and
approximately 89 stpd of sulfur. Additionally, the Air Separation Unit (ASU)
will produce nitrogen and oxygen for export.
The Phase I objective was to determine the feasibility and define the
concept for the EECP located at a specific site, develop a Research, Development
and Testing (RD&T) Plan and prepare a preliminary project financing plan. Phase
I was completed in December 2000, and the final Phase I concept report was
issued in May 2001. In Phase I, a typical refinery site, Motiva Port Arthur, was
identified as the potential EECP site. As a result of the merger between Texaco
and Chevron, Texaco was required to sell its interest in the Motiva Enterprises
LLC joint venture to Shell Oil Company and Saudi Refining Inc. In late 2002, the
team will evaluate the impact of moving the proposed EECP to a ChevronTexaco
refinery.
The Phase II objective is to conduct the research as outlined in Phase
I. It was originally scheduled for two calendar years, 2001 through 2002.
Schedule delays will extend Phase II into the first calendar quarter of year
2003.
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 II.
This phase is focused on the development work that was identified during the
first phase.
o IMPORTANCE OF OUR TEXACO AGREEMENTS
Our agreements with Texaco are important to us in several ways.
Revenues from Texaco provided 20%, 21%, and 20% of our total revenues for the
years ended September 30, 2002, 2001, and 2000. 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 from several sources.
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
17
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 the
use of our technology in plants of this type.
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 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 propose 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.
One of the proposals is to construct a floating gas to liquids
production system 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 have
completed a pre-feasibility study for a company that is investigating use of a
floating GTL plant. The company is currently presenting the concept to
interested parties that have a need for such a facility.
o PERTAMINA
We have completed a study of the feasibility of a 15,000 barrel-per-day
GTL plant for Pertamina, the Indonesian state oil and gas mining company. The
plant would use Pertamina's stranded natural gas as feedstock. The intended
products would be synthetic diesel fuels, naphthas, and other high-value liquid
hydrocarbons. The results of the study have been accepted by Pertamina.
The 15,000 barrel GTL plant is projected to be the "cornerstone" for a
subsequent methane production complex to be built at the Matindok field located
on the island of Sulewasi. The business plan and execution plan for the project
have also been submitted and approved by Pertamina. Beginning in January 2003,
we expect that we will be seeking development funding for the next steps and
anticipate starting front-end engineering in late calendar year 2003. The
project is part of a novel approach involving the integration of the GTL plant
with other gas conversion technologies within the proposed methane complex. The
goal is to achieve synergies between our Fischer-Tropsch process and the other
processes being considered. We have received no revenues from this project.
o GTL BOLIVIA
GTL Bolivia, S.A. has secured funding for initial engineering efforts
for a 10,000 barrel-per-day Fischer-Tropsch facility designed to supply the
local Bolivian market with diesel fuel. GTL Bolivia has identified the gas
supply for the project and a site near Santa Cruz. In the event the project
appears to be technically and economically feasible, GTL Bolivia has stated its
intention to move quickly in further project development. This project has
become a high profile effort, and we anticipate starting engineering work for
18
the front end of the project in the first half of calendar year 2003. Major
hurdles in the development of this project will be the logistics of transporting
the large and heavy equipment to Bolivia.
o OROBOROS
We entered into a letter of intent in October 1999 to grant a license
to Oroboros AB, a Swedish corporation headquartered in Gateborg, Sweden. This
has enabled Oroboros to investigate the feasibility of using the Rentech GTL
Technology for the industrial off-gas produced by Oroboros's steel plant located
at Oxelosund, Sweden or other steel mills. If Oroboros decides its studies and
plans indicate the proposal likely would be feasible, we would expect it will
proceed with this project.
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. We have received no revenues from this relationship.
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.
Through the efforts of ITN, Inc., we granted a license in 1994 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. If a plant is constructed and operated, the license agreement provides
for royalty payments to us for seven years after commencement of production from
the plant. The licensee allows Donyi Polo to construct and operate its own
manufacturing plant, using our technology, 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.
19
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 synthetic products resulting from use of the Rentech GTL Technology
will compete with traditional petroleum products and synthetic liquid
hydrocarbon products produced by other Fischer-Tropsch 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 Fischer-Tropsch 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 Fischer-Tropsch technology allow the Rentech GTL
Technology to be cost-effective in some situations.
Products resulting from the Rentech GTL Technology, like other
Fischer-Tropsch 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
20
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 standards require reduction of the
sulfur content of diesel from the 2001 level of 500 parts per million to 15
parts per million by 2007, a 97% reduction. The EPA regulations also require
manufacturers of diesel engines to reduce harmful air emissions from diesel
engines used in tractor-trailers, buses and other heavy trucks by 95% over 2001
levels by 2007. 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.
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 in 1996 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.
21
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.
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
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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.
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 nine 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., a 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, 2002, 2001, and 2000, we
spent $701,201, $190,905 and $515,261, respectively, on research and development
activities on the Rentech GTL Technology. During each of the same fiscal years,
we received revenues from third parties for research and development activities
on the technology of $2,354,550, $2,212,432, and $751,166, respectively.
23
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.
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 Technology 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
24
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
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
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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
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.
INTELLECTUAL PROPERTY AND PATENTS
Our intellectual property consists of three types of property. We own
twelve U.S. patents that protect the Rentech GTL Technology. We own various
trade secrets and confidential proprietary information that we use with our GTL
business, our stains and sealer business, our oil and gas well field services,
and our industrial automation products. We own U.S. trademarks that protect the
product names we use with sale of our stains and sealers.
The success of our core business of GTL technology, as well as each of
our subsidiary businesses, depends upon our intellectual property that we own
and use in the conduct of the particular business. Our intellectual property
gives us rights to exclusively exploit our technologies. If we lost rights to
exclusively exploit an item of intellectual property, the financial results of
the business involved, and our overall financial results, would be materially
harmed.
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Our patents are granted for terms of twenty years from the date of the
application to the U.S. Patent Office. Our first patent application was filed in
1992. Our latest application was filed this year. Our trade secrets and
confidential proprietary information will remain our property for as long as we
keep them secret and confidential. Our federal trademarks have initial terms of
six years. They can be renewed within ten years from the initial date of filing
and every ten years after that if we continue to use them with the sale of our
products.
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.
Our United States patents related to the Rentech GTL Technology apply
to our processes, applications of the process, products produced, and materials
used as part of the Rentech GTL Technology. The patents include the overall
gas-to-liquids conversion process; 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; 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.
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%. Another patent
covers our method for using high power electrical arcs, also called a plasma
torch, to convert feedstock gas into synthesis gas. We believe the procedures
subject to these patents 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.
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
27
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.
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
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.
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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.
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
29
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
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
30
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.
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.
In addition to its own trademarks, OKON also markets nearly one-half of
its products with the trademark of Goodyear Chemical. This company is a division
of Goodyear Tire and Rubber. Goodyear's trademark used by OKON shows OKON's
product is made with PLIOTEC(R) resins, and the mark also shows the Goodyear's
registered mark for its blimp. Goodyear supports OKON's marketing in this way
because these products use resins manufactured by Goodyear Chemical. We do not
pay Goodyear Chemical for use of its trademark. Goodyear Chemical does not
provide us any allowances, credits or pay us any consideration for this
arrangement.
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.
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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.
Historically, sales of stains and sealers have been seasonal in nature. The
heaviest concentrations 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 years ended September 30, 2002, 2001 and 2000,
one customer of OKON accounted for 10%, 12% and 16% 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.
32
Revenues from our stains, sealers and coatings business segment
represented approximately 20%, 29%, and 41% of our revenues in the years ended
September 30, 2002, 2001, and 2000, respectively.
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 35 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 21%, 37% and 36% of our revenues during the fiscal years ended
September 30, 2002, 2001, and 2000, respectively. 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, 2002, 2001 and 2000, one customer of
PML accounted for 7%, 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.
33
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. During fiscal year
2002, PML upgraded its equipment and technology by adding safety features to
provide advance warning to workers of potential gas blow-outs of a well on which
they are working. This meets new safety standards being adopted by the states
and provides PML a competitive advantage over most other mud logging companies
that have not added this equipment.
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 is continuing its business and retained its original management.
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
$2,629,237, $996,641, and $833,802 during the years ended September 30, 2002,
2001, and 2000, respectively, and sales outside the U.S. were $271,500, $8,247,
and $4,311 during the same years.
REN had a backlog of orders in the approximate amount of $1,375,000 as
of September 30, 2002 as compared to a backlog of approximately $3,140,000 as of
September 30, 2001. We expect to ship all of these orders by April 30, 2003.
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 17 to 19 to meet the
requirements of its new orders.
Caterpillar is REN's largest customer, accounting for 19% of its
revenues in fiscal 2002. LOSS OF THIS CUSTOMER WOULD MATERIALLY REDUCE THE
REVENUES WE EXPECT DURING FISCAL YEAR 2003. If we lose Caterpillar as a
customer, we believe we would be able to fill our remaining backlog. We would
also eliminate or delay our expansion program to help minimize the substantial
loss of revenues that would result.
34
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.
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 17 employees as of September 30, 2002. REN anticipates
increasing its number of employees to 19 in order to meet the requirements of
its new orders.
ADVANCED TECHNOLOGIES
o INICA, Inc.
Through our investment made in 1998 in INICA, Inc., formerly ITN Energy
Systems, Inc., we own minority interests in several advanced technologies. INICA
is a privately owned business engaged in developing and commercializing emerging
technologies.
Our ownership consists of 10% of the shares of INICA, Inc. If approved
by the majority shareholder, we may exchange these shares for approximately 4%
of Global Solar Energy, Inc., which is engaged in production of thin-film
photovoltaics and 4% of Infinite Power Solutions, Inc., which is developing
thin-film micro batteries.
As a minority owner in these corporations, we have no control over
them. We do not participate in their management. We have no obligations for
their liabilities. We intend to remain passive investors in them.
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
35
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.
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.
EMPLOYEES
At September 30, 2002, we had 76 employees. Among our subsidiaries,
Rentech Services Corporation had nine employees, who work at our development and
testing laboratory; OKON, Inc. had 10 employees; Petroleum Mud Logging, Inc. had
29 employees; and REN Corporation had 17 employees.
36
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 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.
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. We are offering the site, including all improvements, for sale.
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.
37
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 building
contains 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.
ITEM 3. LEGAL PROCEEDINGS
Rentech owns 56 percent of Ren Corporation, which produces automated
systems that test equipment produced by manufacturers of industrial equipment. A
judgment was entered on October 29, 2002, in a civil action Ren Corporation
brought against Case Corporation to collect an account receivable. The contract
had been awarded in January 1998, before Rentech's acquisition of its interest
in Ren. The judgment, entered in the U.S. District Court for Oklahoma, denied
Ren's collection claim and awarded judgment in favor of Case Corporation on its
claim against Ren for a breach of a condition of the contract. The judgment is
in the amount of $325,795 plus costs and interest. Ren intends to appeal the
judgment. Judgment amounts payable after appeal, if any, are payable out of the
44 percent of Ren Corporation that is not owned by Rentech.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Our annual meeting of shareholders was held on March 26, 2002. At the
meeting, John P. Diesel and Dennis L. Yakobson were elected to terms ending in
2005 as members of the board of directors. The terms of John J. Ball, Ronald C.
Butz, Douglas L. Sheeran, and Erich W. Tiepel 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:
John P. Diesel. 59,347,404 1,660,385 0
Dennis L. Yakobson 59,250,788 1,757,001 0
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Rentech's common stock is traded on The American Stock Exchange(R)
under the AMEX symbol RTK. The following table sets forth the range of high and
low closing prices for the Company's common stock. 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, 2002 High Low
- ------------------------------------ ---- ---
1st Quarter, ended Dec. 31, 2001 $0.72 $0.50
2nd Quarter, ended Mar. 31, 2002 $0.84 $0.49
38
3rd Quarter, ended Jun. 30, 2002 $0.60 $0.41
4th Quarter, ended Sep. 30, 2002 $0.70 $0.43
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
The approximate number of shareholders of record of our common stock as
of December 6, 2002 was 555. Based upon the securities position listings
maintained for our common stock by registered clearing agencies, we estimate the
number of beneficial owners is not less than 9,800.
We have declared no dividends with respect to the common stock during
the two most recent fiscal years ended September 30, 2002 and 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.
We have a shareholder rights plan. Each outstanding share of our common
stock carries a stock purchase right issued pursuant to a shareholder rights
plan adopted by our board of directors in November 1998. The rights entitle the
holder to buy one one-hundredth of a share of preferred stock at a price of $12
per one one-hundredth of a share. Generally, the rights become exercisable ten
days after a person or group has acquired, or a tender offer is made for 15% or
more of the common stock of Rentech. If either of these events occur, each right
will entitle the holder (other than a holder owning more than 15% of the
outstanding stock) to buy the number of shares of the Company's common stock
having a market value two times the exercise price of $12 per share. The rights
may be redeemed by Rentech for $.0001 per right until a person or group has
acquired 15% of the Rentech stock. The rights expire in December 2008.
Our board of directors is authorized to issue shares of preferred stock
without approval of shareholders. The terms of the preferred stock are
determined at the time they are issued by the board of directors. Shares of
preferred stock may be issued in one or more series. Each series may be issued
with different rights. These rights may include voting rights, preferences as to
dividends, and mandatory redemption provisions carried out through funds set
aside by Rentech. Upon liquidation, the rights may include rights of redemption
or conversion into common and preferences over any other stock to distribution
of assets.
After the end of our fiscal year ended September 30, 2001, we issued
shares of our Series 1998-B convertible preferred stock. These shares have no
voting rights. The holders of the preferred shares are entitled to cumulative
dividends at the rate of nine percent per annum payable quarterly in cash, or at
Rentech's option, in shares of its common stock. The holders of the preferred
stock have the right to convert their preferred stock into shares of common
stock at 82.5% of the average market closing price for the five preceding
trading days. In the event of liquidation or dissolution of the Company, the
holders of the preferred stock are entitled to receive a preference in
distribution of its assets in the amount of $10 per preferred share plus any
accumulated but unpaid dividends.
The following table shows information concerning all sales of our
unregistered securities made by us during the past three years. A description of
each transaction is given in the numbered paragraphs that follow the table,
corresponding with the numbers of the transactions described in the table.
39
No. Total Exemption
Date of Security Securities Offering From
Sale Sold Sold Price Registration
- ------------------ --------- --------- --------- ------------
1. Nov. 18, 1999 Common Stock 2,500,000 $1,500,000 Section 4(2) of
Securities Act of 1933
2. Dec. 4, 1999 Common Stock 166,667 $100,000 Section 4(2) of
Securities Act of 1933
3. Jan. 17, 2000 Common Stock 4,136,667 $2,678,699 Section 4(2) of
Securities Act of 1933
4. Mar. 18, 2000 Common Stock 2,000,000 $1,200,000 Section 4(2) of
Securities Act of 1933
5. Mar. 29, 2000 Common Stock 2,291,667 $2,750,000 Regulation S
6. Jun. 18, 2000 Common Stock 200,000 $106,240 Section 4(2) of
Securities Act of 1933
7. Jun. 21, 2000 Common Stock 200,000 $400,000 Section 4(2) of
Securities Act of 1933
8. Dec. 13, 2000 Common Stock 60,000 $30,000 Section 4(2) of
Securities Act of 1933
9. Dec. 28, 2000 Series 1998-B 44,444 $444,444 Section 4(2) of
Convertible Securities Act of 1933
Preferred Stock
10. Feb. 2, 2001 Common Stock 200,000 $244,000 Section 4(2) of
Securities Act of 1933
11. Mar. 30, 2001 Series 1998-B 44,444 $444,444 Section 4(2) of
Convertible Securities Act of 1933
Preferred Stock
12. May 21, 2001 Common Stock 2,000,000 $1,900,000 Section 4(2) of
Securities Act of 1933
13. Jun. 22, 2001 Common Stock 50,000 $15,000 Section 4(2) of
Securities Act of 1933
14. Nov. 2, 2001 Series 1998-B 50,000 $500,000 Section 4(2) of
Convertible Securities Act of 1933
Preferred
Stock
15. Feb. 25, 2002 Convertible 4 $2,250,000 Section 4(2) of
Promissory Securities Act of 1933
Notes
40
16. Feb. 28, 2002 Common 2,926,969 $1,463,250 Section 4(2) of
Stock Securities Act of 1933
(1) Shares issued to one accredited investor for cash in the amount of
$1,500,000. We paid a commission of $75,000.
(2) Shares issued to one accredited investor for cash in the amount of $100,000.
We paid a commission of $5,000.
(3) Shares issued to eighteen accredited investors at $2.40 per unit, consisting
of four shares of common stock and a warrant for the purchase of one share of
common stock for each four shares purchased. The warrants may be exercised for
1,034,167 shares at $1.20 a share until March 31, 2003. Warrants for the
purchase of 98,668 shares of common stock were issued to the placement agents
entitling them to purchase those shares at $.66 each until October, 12, 2004. We
paid a commission of $133,935.
(4) Shares issued to two accredited investors together with options to purchase
4,000,000 shares of common stock at $1.25 per share until December 31, 2001 and
2,000,000 shares of common stock at $5.00 per share until December 31, 2004.
(5) Shares issued to two offshore investors together with warrants to purchase
2,291,667 shares at a price of $2.64 per share until March 29, 2003. We paid a
commission of $275,000.
(6) Shares with a market value of $106,240 issued to our four independent
directors in payment of director fees for fiscal years 2001 and 2000.
(7) Shares with a market value of $400,000 issued to four accredited investors,
as partial consideration for the acquisition of a majority interest in REN
Corporation.
(8) Shares with a market value of $30,000 issued to one accredited investor as a
commission for the acquisition of the assets we operate as our Petroleum Mud
Logging, Inc. subsidiary.
(9) Shares of Series 1998-B Convertible Preferred Stock issued to three
accredited investors for $444,444. We paid a commission of $44,444. The
convertible preferred shares are convertible, for two years after issuance, and
into shares of common stock at 82.5% of the average closing price for the five
trading days prior to conversion.
(10)Shares with a market value of $244,000 issued to four accredited investors
as partial consideration of the acquisition of a majority interest in REN
Corporation.
(11)Shares of Series 1998-B Convertible Preferred Stock issued to three
accredited investors. We paid a commission of $44,000. The convertible preferred
shares are convertible, for two years after issuance; and into shares of common
stock at 82.5% of the average closing price for the five trading days prior to
conversion.
(12)Shares issued to fifteen accredited investors at $0.95 per share for cash in
the amount of $1,900,000.
(13)Shares issued to one accredited investor upon the exercise of stock
warrants.
(14)Shares of Series 1998-B Convertible Preferred Stock issued to three
accredited investors. We paid a commission of $25,000. The convertible preferred
shares are convertible, for two years after issuance, into shares of common
stock at 82.5% of the average closing price for the five trading days prior to
conversion.
(15)Convertible promissory notes issued to four accredited investors. The notes
are payable, with interest at 8.5% per annum, in monthly installments that
amortize the notes over 20 years, with the remaining balance due on February 25,
2006. In addition to the monthly payments in money, after the first 12 months
one-thirty-sixth of the declining principal balances of the notes are
automatically converted into common stock at a conversion price of $.50 per
share. If the average market price for the seven preceding trading days is less
than $.50 per share, the amount of the money difference is added to the
principal of the note. The notes are convertible into no more than 4,500,000
shares of common stock, at a price of $.50 per share, less two shares for every
dollar of principal reduction of the notes paid in money.
(16)Common stock issued to 22 accredited investors. We paid commissions of
$73,163.
The proceeds of the offerings will be used for development of
gas-to-liquids projects and technology, including general working capital.
41
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated 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, and the risk factors included elsewhere
in this Annual Report on Form 10-K.
Rentech, Inc. and Subsidiaries
------------------------------
Year Ended September 30
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
CONSOLIDATED
STATEMENT OF
OPERATIONS DATA
Revenues $ 9,560,335 $ 8,166,576 $ 5,066,607 $ 2,880,900 $ 1,987,586
Cost of Sales $ 5,462,243 $ 6,150,359 $ 3,134,396 $ 1,416,078 $ 944,068
Gross Profit $ 4,098,092 $ 2,016,217 $ 1,932,211 $ 1,464,822 $ 1,043,518
Loss from Operations $ (4,862,560) $ (4,577,579) $ (3,804,389) $ (3,442,392) $ (1,986,818)
Net Loss $ (5,332,613) $ (6,770,707) $ (4,099,395) $ (3,442,661) $ (2,180,855)
Loss Applicable to
Common Stock $ (5,469,545) $ (7,254,306) $ (4,189,006) $ (3,974,593) $ (3,345,847)
BASIC AND DILUTED
LOSS PER SHARE(1)
Loss Per Common Share $ (.08) $ (.11) $ (.07) $ (.09) $ (.10)
CONSOLIDATED
BALANCE SHEET
DATA
Working Capital $ 775,686 $ 1,412,195 $ 1,892,376 $ 115,457 $ 3,195,381
Total Assets $ 16,163,228 $ 16,115,455 $ 16,462,592 $ 13,209,981 $ 10,715,250
Total Long-Term
Liabilities $ 3,269,044 $ 1,157,927 $ 999,355 $ 1,246,917 $ --
Total Liabilities $ 7,422,576 $ 4,069,122 $ 1,758,615 $ 2,149,183 $ 394,6847
Accumulated Deficit $(30,903,641) $(25,571,028) $(18,800,321) $(14,700,926) $(11,258,265)
- --------------
(1) The weighted average number of shares of common stock outstanding
during the years ended September 30, 2002, 2001, 2000, 1999, and 1998,
were 69,987,685, 64,807,168, 57,532,816, 43,838,417, and 33,289,164,
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
42
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.
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 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. We also receive revenues from prospective businesses who
engage us to perform studies for their potential projects that would use the
Rentech GTL Technology. These studies are preliminary engineering design studies
and evaluations of the feasibility of their use of their feedstock with our
technology. 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
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
43
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.
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 working with
several energy companies and related businesses to prepare and evaluate their
proposals to develop plants that would use our technology. There are no
assurances that adequate financing will be available or that we will succeed in
retrofitting and successfully operating any existing industrial 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.
44
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 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 and
operating costs 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.
If we invest with others in developing a plant that uses our Rentech
GTL Technology, we expect to incur large costs for any plants in which we may
acquire an equity interest. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity 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 and the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. The most significant estimates and
assumptions relate to accounting for fixed price contracts, the valuation of
long-lived assets, intangible assets and goodwill and the realization of
deferred income taxes. Actual amounts could differ significantly from these
estimates.
Accounting for Fixed Price Contracts. Our 56% owned subsidiary, REN
Corporation, recognizes revenues from fixed price contracts on the
percentage-of-completion method of accounting. Under this method of accounting,
the amount of revenue recognized is the percentage of the contract price that
the costs expended to date bear to the total estimated costs of the contract,
based upon current estimates of the costs to complete the contract. Project
managers make significant assumptions concerning cost estimates for materials
and labor. Due to the uncertainties inherent in the estimation process, as well
as the potential changes in customer needs as these contracts progress, it is at
least reasonably possible that completion costs for uncompleted contracts may be
revised in the future, and that such revisions could be material.
Valuation of Long-Lived Assets, Intangible Assets and Goodwill. We must
assess the realizable value of long-lived assets, intangible assets and goodwill
for potential impairment at least annually or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. In
assessing the recoverability of our goodwill and other intangibles, we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. In addition, we must make assumptions
regarding the useful lives of these assets. If these estimates or their related
45
assumptions change in the future, we may be required to record impairment
charges for these assets. Effective October 1, 2001, we elected early adoption
of SFAS No. 142, and were required to analyze goodwill for impairment. We
completed the impairment test as of March 31, 2002 and determined that goodwill
was not impaired. As of September 30, 2002, we evaluated our long-lived assets
and intangible assets for potential impairment. Based upon our evaluation, no
impairment charge was recognized.
Deferred Income Taxes. We have provided a full valuation reserve
related to our substantial deferred tax assets. In the future, if sufficient
evidence of our ability to generate sufficient future taxable income in certain
tax jurisdictions becomes apparent, we may be required to reduce this valuation
allowance, resulting in income tax benefits in our consolidated statement of
operations. We evaluate the realizability of the deferred tax assets annually
and assess the need for the valuation allowance.
RESULTS OF OPERATIONS
FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001
Revenues. We had revenues from product sales, service revenues and
royalty income of $9,560,335 in fiscal 2002 and $8,166,576 in fiscal 2001, an
increase of 17%.
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
$1,927,854 in fiscal 2002. This compares to revenues from this segment of
$2,367,689 for the 2001 fiscal year, a decrease of 19%. The decrease in revenue
from this segment was due to an industry-wide reduction in inventory purchasing
and stocking levels by customers, resulting from construction slow-downs in our
primary distribution markets.
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 $2,021,957 were derived from
contracts for the oil and gas field services provided by our subsidiary
Petroleum Mud Logging, Inc. in fiscal 2002. Our oil and gas field service
revenues for fiscal year 2002 decreased by $1,009,182, or 33%, from the service
revenues of $3,031,139 in fiscal 2001. The decrease in oil and gas field
services revenue was due to decreased demand for our mud logging services,
resulting from a substantial decrease in drilling for new natural gas wells in
our service market.
Service revenues in the amount of $2,900,737 during fiscal 2002 and
$193,317 during fiscal 2001 were derived from contracts for the manufacture of
complex microprocessor controlled industrial automation systems by our 56% owned
subsidiary, REN Corporation. The increase of $2,707,420 during fiscal 2002 is
due to the fact that we only recorded two months of revenue during fiscal 2001
for this segment as the acquisition of REN Corporation was completed on August
1, 2001.
Service revenues also include revenue earned for technical services
provided to certain customers with regard to the Rentech GTL Technology. These
technical services were performed at our development and testing laboratory. Our
46
service revenues for these technical services were $2,354,550 during fiscal
2002, including $1,436,636 from Texaco and $917,914 from other customers, as
compared to $2,212,432, including $1,726,795 from Texaco and $485,637 from other
customers, during fiscal 2001. Compared to the prior year, our service revenues
from these technical services increased by $142,118 or 6%. The increase during
fiscal 2002 was due to the recognition of $800,000 in revenue upon the
completion of the study for the Wyoming Business Council while there was no such
revenue during fiscal 2001. The increase in revenue from the Wyoming Business
Council during fiscal 2002 was offset by a decrease in technical services
revenue from customers other than Texaco and the Wyoming Business Council of
$367,723, as compared to fiscal 2001. The decrease in revenue from customers
other than Texaco and the Wyoming Business Council was due to fewer contracts
awarded in fiscal 2002 as a result of the overall recessionary nature impacting
planning for capital spending in the oil services sector. The increase in
revenue from the Wyoming Business Council was further offset by a decrease in
revenue from Texaco of $290,159 during fiscal 2002 as compared to fiscal 2001.
The work from Texaco decreased due to the timing of its assignment of work to us
to fulfill our subcontract with Texaco for its contract with the U.S. Department
of Energy for the development of a model for an energy plant that produces both
transportation fuels and electricity.
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 a tenant. Rental income from this tenant contributed $115,237
in revenue during fiscal 2002 as compared to $121,999 during fiscal 2001. 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 both fiscal
2002 and fiscal 2001. 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 OKON products
as well as for our oil and gas field services, technical services including
research and development contract costs and industrial automation services.
During fiscal 2002, the combined costs of sales were $5,462,243 compared to
$6,150,359 during fiscal 2001. The decrease for fiscal 2002 resulted from a
decrease in costs of sales for the products sales, oil and gas field services
and alternative fuels segments, offset by an increase for the industrial
automation systems segment.
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 2002,
our costs of sales for the paint segment decreased by $192,274 or 17% to
$932,677, as compared to fiscal 2001. Of the decrease for the current year, 69%
was related to the reduced cost of raw materials used in the manufacturing
process. This reduction reflected the competitive effect of the slow-down in
construction on the producers of raw materials. The remaining 31% was related to
various other costs which decreased as a direct result of the decrease in
product sales. Product sales decreased during fiscal 2002 due to a continued
industry-wide reduction in inventory purchasing and stocking levels by
customers, resulting from construction slow-downs in our primary distribution
markets.
Costs of sales for oil and gas field services were $1,665,895 during
fiscal 2002, down from $2,099,703 during fiscal 2001, a decrease of $433,808 or
21%. Of the decrease for the current year, 50% was related to a decrease in
field labor, 26% was related to a decrease in field living expenses and the
47
remaining 24% was related to a decrease in various other costs related to having
fewer mud logging vehicles in the field resulting in a decrease in revenues for
this segment. The decrease in oil and gas field services revenue were due to
decreased demand for our mud logging services, resulting from a substantial
decrease in drilling for new natural gas wells in our service market.
Costs of sales for the industrial automation systems segment were
$2,143,782 during fiscal 2002 as compared to $157,576 during fiscal 2001. The
increase of $1,986,206 during fiscal 2002 is because we only recorded two months
of costs during fiscal 2001 for this segment as the acquisition of REN
Corporation was completed on August 1, 2001.
Costs of sales for technical services were $591,889 during fiscal 2002,
down from $2,207,521 during fiscal 2001. These costs decreased $1,615,632, or
73% as a result of the efficiencies gained over time at the facility as well as
the decrease in revenue from Texaco and other customers for services performed
in 2002. Revenues from Texaco and other customers decreased due to the awarding
of contracts to us for studies. The costs of sales for the Wyoming Business
Council contract are included in the research and development contract costs
category below.
Costs of sales also includes research and development contract costs of
$128,000 during fiscal 2002, as compared to $560,608 during fiscal 2001. These
costs are made up of engineering and labor costs incurred on the completion of
the Wyoming Business Council contract. The decrease of $432,608 or 77% during
fiscal 2002 was due to the completion of our engineering work on the project and
the delivery of our final report in fiscal 2002.
Gross Profit. Our gross profit for fiscal 2002 was $4,098,092, as
compared to $2,016,217 for fiscal 2001. The increase of $2,081,875 or 103%
resulted from a combination of the contributions from each of our operating
segments. The gross profit contribution of our paint segment decreased during
fiscal 2002 by $247,561 as compared to fiscal 2001, while the contribution of
our oil and gas field services segment decreased by $575,374 and the
contribution from rental income decreased by $6,762 for the same period. These
decreases were more than offset by increases of $721,214 for the industrial
automation systems segment and $1,757,750 from technical services during fiscal
2002 as compared to fiscal 2001. Gross profit increased further in fiscal 2002
compared to fiscal 2001 as a result of a reduction of $432,608 in research and
development contract costs for the Wyoming Business Council contract.
Operating Expenses. Operating expenses consist of general and
administrative expense, depreciation and amortization and research and
development.
General and Administrative Expenses. General and administrative
expenses were $7,327,898 during fiscal 2002, up $1,736,852 from fiscal 2001 when
these expenses were $5,591,046. The increase for the current year is due to
increases in several areas that were not offset by a 73% decrease in expenses
allocated to costs of sales at our research and development laboratory as a
result of the efficiencies gained over time at the facility as well as the
decrease in revenue from Texaco and other customers. In addition, fiscal 2002
included an increase of $767,530 in general and administrative expenses for our
industrial automation systems segment as compared to fiscal 2001, as well as
non-cash accruals of audit, legal and payroll expenses of $197,044 during fiscal
2002, for which the Company had previously not accrued. We did not have these
costs during fiscal 2001.
Depreciation and Amortization. Depreciation and amortization expenses
during fiscal 2002 and 2001 were $1,229,972 and $983,158. Of these amounts,
48
$340,141 and $184,991 were included in costs of sales. Of the increase of
$246,814 or 25%, $212,725 or 86% is related to the depreciation and amortization
of assets acquired with the industrial automation systems segment. The remainder
of the increase resulted from a combination of additions to and reductions in
depreciation of fixed assets in the other operating segments. This increase is
partially offset by a decrease in amortization of goodwill of $98,351 during
fiscal 2002 as compared to fiscal 2001. In accordance with SFAS No. 142, which
we adopted during fiscal 2002, we are no longer amortizing goodwill related to
the acquisitions of OKON and PML.
Research and Development. Research and development expenses were
$742,923 during fiscal 2002, including $701,201 for our alternative fuels
segment, $29,542 for our paint segment and $12,180 for our industrial automation
systems segment. This expense increased by $538,340 from fiscal 2001, when these
expenses were $204,583, including $190,905 for our alternative fuels segment and
$13,678 for our paint segment. Due to a decrease in billable technical services
work performed at the development and testing laboratory for customers, we were
able to work on certain research and development related activities for our own
purposes. Extensive tests were completed evaluating catalyst life and efficiency
as well as other aspects of our technology.
Total Operating Expenses. Total operating expenses during fiscal 2002
were $8,960,652, as compared to $6,593,796 during fiscal 2001, an increase of
$2,366,856. The increase in total operating expenses as compared to the prior
year is a result of the increases in general and administrative expenses of
$1,736,852, depreciation and amortization charges included in operating expenses
of $91,664 and an increase in research and development expenses of $538,340.
Loss From Operations. Loss from operations during fiscal 2002 increased
by $284,981 to a loss of $4,862,560, as compared to a loss of $4,577,579 during
fiscal 2001. The increased loss compared to the prior year resulted from an
increase in total operating expenses of $2,366,856 during fiscal 2002, which is
partially offset by an increase in gross profit of $2,081,875.
Other Income (Expenses). Other income (expenses) includes loss on
investment, equity in loss of investee, interest income, interest expense and
gain on disposal of fixed assets.
Loss on Investment. During our fiscal 2001 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 were not 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 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. During fiscal 2002, we recognized $252,013
in equity in loss of investee, as compared to $386,047 during fiscal 2001. 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 decrease during fiscal 2002 is due to a decrease in
insurance and other maintenance costs of the facility.
Interest Income. Interest income during fiscal 2002 was $36,468,
decreased from $121,509 during fiscal 2001. The decreased interest income was
due to having fewer funds invested in interest-bearing cash accounts.
49
Interest Expense. Interest expense during fiscal 2002 was $267,618,
increased from $108,166 during fiscal 2001. The increase in interest expense is
the result of the addition of the convertible notes payable and the notes
payable added as a result of the acquisition of REN Corporation in August 2001.
Gain on Disposal of Fixed Assets. Gain on disposal of fixed assets was
$189 during fiscal 2002, with no comparable amount during fiscal 2001. This gain
represents the disposal of out-dated office furniture and equipment, computer
equipment and vehicles.
Total Other Expenses. Total other expenses decreased to $482,974 during
fiscal 2002 from total other expenses of $2,214,839 during fiscal 2001. The
decrease in total other expenses of $1,731,865 resulted from having no loss on
investment during fiscal 2002, as compared to $1,842,135 during fiscal 2001; a
decrease in equity in loss of investee of $134,034; a decrease in interest
income of $85,041; an increase in interest expense of $159,452; and an increase
in gain on disposal of fixed assets of $189.
Minority Interest in Subsidiary's Net Income. The minority interest in
subsidiary's net income of $12,921 during fiscal 2002, as compared to $21,711
during fiscal 2001, resulted from the acquisition of 56% of REN Corporation on
August 1, 2001.
Net Loss. For the year ended September 30, 2002, we experienced a net
loss of $5,332,613 compared to a net loss of $6,770,707 during the year ended
September 30, 2001. The decrease of $1,438,094 resulted from an increase in loss
from operations of $284,981, a decrease in total other expenses of $1,731,865,
and a decrease in minority interest in subsidiary's net loss of $8,790.
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. During the year ended September 30, 2002, we issued
convertible preferred stock, and recorded dividends of $136,932, compared to
$483,599 for the year ended September 30, 2001.
Loss Applicable to Common Stock. As a result of recording dividends on
convertible preferred stock of $136,932 during fiscal 2002 and $483,599 during
fiscal 2001, the loss applicable to common stock was $5,469,545 or $0.08 per
share during fiscal 2002 and $7,254,306 or $0.11 per share during fiscal 2001.
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, an increase of 13%. Of the increase for the
current year, 51% was due to the addition of new customers while 9% of the
increase was related to the introduction of new products. The remaining 40% of
the current year increase resulted from increased marketing activities
consisting of test markets at a large retail chain and promotions with existing
customers.
50
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 to increased demand for our mud logging services, particularly for new wells
drilled for natural gas. This reflected increased demand in the energy industry
for natural gas because of its clean burning qualities. 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
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, an increase of
194%, including $1,726,795 and $751,166 in payments from Texaco. Of the increase
for the current year, 34% was due to the addition of several new customers and
66% was due to the increase in services provided to Texaco. The additional work
for Texaco consists of the services necessary to fulfill our subcontract with
Texaco for its contract with the U.S. Department of Energy for development of a
model for an energy plant that produces both transportation fuels and
electricity. 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
51
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, or
9%, as compared to fiscal 2000. Of the increase for the current year, 69% is
related to the additional costs of raw materials, 26% is related to the increase
in labor costs, and the remaining 5% is made up increased costs of freight,
utilities and supplies for this business segment. Revenue from this segment
increased over the prior year due to increased marketing efforts. Of the
increase in revenue compared to the prior year, 91% was due to new customers and
9% was due to new products related to these marketing efforts.
Costs of sales for oil and gas field services were $2,099,703 for
fiscal 2001, up from $1,353,418 for fiscal 2000, an increase of $746,285 or 55%.
Of the increase for the current year, 83% is due to the increase in labor and
employee benefits while the remaining 17% is related to other costs related to
the increased revenues of this segment. The increase in revenues resulted from
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, an increase of $1,456,355 or 194%. Of
the increase for the current year, 36% is related to the increase in labor and
employee benefits resulting from the addition of engineers and technicians at
our development and testing laboratory to meet new contracts. Another 40% of the
increase for the current year resulted from an increase in materials for the new
contracts. The remaining 24% is related to the increased costs of supplies,
utilities and depreciation resulting from the increase in technical services
revenues. Technical services revenues increased over the prior year due to the
addition of several new customers as well as an increase in services provided to
Texaco during the year.
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.
52
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. Of the increase for the current year, 86% 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. The remaining 14% of the increase for the current year
resulted from 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, $184,991 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. Of the increase of $371,171 during
fiscal 2001, $69,067 was related to the addition of equipment at the development
and testing laboratory, $65,675 was related to additional equipment acquired for
the other operating segments and $236,429 resulted from the amortization of
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. That work decreased the amount of cost related to
research and development as our engineers and technicians focused on contract
work for third parties rather than on our own research and development.
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 increases in general and administrative expenses of $814,615, depreciation
and amortization charges of $353,259 included in operating expenses, which were
offset in part by the decrease of $310,678 in research and development costs,
compared to the prior year.
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 $857,196 increase in operating
expenses, which is partially offset by the increase of $84,006 in gross profit
contributed by our operating segments.
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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 leased by OKON 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, as compared to the prior year, resulted from the $1,842,135 loss on
investment in Dresser Engineers, the increase of $109,462 in the equity in loss
of investee related to our Sand Creek Energy, LLC joint venture, and the
decrease of $13,934 in interest income which are offset in part by the reduction
of $28,667 in interest expense and the decrease of $17,031 in loss or disposal
of fixed assets.
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.
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 as compared to the prior year resulted from the $773,190 increase in loss
from operations and the increase of $1,919,833 in other expenses, which are
offset partially by the $21,711 minority interest in subsidiary's net loss.
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
54
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 of $483,599 for fiscal 2001 and $89,611 for fiscal
2000, 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had working capital of $775,686, as compared
to working capital of $1,412,195 at September 30, 2001. The decrease in working
capital is primarily due to the increase in various liabilities and lines of
credit with regard to the acquisition of 56% of REN Corporation. This decrease
also resulted from the use of cash for operations, investing activities and
payments on long-term debt.
As of September 30, 2002, we had $4,929,218 in current assets,
including accounts receivable of $1,436,886. At that time, our current
liabilities were $4,153,532. We had long-term liabilities of $3,269,044. Most of
our long-term liabilities relate to our long-term convertible debt as well as
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. We
believe that OKON, activities at the development and testing laboratory, PML and
REN will provide positive cash flow during fiscal 2003.
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
55
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 may use the facility as a
large pilot plant for continuing work with the Rentech GTL Technology or we may
sell all or some of the assets associated with the facility.
From our inception on December 18, 1981 through September 30, 2002, we
have incurred losses in the amount of $30,903,641. For the year ended September
30, 2002, we recognized a $5,332,613 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, 2002, we had a cash balance of $1,032,920 and our cash balance
has decreased since that time. We have been successful in the past in raising
equity financing. For the years ended September 30, 2002, 2001 and 2000, we
received cash proceeds from the issuance of common stock of $1,456,724,
$2,332,005 and $6,951,913. For the years ended September 30, 2002, 2001 and
2000, we have received cash proceeds from the issuance of convertible preferred
stock of $500,000, $793,673 and $150,000.
To achieve our objectives as planned for fiscal 2003, 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
all or some of the assets of Sand Creek Energy, LLC, a company in which we have
a 50% interest. We are currently funding 50% of the expense of maintaining this
facility at a cost of approximately $18,000 per month. We believe that with our
current available cash, revenues from operations, additional equity financing
and the potential sale of assets, we will be able to meet our cash operating
requirements through September 30, 2003.
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.
56
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
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 20% of our total revenues in fiscal 2002 and 21% in fiscal
2001. 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, 2002 and 2001. We are not able to determine
if it is more likely than not that the net deferred tax assets will be realized.
See Note 15 to the Consolidated Financial Statements.
ANALYSIS OF CASH FLOW
OPERATING ACTIVITIES
Net Loss. Operating activities produced net losses of $5,332,613 during
fiscal 2002, as compared to $6,770,707 during fiscal 2001. The cash flows used
in operations during these periods resulted from the following operating
activities.
Depreciation. Depreciation is a non-cash expense. This expense
increased during fiscal 2002 by $120,218, as compared to fiscal 2001. This
increase was attributable to the additional equipment acquired for our oil and
57
gas field services segment as well as for our development and testing
laboratory. The increase was offset by a decrease attributable to the fact that
certain fixed assets became fully depreciated during the year.
Amortization. Amortization is also a non-cash expense. This expense
increased during fiscal 2002 by $126,596, as compared to fiscal 2001. The
increase is attributable to the amortization of capitalized software, production
backlog and non-compete agreement acquired with the purchase of REN Corporation,
and is offset by the decrease in amortization of goodwill. In accordance with
SFAS No. 142, the Company is no longer amortizing goodwill related to the
acquisitions of OKON and PML. During fiscal 2001, we amortized $98,351 in
goodwill related to these acquisitions.
Bad Debt Expense. During fiscal 2002, we wrote-off the note receivable
from Dresser Engineers & Constructors, Inc. as a bad debt expense of $191,779 as
we determined that the note receivable was not collectible.
Revenue Recognized from Contract Liability. We completed the Wyoming
Business Council study during fiscal 2002. As such, we recognized revenue of
$800,000, of which $750,000 has previously been recorded as a contract
liability.
Interest Income on Receivable from Related Party. During fiscal 2002,
we added $16,038 of interest income back to operations. This amount relates to
the interest earned on the note receivable from REN which was included in the
Stock Purchase Agreement.
Equity in Loss of Investee. We recognized equity in loss of investee in
the amount of $252,013 during fiscal 2002. 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 decrease during
fiscal 2002 is due to a decrease in insurance and other maintenance costs of the
facility.
Minority Interest in Net Income of Subsidiary. The minority interest in
net income of subsidiary of $12,921 during fiscal 2002 results from the
acquisition of 56% of REN Corporation.
Stock Options Issued for Services. During fiscal 2002, we issued stock
options in lieu of cash to certain independent contractor consultants for their
services. As a result, recognized $88,845 in consulting expense related to the
issuances.
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 decreased by $304,277 during
fiscal 2002, as compared to fiscal 2001. The decrease in accounts receivable was
due to increased collection efforts within each of our business segments as well
as a decrease in sales by the paint segment of 19% and a decrease of revenue
from the oil and gas field services segment of 33%. These decreases were
partially offset by an increase in technical services revenue at our research
and development laboratory of 6% and an increase in revenue from our industrial
automation systems segment of 1401%.
Costs and Estimated Earnings in Excess of Billings. Costs and estimated
earnings in excess of billings decreased $715,707 during fiscal 2002 as a result
of the timing of contract billings and other contract activity within the
industrial automation systems segment. These contracts are accounted for under
the percentage of completion method of accounting.
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Other Receivables and Receivable from Related Party. Other receivables
and receivable from related party decreased during fiscal 2002 by $38,539 due to
the collection of the prior year balance in receivable from related party.
Inventories. Inventories increased by $19,155 during fiscal 2002. The
increase is a result of inventory-building at OKON due to an industry-wide
reduction in inventory stocking levels by customers, resulting from construction
slow-downs in our primary distribution markets.
Prepaid Expenses and Other Current Assets. Prepaid expenses and other
current assets decreased during fiscal 2002 by $324,571. The decrease reflects
the timing of the payment of certain annual insurance premiums as well as the
reduced stock subscription receivable in fiscal 2002 as compared to fiscal 2001.
Billings in Excess of Costs and Estimated Earnings. Billings in excess
of costs and estimated earnings increased $13,855 during fiscal 2002 as a result
of contracts within the industrial automation systems segment which are
accounted for under the percentage of completion method of accounting.
Accrued Liabilities, Accrued Payroll and Other. Accrued liabilities,
accrued payroll and other increased $221,905 during fiscal 2002 as a result of
the timing of payment of certain payroll related accruals.
Net Cash Used in Operating Activities. The total net cash used in
operations increased to $4,172,815 during fiscal 2002, as compared to $3,218,907
during fiscal 2001. The increase reflects increased cash costs for general and
administrative expenses those for our industrial automation systems subsidiary
acquired in August 2001.
INVESTING ACTIVITIES
Purchase of Property and Equipment. During fiscal 2002, we purchased
$227,354 of property and equipment. Most of these purchases, $104,676 and
$64,804, respectively, were for our development and testing research laboratory
facilities and for mud logging vehicles.
Proceeds from Disposal of Fixed Assets. We received proceeds from the
disposal of fixed assets during fiscal 2002 of $9,990.
Cash Used in Purchase of Investments. We used $248,820 to fund our 50%
share of expenses of Sand Creek Energy, LLC during fiscal 2002.
Deposits and Other Assets. During fiscal 2002, our net increase in
deposits and other assets was $112,909. During the year, we acquired long-term
convertible debt for which we had issuance costs of $132,461. These costs are
being amortized over the life of the loans. This increase was offset by certain
other decreases in deposits and other assets.
Net Cash Used in Investing Activities. The total net cash used in
investing activities decreased to $579,093 during fiscal 2002 as compared to
$1,022,175 during fiscal 2001. The decrease reflects a significant decrease in
the purchase of property and equipment and the fact that no cash was used to
acquire a business in fiscal 2002 as in fiscal 2001.
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FINANCING ACTIVITIES
Proceeds from Issuance of Common Stock. During fiscal 2002, we received
$1,456,724 in cash proceeds from the issuance of common stock compared to
$2,332,005 during fiscal 2001.
Proceeds from Issuance of Convertible Preferred Stock. During fiscal
2002, we received $500,000 in cash proceeds from the issuance of convertible
preferred stock compared to $793,673 during fiscal 2001.
Proceeds from Stock Subscription Receivable. During fiscal 2002, we
received proceeds from a stock subscription receivable in the amount of
$250,000, as compared to no proceeds during fiscal 2001.
Purchase of Restricted Cash. During fiscal 2002, we purchased
restricted cash in the amount of $500,000, as compared to no such purchase
during fiscal 2001.
Payment of Offering Costs. During fiscal 2002, we paid $147,644 in
offering costs as compared to $75,980 during fiscal 2001.
Proceeds from Line of Credit. During fiscal 2002, we received net
proceeds from a line of credit of $1,493,839 as compared to no such proceeds
during fiscal 2001.
Proceeds from Long-Term Debt and Notes Payable. During fiscal 2002, we
received proceeds from long-term convertible debt in the amount of $2,250,000,
compared to no such proceeds during fiscal 2001. During fiscal 2001, we received
proceeds of $444,951 from notes payable with no such amounts during fiscal 2002.
Payments on Related Party Payable. During fiscal 2002, we repaid
$30,600 on a related party payable. There were no such repayments during fiscal
2001.
Payments on Long-Term Debt and Notes Payable. During fiscal 2002, we
repaid $380,943 on our debt obligations as compared to $624,846 during fiscal
2001.
Net Cash Provided by Financing Activities. The net cash provided by
financing activities during fiscal 2002 was $4,891,376, compared to $3,617,719
in cash provided by financing activities during fiscal 2001.
Cash increased during fiscal 2002 by $139,468 compared to a decrease of
$623,363 during fiscal 2001. These changes increased the ending cash balance at
September 30, 2002 to $1,032,920 and decreased the ending cash balance at
September 30, 2001 to $893,452.
WE HAVE A HISTORY OF OPERATING LOSSES, AND HAVE NEVER OPERATED AT A
PROFIT.
From our inception on December 18, 1981 through September 30, 2002, we
have incurred losses in the amount of $30,903,641. For the year ended September
30, 2002, our net loss was $5,332,613. 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.
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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.
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.
61
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.
CONTRACTUAL OBLIGATIONS
In addition to the line of credit and long-term convertible debt
previously described, we have entered into various other contractual
obligations. The following table lists our significant contractual obligations
at September 30, 2002.
Payments Due By Period
--------------------------------------------------------------
Less than After
Contractual Obligations 1 year 2-3 years 4-5 years 5 years Total
- -------------------------------------------------------------------------------------------
Lines of credit $1,493,839 $ -- $ -- $ -- $1,493,839
Long-term debt 127,103 66,015 33,902 978,486 1,205,506
Long-term convertible debt 47,048 106,940 2,070,352 -- 2,224,340
Operating leases 226,939 143,732 -- -- 370,671
- -------------------------------------------------------------------------------------------
$1,894,929 $ 316,687 $2,104,254 $ 978,486 $5,294,356
===========================================================================================
We have entered into various long-term promissory notes, with monthly
principal and interest payments of $39,893, at interest rates of 5.9% to 9.6%,
which are collateralized by certain fixed assets of the Company.
We have leased office space under a non-cancelable operating lease,
which expires October 31, 2003, with a renewal option for an additional five
years. We have also leased office and warehouse space under a lease which
expires during March 2005. In addition we have entered into various other
operating leases, which expire through August 2004.
In addition to the contractual obligations previously described, we
have entered into various other commercial commitments. The following table
lists these commitments at September 30, 2002.
62
Amount of Commitment Expiration Per Period
------------------------------------------------------------
Other Less than After
Commercial Commitments 1 year 2-3 years 4-5 years 5 years Total
- ------------------------------------------------------------------------------------------
Available lines of credit $ 6,161 $ -- $ -- $ -- $ 6,161
Employment agreements 1,046,619 273,026 -- -- 1,319,645
- ------------------------------------------------------------------------------------------
$1,052,780 $ 273,026 $ -- $ -- $1,325,806
==========================================================================================
We are a guarantor on the $1,000,000 line of credit with Premier Bank
until it matures on March 1, 2003. This guaranty includes any amount of the line
of credit attributable to the 44% shareholders of REN.
We have entered into various employment agreements with officers of the
Company which extend from January 1, 2001 to August 31, 2004. These agreements
describe annual compensation as well as the compensation that we must pay upon
termination of employment.
RECENT ACCOUNTING PRONOUNCEMENTS FROM FINANCIAL STATEMENT DISCLOSURES
In June 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 August 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4,
44 and 64, Amendment of FASB No. 13, and Technical Corrections." SFAS rescinds
FASB No. 4 "Reporting Gains and Losses from Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." This statement also rescinds SFAS No. 44
"Accounting for Intangible Assets of Motor Carriers" and amends SFAS No. 13,
"Accounting for Leases". This statement is effective for fiscal years beginning
after May 15, 2002. The Company does not expect the adoption of this statement
to have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value when the liability is incurred.
SFAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The Company does not
expect the adoption of this statement to have a material effect on the Company's
financial statements.
63
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions" SFAS No. 147 amends FASB Statements No. 72 and 144 and
FASB Interpretations No. 9. The Company does not expect the adoption of this
statement to have any material effect on the Company's financial statements.
In November 2002, the FASB published interpretation No, 45 "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The Interpretation expands on the
accounting guidance of Statements No. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being superseded.
The Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued
or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company is currently evaluating what effect the adoption of this
statement will have the Company's financial statements.
In October 2002, the FASB issued an exposure draft "Accounting for
Stock-Based Compensation- Transition and Disclosure". This proposed statement
would amend FASB Statement No. 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for an entity that voluntary changes
to the fair value method of accounting for stock-based compensation. In
addition, this proposed Statement would amend the disclosure provision of that
Statement to require more prominent disclosure about the effects of an entity's
accounting policy decisions with respect to stock-based employee compensation on
reported net income. The proposed effective date for this Statement would be for
fiscal years ended after December 15, 2002. The Company is currently evaluating
what effect the adoption of this statement will have the Company's financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes 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.
64
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 2002
-----------
Revenues $ 2,511,454 $ 2,361,105 $ 2,502,948 $ 2,184,828
Gross Profit $ 1,192,099 $ 987,324 $ 1,073,934 $ 844,735
Loss from operations $ (1,263,690) $ (1,502,173) $ (950,130) $ (1,146,567)
Net Loss $ (1,307,071) $ (1,697,853) $ (1,092,019) $ (1,235,670)
Loss Per share $ (.02) $ (.02) $ (.02) $ (.02)
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 from operations $ (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)
The financial statements identified in Item 13 are filed as part of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 19, 2002, Rentech dismissed BDO Seidman LLP as our
independent public accountants and engaged Ehrhardt Keefe Steiner & Hottman P.C.
to serve as our independent certified public accountants for fiscal 2002. The
decision to change independent public accountants was recommended by the Audit
Committee and approved by our Board of Directors.
BDO Seidman's reports on our consolidated financial statements for each
of the fiscal years ended 2000 and 2001 did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
During the fiscal years ended 2000 and 2001, and through August 19,
2002, there were no disagreements with BDO Seidman on any matter of accounting
principle or practice, financial statement disclosure, or auditing scope or
procedure which, if not resolved to BDO Seidman's satisfaction, would have
caused them to make reference to the subject matter in connection with their
report on our consolidated financial statements for such years; and there were
no reportable events as defined in item 304(a)(1)(v) of Regulation S-K.
Rentech provided both BDO Seidman and Ehrhardt Keefe Steiner & Hottman
with a copy of the foregoing disclosures.
During the fiscal years ended 2000 and 2001 and through the date of our
decision, Rentech did not consult Ehrhardt Keefe Steiner & Hottman with respect
to the application of accounting principles to a specified transaction either
completed or proposed, or the type of audit opinion that might be rendered on
our consolidated financial statements, or any other matters or reportable events
as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
65
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 2005
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 2005
- ---------------
(1) Member of audit committee.
(2) Director since 1984 and officer since 1989.
(3) Member of compensation committee.
(4) President since 1983.
John J. Ball, Director--
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.
66
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--
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.
67
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.
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.
68
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.
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
69
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.
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
70
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.
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
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 (1) Compen- Stock Underlying LTIP Compen-
Position Year Salary Bonus sation Award(s) Options/SARs Payouts sation
- -------- ---- ------ ----- ------ -------- ------------ ------- ------
($) ($) ($) ($) (#) ($) ($)
Dennis L. Yakobson 2002 $238,383 -- -- -- 95,000 -- --
Chief Executive 2001 $235,437 -- -- 60,000 -- --
Officer (2) 2000 $224,950 $120,147 -- -- -- -- --
Ronald C. Butz 2002 $211,294 -- -- -- 95,000 -- --
Chief Operating 2001 $208,683 -- -- -- 60,000 -- --
Officer(3) 2000 $199,388 $ 88,147 -- -- -- -- --
Charles B. Benham 2002 $150,948 -- 90,000 -- --
Vice President - 2001 $148,483 -- -- 50,000 -- --
Research & 2000 $141,842 $ 43,046 -- -- -- -- --
Development(4)
Mark S. Bohn 2002 $150,948 -- -- -- 40,000 -- --
Vice President - 2001 $147,550 -- -- -- 50,000 -- --
Engineering(5) 2000 $132,512 $ 43,046 -- -- -- -- --
James P. Samuels 2002 $149,865 -- -- -- 80,000 -- --
Chief Financial 2001 $146,501 -- -- -- 50,000 -- --
Officer(6) 2000 $140,031 $ 52,884 -- -- -- -- --
- --------------------
71
(1) After payment of personnel income tax obligations on these sums, the
recipients individually elected to invest all their net bonus amounts
in Rentech by exercising stock options.
(2) Of this amount, $64,300, $43,314, and $42,910 were non-funded deferred
compensation as of September 30, 2002, 2001, and 2000, respectively,
with a balance of non-funded deferred compensation as of September 30,
2002 of $209,490.
(3) Of this amount, $54,622, $32,936 and $31,613 were non-funded deferred
compensation as of September 30, 2002, 2001, and 2000, respectively,
with a balance of non-funded deferred compensation as of September 30,
2002 of $156,646.
(4) Of this amount, $17,017 was non-funded deferred compensation as of
September 30, 2002, with a balance of non-funded deferred compensation
as of September 30, 2002 of $22,080.
(5) Of this amount, $17,107 was non-funded deferred compensation as of
September 30, 2002, with a balance of non-funded deferred compensation
as of September 30, 2002 of $22,080.
(6) Of this amount, $16,985 was non-funded deferred compensation as of
September 30, 2002, with a balance of non-funded deferred compensation
as of September 30, 2002 of $8,740.
OPTION/SAR GRANTS
The following table sets forth information with respect to the named
executives concerning the grant of stock options and/or limited SARs during the
last fiscal year:
Option/SAR Grants in Last Fiscal Year*
Individual Grants Grant Date Value
- ----------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f)
Number of % of Total Grant
Securities Options/SARs Date
Underlying Granted to Exercise or Present
Options/SARs Employees in Base Price Expiration ValueName
Granted (#) Fiscal Year ($/Sh) Date
Dennis L. Yakobson 25,000 9.0% $0.47 01/17/2007 $0.47
70,000 $0.41 07/10/2007 $0.41
Ronald C. Butz 25,000 9.0% $0.47 01/17/2007 $0.47
70,000 $0.41 07/10/2007 $0.41
Charles B. Benham 20,000 8.5% $0.47 01/17/2007 $0.47
70,000 $0.41 07/10/2007 $0.41
Mark S. Bohn 20,000 8.5% $0.47 01/17/2007 $0.47
20,000 $0.41 07/10/2007 $0.41
James P. Samuels 20,000 7.6% $0.47 01/17/2007 $0.47
60,000 $0.41 07/10/2007 $0.41
* The market price is the closing market price on the date of grant.
OPTION/SAR EXERCISES AND HOLDINGS
The following table sets forth information with respect to the named
executives, concerning the exercise of options and/or limited SARs during the
last fiscal year and unexercised options and limited SARs held as of the end of
the last fiscal year.
72
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values:
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired at FY-End(#) at FY-End
On Exercise Value Exercisable/ Exercisable/
Name (#) Realized ($) Unexercisable Unexercisable ($)
- ---------------------------------------------------------------------------------------
Dennis L. Yakobson 60,000 $ 17,675 210,000(1) $ 14,650
Ronald C. Butz 0 $ 0 210,000(1) 14,650
Charles B. Benham 60,000 $ 17,675 190,000(1) 14,100
Mark S. Bohn 60,000 $ 17,675 140,000(1) 5,600
James P. Samuels 220,000 $ 69,400 180,000(1) 12,400
- --------------
(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.
Executive Employment Agreements
We have entered into employment agreements with the executive officers
identified in the preceding table. These agreements provide for annual base
salaries which may be increased by us from time to time, with annual cost of
living increases. In addition, each employment agreement entitles the employee
to participate in employee benefit plans that we may from time to time offer to
our employees.
Each agreement is for an initial term of three years. Upon the
expiration of each year, the term is extended for one year, unless either we or
the employee elect not to extend the term, so that a three-year term remains in
effect, unless one party has rejected the extension.
Under each agreement, employment may be terminated as follows:
o by us upon the employee's death, disability or cause;
o by the employee if the employee's annual salary is decreased; the
employee is relocated without consent; we have breached the employment
agreement; we have purported to terminate the employee without giving reasonable
notice of the basis; or disability.
If employment is terminated by reason of death, we will continue to pay
salary monthly for 12 months, or if for disability, we will pay an amount equal
to the employee's annual salary upon termination. If we wrongfully terminate the
73
employee's employment, we are required to pay severance pay in a lump sum equal
to three times the annual salary, and other damages resulting from our breach,
including those for loss of employee benefits during the remaining term of the
agreement.
By each agreement, the employee is prohibited from disclosing to third
parties, directly or indirectly, our trade secrets, either during or after the
employee's employment with our company, other than as required in the
performance of the employee's duties. The agreement also provides that the
employee will not have or claim any right, title or interest in any invention
owned by us. The employee also agrees to irrevocably assign to us all of the
employee's right, title and interest in and to any and all inventions and
concepts made, generated or conceived by the employee during his or her period
of employment with us and which related to our business, whether or not
developed on the employee's own time. Each employee further agrees that during
the period of employment with us and for a period of three years following the
termination of employment, the employee will not compete with us, and for a
period of one year, not to solicit our business customers or employees to
discontinue or change their relationship with us.
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 $134,094, $120,238 and $26,421 to the plan for the years ended
September 30, 2002, 2001, and 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
74
The following table provides information as of September 30, 2002 with
respect to our compensation plans, including individual compensation
arrangements, under which our equity securities are authorized for issuance.
(a) (b) (c)
----------------- ----------- ------------
Number of
securities
remaining
available
for future
Weighted- issuance
Number of average under equity
securities to be exercise compensation
issued upon price of plans
exercise of outstanding (excluding
outstanding options, securities
options, warrants warrants reflected in
Plan category and rights and rights column (a))
- ------------------------ --------------- ---------- ----------
Equity compensation
plans approved by
security holders 1,158,000 $0.70 430,000
Equity compensation
plans not approved by
security holders(1)(2)(3) 1,917,000 $0.77 0
Total 3,075,000 $0.74 430,000
- ----------------
(1) Includes stock options to purchase 1,134,000 shares of common stock issued
as compensation to employees pursuant to individual grants that were approved by
the board of directors. These options may be exercised for terms of five years
from the dates of the grants. The exercise prices payable in cash upon exercise
of the options are the market value of our stock on the day of the respective
grants.
(2) Includes stock options to purchase 88,000 shares of common stock issued to
employees pursuant to the 2003 Stock Option Plan, described in Note 11 to our
Consolidated Financial Statements attached to this report.
(3) Includes stock options to purchase 695,000 shares of common stock issued to
consultants pursuant to individual compensation arrangements. These stock
options have expiration dates ranging between three and five years from the
dates of the grants. The exercise prices of these options range between $0.55
and $1.25 per share, and are not based on the market value of our stock on the
day of the respective grants.
75
The following table sets forth certain information as of December 17,
2002 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 the
Company's voting securities 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
Name and Address of Nature of
------------------- Beneficial Percent
Title of Class Beneficial Owner(1)(2) Ownership(3) of Class
- -------------- ---------------- --------- --------
Common C. David Callaham(4) 4,120,700(5) 5.7%
Common John J. Ball (6) 175,000 *
Common Charles B. Benham 846,320 1.2%
Common Mark S. Bohn 856,710 1.2%
Common Ronald C. Butz(7) 775,031 1.1%
Common John P. Diesel 250,000 *
Common James P. Samuels 728,500 1.0%
Common Douglas L. Sheeran 340,850 *
Common Erich W. Tiepel 635,125 *
Common Dennis L. Yakobson(8) 965,824 1.3%
All Directors and
Executive Officers
as a Group (9 persons) 5,573,360 7.7%
- ---------------
*Less than 1%.
(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 - 100,000; Charles B. Benham - 190,000; Mark S. Bohn - 140,000;
Ronald C. Butz - 210,000; John P. Diesel - 100,000; James P. Samuels -
180,000; Douglas L. Sheeran - 100,000; Erich W. Tiepel - 140,000;
Dennis L. Yakobson - 210,000.
(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) Mr. Callaham's address is 10804 N.E. Highway 99, Vancouver, WA 98686.
(5) Includes 415,350 shares of common stock underlying stock purchase
warrants.
(6) Includes 2,000 shares of common stock held by Mr. Ball's wife, as to
which Mr. Ball disclaims beneficial ownership.
(7) Does not include 237,432 shares of common stock held by Mr. Butz's
wife, as to which Mr. Butz disclaims beneficial ownership.
(8) Includes 8,000 shares of common stock held by Mr. Yakobson's wife, as
to which Mr. Yakobson disclaims beneficial ownership.
76
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the year ended September 30, 2002, we incurred $10,000 in
consulting services which were paid to a director of the Company. As of
September 30, 2001 we owed an officer of the Company $30,600. This payable did
not bear interest and was repaid during fiscal 2002.
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 $1,000,000.
For the year ended September 30, 2002 and 2001, we contributed $248,820
and $372,794 to SCE and have recognized $252,013 and $386,047 related to our
equity in SCE's loss. Also, as of September 30, 2002 and 2001, we have a
receivable due from SCE in the amount of $17,966 and $69,293.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Rentech's chief executive officer and chief financial officer evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934, as amended) within 90 days
of the filing date of this Form 10-K (the Evaluation Date). Based on that
evaluation, they concluded that, as of the Evaluation Date, Rentech had
sufficient procedures for recording, processing, summarizing and reporting
information that is required to be disclosed in its reports under the Securities
Exchange Act of 1934, as amended.
Since the Evaluation Date, there have not been any significant changes
to Rentech's internal controls or other factors that could significantly affect
these controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements
See Index to Financial Statements and Schedule at page F-1.
(b) Reports on Form 8-K
Current Report on Form 8-K filed on November 12, 2002.
(c) Exhibits Required by Item 601 of Regulation S-K See Index to Exhibits.
(d) Financial Statement Schedules
See Index to Financial Statements and Schedules at page F-1.
77
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 23, 2002 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 23, 2002 Dennis L. Yakobson, President, Chief
Executive Officer and Director
/s/ Ronald C. Butz
-------------------------------------------
Date: December 23, 2002 Ronald C. Butz, Chief Operating Officer,
Vice President, Secretary and Director
/s/ James P. Samuels
-------------------------------------------
Date: December 23, 2002 James P. Samuels, Vice President - Finance,
Chief Financial Officer
/s/ John J. Ball
-------------------------------------------
Date: December 23, 2002 John J. Ball, Director
/s/ John P. Diesel
-------------------------------------------
Date: December 23, 2002 John P. Diesel, Director
/s/ Douglas L. Sheeran
-------------------------------------------
Date: December 23, 2002 Douglas L. Sheeran, Director
/s/ Erich W. Tiepel
-------------------------------------------
Date: December 23, 2002 Erich W. Tiepel, Director
78
CERTIFICATION
I, Dennis L. Yakobson, certify that:
1. I have reviewed this annual report on Form 10-K of Rentech, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 23, 2002 /s/ Dennis L. Yakobson
-----------------------------
Signature: Dennis L. Yakobson
Title: Chief Executive Officer
79
CERTIFICATION
I, James P. Samuels, certify that:
1. I have reviewed this annual report on Form 10-K of Rentech, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 23, 2002 /s/ James P. Samuels
----------------------------
Signature: James P. Samuels
Title: Chief Financial Officer
80
EXHIBIT INDEX
2.1 Stock Purchase Agreement dated August 1, 2001 between Rentech and Ren
Corporation (incorporated by reference to the exhibits to Rentech's
Annual Report on Form 10-K for the fiscal year ended September 30,
2001).
3.1 Restated and Amended Articles of Incorporation, dated January 4, 1991
(incorporated by reference to the exhibits to Amendment No. 2 to
Rentech's Registration Statement No. 33-378150-D on Form S-18).
3.2 Articles of Amendment dated April 5, 1991 to the Restated and Amended
Articles of Incorporation (incorporated by reference to the exhibits to
Rentech's Current Report on Form 8-K dated August 10, 1993 filed with
the Securities and Exchange Commission).
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 to Exhibit No. 3.(I).2 to Rentech's Annual Report on Form
10-KSB filed with the Securities and Exchange Commission on January 13,
1999).
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 to
Exhibit No. 3.(I).4 to Rentech's Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission on January 13, 1999).
3.5 Bylaws dated January 19, 1999 (incorporated by reference to Exhibit No.
3.(ii) to Rentech's Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on January 12, 2000).
4.1 Shareholder Rights Plan dated November 10, 1998 (incorporated by
reference to the exhibits to Rentech's Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 19, 1998).
4.2 Form of Warrant issued to investors in the 1999 private placement of
securities (incorporated by reference to Exhibit No. 4.2 to Rentech's
Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission on January 12, 2000).
10.1 1990 Stock Option Plan (incorporated by reference to the exhibits to
Rentech's Registration Statement No. 33-37150-D on Form S-18.)
10.2 1994 Stock Option Plan (incorporated by reference to the exhibits to
Post-Effective Amendment No. 5 to Rentech's Registration Statement No.
33-37150-D Form S-18 on Form SB-2).
10.3 1996 Stock Option Plan (incorporated by reference to the exhibits to
Rentech's Current Report on Form 8-K dated December 18, 1996).
81
10.4 1998 Stock Option Plan (incorporated by reference to the exhibits to
Rentech's Registration Statement No. 333-95537 on Form S-8).
10.5 2001 Stock Option Plan.
10.6 2003 Stock Option Plan.
10.7 Employment Contract with executive officer of subsidiary Ren
Corporation (incorporated by reference to Exhibit 10.6 to Rentech's
Annual Report on Form 10-K for the year ended September 30, 2001).
10.8 License Agreement with Texaco Natural Gas, Inc. dated October 8, 1998
(incorporated by reference to Exhibit 10.10 to Rentech's Annual Report
on Form 10-KSB for the year ended September 30, 1998).
10.9 Technical Services Agreement dated June 14, 1999 between Rentech and
Texaco Energy Systems, Inc. (incorporated by reference to Exhibit 10.7
to Rentech's Annual Report on Form 10-K for the year ended September
30, 2001)
10.10 Services Contract with Wyoming Business Council dated January 30, 2001
(incorporated by reference to Exhibit No. 10.9 to Rentech's Amendment
Two to Registration Statement No. 333-85682 on Form S-3/A).
10.11 Marketing Agreement with Comart dated July 22, 2000 (incorporated by
reference to Exhibit No. 10.10 to Rentech's Amendment No. Two to
Registration Statement No. 333-85682 on Form S-3/A).
10.12 Letter Agreement with BC Projectos dated March 4, 1999 (incorporated by
reference to Exhibit No. 10.11 to Rentech's Amendment No. Two to
Registration Statement No. 333-85682 on Form S-3/A).
10.13 Letter of Intent with Pertamina dated October 2, 2001 (incorporated by
reference to Exhibit No. 10.12 to Rentech's Amendment No. Two to
Registration Statement No. 333-85682 on Form S-3/A).
10.14 Letter of Intent with Oroboros AB dated September 29, 1999
(incorporated by reference to Exhibit No. 10.13 to Rentech's Amendment
No. Two to Registration Statement No. 333-85682 on Form S-3/A).
10.15 Memorandum of Understanding with GTL Bolivia, S.A. dated June 22, 2001
(incorporated by reference to Exhibit No. 10.14 to Rentech's Amendment
No. Two to Registration Statement No. 333-85682 on Form S-3/A).
10.16 Memorandum of Understanding with Jacobs Engineering U.K. Limited dated
July 15, 1999 (incorporated by reference to Exhibit No. 10.15 to
Rentech's Amendment No. Two to Registration Statement No. 333-85682 on
Form S-3/A).
82
10.17 Agreement with Petrie Parkman & Co. dated May 10, 2001 (incorporated by
reference to Exhibit No. 10.16 to Rentech's Amendment No. Two to
Registration Statement No. 333-85682 on Form S-3/A).
10.18 Employment Agreement with Charles B. Benham (incorporated by reference
to Exhibit No. 10.18 to Rentech's Amendment No. Two to Registration
Statement No. 333-85682 on Form S-3/A).
10.19 Employment Agreement with Mark S. Bohn (incorporated by reference to
Exhibit No. 10.19 to Rentech's Amendment No. Two to Registration
Statement No. 333-85682 on Form S-3/A).
10.20 Employment Agreement with Ronald C. Butz (incorporated by reference to
Exhibit No. 10.20 to Rentech's Amendment No. Two to Registration
Statement No. 333-85682 on Form S-3/A).
10.21 Employment Agreement with James P. Samuels (incorporated by reference
to Exhibit No. 10.21 to Rentech's Amendment No. Two to Registration
Statement No. 333-85682 on Form S-3/A).
10.22 Employment Agreement with Dennis L. Yakobson (incorporated by reference
to Exhibit No. 10.22 to Rentech's Amendment No. Two to Registration
Statement No. 333-85682 on Form S-3/A).
21 Subsidiaries of Rentech Inc.
23 Consent of Independent Certified Public Accountants.
99 Letter of Intent between Rentech, Inc. and ITN Energy Systems, Inc.
dated October 17, 1996 (incorporated by reference to the exhibits to
Registrant's Current Report on Form 8-K/A dated November 7, 1996).
83
RENTECH, INC. AND SUBSIDIARIES
Table of Contents
-----------------
Page
----
Independent Auditors' Report...............................................F - 2
Consolidated Financial Statements
Consolidated Balance Sheets.......................................F - 3
Consolidated Statements of Operations.............................F - 5
Consolidated Statement of Stockholders' Equity....................F - 6
Consolidated Statements of Cash Flows.............................F - 8
Notes to Consolidated Financial Statements................................F - 11
F - 1
INDEPENDENT AUDITORS' REPORT
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, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 2002. 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, 2002 and 2001 and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has experienced circumstances, which raise substantial
doubt about its ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Ehrhardt Keefe Steiner & Hottman PC
December 18, 2002
Denver, Colorado
F-2
RENTECH, INC.
Consolidated Balance Sheets
September 30,
-------------------------
2002 2001
----------- -----------
Assets
Current assets
Cash $ 1,032,920 $ 893,452
Restricted cash 500,000 --
Accounts receivable, net of $12,000 (2002) and $7,325 (2001)
allowance for doubtful accounts (Note 17) 1,436,886 1,745,838
Costs and estimated earnings in excess of billings (Note 13) 788,727 73,020
Stock subscription receivable (Note 11) 76,186 250,000
Note receivable (Note 6) -- 191,779
Other receivables 65,494 52,706
Receivable from related party (Note 7) 17,966 69,293
Inventories (Note 3) 757,393 738,238
Prepaid expenses and other current assets 253,646 309,064
----------- -----------
Total current assets 4,929,218 4,323,390
----------- -----------
Property and equipment, net (Note 4) 4,120,915 4,388,776
Other assets
Licensed technology, net of accumulated amortization of
$2,077,528 (2002) and $1,848,747 (2001) 1,353,621 1,582,402
Capitalized software costs, net of accumulated amortization of
$552,386 (2002) and $236,429 (2001) 395,306 711,263
Goodwill, net of accumulated amortization of $400,599 (2002)
and $400,599 (2001) (Notes 2 and 14) 1,281,807 1,511,368
Production backlog, net of accumulated amortization of
$166,117 (2002) and $27,762 (2001) -- 138,355
Non-compete agreement, net of accumulated amortization of
$38,500 (2002) and $5,432 (2001) 124,001 157,069
Investment in INICA, Inc. (Note 5) 3,079,107 3,079,107
Technology rights, net of accumulated amortization of $143,873
(2002) and $115,098 (2001) 143,873 172,648
Note and other receivable from related party (Notes 2 and 12) 571,394 --
Deposits and other assets, net of $0 (2002) and $167,206 (2001)
allowance for doubtful accounts 163,986 51,077
----------- -----------
Total other assets 7,113,095 7,403,289
----------- -----------
$16,163,228 $16,115,455
=========== ===========
(Continued on following page.)
See notes to consolidated financial statements.
F-3
RENTECH, INC.
Consolidated Balance Sheets
(Continued from previous page.)
September 30,
----------------------------
2002 2001
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 886,254 $ 883,255
Billings in excess of costs and estimated earnings (Note 13) 144,785 130,930
Payable to related party (Note 20) -- 30,600
Accrued payroll and benefits 201,191 190,530
Deferred compensation (Note 12) 419,036 346,000
Accrued liabilities 508,276 436,017
Other liability (Note 12) 326,000 --
Contract liability (Note 19) -- 750,000
Lines of credit payable (Note 10) 1,493,839 --
Current portion of long-term debt (Note 8) 127,103 143,863
Current portion of long-term convertible debt to stockholders (Note 9) 47,048 --
------------ ------------
Total current liabilities 4,153,532 2,911,195
------------ ------------
Long-term liabilities
Long-term debt, net of current portion (Note 8) 1,078,403 1,147,773
Long-term convertible debt to stockholders, net of current portion
(Note 9) 2,177,292 --
Lessee deposits 7,485 7,485
Investment in Sand Creek (Note 7) 5,864 2,669
------------ ------------
Total long-term liabilities 3,269,044 1,157,927
------------ ------------
Total liabilities 7,422,576 4,069,122
------------ ------------
Minority interest (Note 2) 296,710 309,632
------------ ------------
Commitments and contingencies (Notes 1, 7, 12 and 19)
Stockholders' equity (Note 11)
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; 691,664 and 641,664 shares issued and no and 27,778
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;
71,790,667 and 66,665,631 shares issued and outstanding 717,907 666,653
Additional paid-in capital 38,629,676 36,384,562
Unearned compensation -- (21,266)
Accumulated deficit (30,903,641) (25,571,028)
------------ ------------
Total stockholders' equity 8,443,942 11,736,701
------------ ------------
$ 16,163,228 $ 16,115,455
============ ============
See notes to consolidated financial statements
F-4
RENTECH, INC.
Consolidated Statements of Operations
For the Years Ended
September 30,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Revenues (Notes 16 and 17)
Product sales $ 1,927,854 $ 2,367,689 $ 2,096,159
Service revenues 7,392,481 5,558,887 2,710,448
Royalty income 240,000 240,000 260,000
------------ ------------ ------------
Total revenues 9,560,335 8,166,576 5,066,607
------------ ------------ ------------
Cost of sales
Product sales 932,677 1,124,951 1,029,812
Service costs 4,401,566 4,464,800 2,104,584
Research and development contract costs (Note 19) 128,000 560,608 --
------------ ------------ ------------
Total cost of sales 5,462,243 6,150,359 3,134,396
------------ ------------ ------------
Gross profit 4,098,092 2,016,217 1,932,211
Operating expenses
General and administrative expense 7,327,898 5,591,046 4,776,431
Depreciation and amortization 889,831 798,167 444,908
Research and development 742,923 204,583 515,261
------------ ------------ ------------
Total operating expenses 8,960,652 6,593,796 5,736,600
------------ ------------ ------------
Loss from operations (4,862,560) (4,577,579) (3,804,389)
------------ ------------ ------------
Other income (expenses)
Loss on investment (Note 6) -- (1,842,135) --
Equity in loss of investee (Note 7) (252,013) (386,047) (276,585)
Interest income 36,468 121,509 135,443
Interest expense (267,618) (108,166) (136,833)
Gain (loss) on disposal of fixed assets 189 -- (17,031)
------------ ------------ ------------
Total other income (expense) (482,974) (2,214,839) (295,006)
------------ ------------ ------------
Minority interest in subsidiary's net loss 12,921 21,711 --
------------ ------------ ------------
Net loss (5,332,613) (6,770,707) (4,099,395)
Dividend requirements on convertible preferred stock
(Note 11) 136,932 483,599 89,611
------------ ------------ ------------
Loss applicable to common stockholders $ (5,469,545) $ (7,254,306) $ (4,189,006)
============ ============ ============
Basic and diluted loss per common share $ (.08) $ (.11) $ (.07)
============ ============ ============
Basic and diluted weighted-average number of common
shares outstanding 69,987,685 64,807,168 57,532,816
============ ============ ============
See notes to consolidated financial statements
F-5
RENTECH, INC.
Consolidated Statements of Stockholders' Equity
Convertible Preferred Stock
---------------------------------------------------------
Series A Series B Common Stock
--------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 1999 -- $ -- 133,332 $ 1,333,320 49,272,747 $ 492,725
Common stock and stock options issued
for cash net of offering costs of $603,049
(Note 11) -- -- -- -- 8,428,334 84,283
Common stock issued for cash on options
and warrants exercised (Note 11) -- -- -- -- 2,324,527 23,245
Common stock issued for deposit on
business acquisition (Notes 2 and 11) -- -- -- -- 200,000 2,000
Common stock issued for services -- -- -- -- 100,000 1,000
Common stock issued for prepaid
expenses -- -- -- -- 100,000 1,000
Common stock issued for commissions on
business acquisition (Note 11) -- -- -- -- 60,000 600
Preferred stock issued for cash, net of
offering costs of $16,660 (Note 11) -- -- 16,666 166,660 -- (16,660)
Preferred stock and $46,680 in dividends
redeemed for cash (Note 11) -- -- (23,832) (238,320) -- --
Common stock issued for conversion of
preferred stock and $22,731 in dividends
(Note 11) -- -- (126,166) (1,261,660) 2,338,620 23,387
Stock options granted for services
(Note 11) -- -- -- -- -- --
Stock options granted to employees for
services -- -- -- -- -- --
Deemed dividends on preferred stock of
$20,200 -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Additional Total
Paid-in Unearned Accumulated Stockholders'
Capital Compensation Deficit Equity
------------ ------------ ------------ ------------
Balance, September 30, 1999 $ 23,935,679 $ -- $(14,700,926) $ 11,060,798
Common stock and stock options issued
for cash net of offering costs of $603,049
(Note 11) 5,844,668 -- -- 5,928,951
Common stock issued for cash on options
and warrants exercised (Note 11) 999,717 -- -- 1,022,962
Common stock issued for deposit on
business acquisition (Notes 2 and 11) 398,000 -- -- 400,000
Common stock issued for services 52,120 -- -- 53,120
Common stock issued for prepaid
expenses 52,120 -- -- 53,120
Common stock issued for commissions on
business acquisition (Note 11) 29,400 -- -- 30,000
Preferred stock issued for cash, net of
offering costs of $16,660 (Note 11) -- -- 150,000
Preferred stock and $46,680 in dividends
redeemed for cash (Note 11) (46,680) -- -- (285,000)
Common stock issued for conversion of
preferred stock and $22,731 in dividends
(Note 11) 1,275,696 -- -- 37,423
Stock options granted for services
(Note 11) 351,998 -- -- 351,998
Stock options granted to employees for
services 49,829 (49,829) -- --
Deemed dividends on preferred stock of
$20,200 -- -- --
Net loss -- -- (4,099,395) (4,099,395)
------------ ------------ ------------ ------------
See notes to consolidated financial statements
F-6
Consolidated Statements of Stockholders' Equity
Convertible Preferred Stock
---------------------------------------------------------
Series A Series B Common Stock
--------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2000 -- -- -- -- 62,824,228 628,240
Common stock issued for cash, net of
offering costs of $103,995 (Note 11) -- -- -- -- 2,000,000 20,000
Common stock issued for cash on options
and warrants exercised (Note 11) -- -- -- -- 518,027 5,180
Common stock issued for deposit on
business acquisition (Notes 2 and 11) -- -- -- -- 200,000 2,000
Preferred stock issued for cash and a
$250,000 stock subscription receivable,
net of offering costs of $122,995
(Note 11) -- -- 116,666 1,166,668 -- --
Common stock issued for conversion of
preferred stock (Note 11) -- -- (88,888) (888,888) 1,123,376 11,233
Stock options granted for services
(Note 11) -- -- -- -- -- --
Warrants for convertible preferred stock
redeemed for cash -- -- -- -- -- --
Deemed dividends on preferred stock of
$483,599 (Note 11) -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2001 -- -- 27,778 277,780 66,665,631 666,653
Common stock issued for cash, net of
offering costs of $122,644 (Note 11) -- -- -- -- 2,926,969 29,272
Common stock issued for options and
warrants exercised (Note 11) -- -- -- -- 606,474 6,065
Preferred stock issued for cash, net of
offering costs of $25,000 (Note 11) -- -- 50,000 500,000 -- --
Common stock issued for conversion of
preferred stock (Note 11) -- -- (77,778) (777,780) 1,591,593 15,917
Stock options granted/earned for services
(Note 11) -- -- -- -- -- --
Deemed dividends on preferred stock of
$136,932 (Note 11) -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2002 -- $ -- -- $ -- 71,790,667 $ 717,907
============ ============ ============ ============ ============ ============
Additional Total
Paid-in Unearned Accumulated Stockholders'
Capital Compensation Deficit Equity
------------ ------------ ------------ ------------
Balance, September 30, 2000 32,925,887 (49,829) (18,800,321) 14,703,977
Common stock issued for cash, net of
offering costs of $103,995 (Note 11) 1,776,005 -- -- 1,796,005
Common stock issued for cash on options
and warrants exercised (Note 11) 530,820 -- -- 536,000
Common stock issued for deposit on
business acquisition (Notes 2 and 11) 242,000 -- -- 244,000
Preferred stock issued for cash and a
$250,000 stock subscription receivable,
net of offering costs of $122,995
(Note 11) (122,995) -- -- 1,043,673
Common stock issued for conversion of
preferred stock (Note 11) 877,655 -- -- --
Stock options granted for services
(Note 11) 157,274 28,563 -- 185,837
Warrants for convertible preferred stock
redeemed for cash (2,084) -- -- (2,084)
Deemed dividends on preferred stock of
$483,599 (Note 11) -- -- -- --
Net loss -- -- (6,770,707) (6,770,707)
------------ ------------ ------------ ------------
Balance, September 30, 2001 36,384,562 (21,266) (25,571,028) 11,736,701
Common stock issued for cash, net of
offering costs of $122,644 (Note 11) 1,311,334 -- -- 1,340,606
Common stock issued for options and
warrants exercised (Note 11) 129,338 -- -- 135,403
Preferred stock issued for cash, net of
offering costs of $25,000 (Note 11) (25,000) -- -- 475,000
Common stock issued for conversion of
preferred stock (Note 11) 761,863 -- -- --
Stock options granted/earned for services
(Note 11) 67,579 21,266 -- 88,845
Deemed dividends on preferred stock of
$136,932 (Note 11) -- -- -- --
Net loss -- -- (5,332,613) (5,332,613)
------------ ------------ ------------ ------------
Balance, September 30, 2002 $ 38,629,676 $ -- $(30,903,641) $ 8,443,942
============ ============ ============ ============
See notes to consolidated financial statements
F-7
RENTECH, INC.
Consolidated Statements of Cash Flows
For the Years Ended
September 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Operating activities
Net loss $(5,332,613) $(6,770,707) $(4,099,395)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash used in operating
activities
Increase in allowance for doubtful accounts 4,675 2,925 2,400
Depreciation 485,036 364,818 261,635
Amortization 744,936 618,340 350,352
Loss on investment -- 1,842,135 --
Bad debt expense 191,779 -- --
Write-off of deferred offering costs -- 123,642 --
Revenue recognized from contract liability (750,000) -- --
Interest income on receivable from related party (16,038) (70,814) --
Loss on disposal of fixed assets 189 -- 17,031
Equity in loss of investee 252,013 386,047 276,585
Minority interest in net loss of subsidiary (12,921) (21,711) --
Common stock issued for services -- 53,120 53,120
Stock options issued for services 88,845 185,837 351,998
Changes in operating assets and liabilities, net of business
combination
Accounts receivable 304,277 (919,072) (372,921)
Costs and estimated earnings in excess of billings (715,707) 203,736 --
Other receivables and receivable from related party 38,539 31,361 (105,893)
Inventories (19,155) (101,534) (27,384)
Prepaid expenses and other current assets 324,571 (20,749) 131,638
Accounts payable 2,999 459,780 14,190
Billings in excess of costs and estimated earnings 13,855 37,033 --
Accrued liabilities, accrued payroll and other 221,905 378,669 80,702
Lessee deposits -- (1,763) --
----------- ----------- -----------
1,159,798 3,551,800 1,033,453
----------- ----------- -----------
Net cash used in operating activities (4,172,815) (3,218,907) (3,065,942)
----------- ----------- -----------
Investing activities
Purchase of property and equipment (227,354) (676,379) (470,361)
Proceeds from disposal of fixed assets 9,990 -- 24,068
Net cash used in purchase of business -- (59,013) --
Purchase of capitalized software -- -- (851,610)
Cash used in purchase of investments (248,820) (372,794) (464,220)
Deposits for acquisitions -- -- (273,899)
Deposits and other assets (112,909) 86,011 (10,617)
----------- ----------- -----------
Net cash used in investing activities (579,093) (1,022,175) (2,046,639)
----------- ----------- -----------
Financing activities
Proceeds from issuance of common stock, net of offering costs 1,456,724 2,332,005 6,951,913
Proceeds from issuance of convertible preferred stock, net of
offering costs 500,000 793,673 150,000
Proceeds from stock subscription receivable 250,000 -- --
Purchase of restricted cash (500,000) -- --
Payment of offering costs (147,644) (75,980) (47,662)
Redemption of convertible preferred stock -- (2,084) (285,000)
Proceeds from contract liability -- 750,000 --
Proceeds from line of credit, net 1,493,839 -- --
Proceeds from long-term debt and notes payable 2,250,000 444,951 --
Payments on related party payable (30,600)
Payments on long-term convertible debt and notes payable (380,943) (624,846) (448,037)
----------- ----------- -----------
Net cash provided by financing activities 4,891,376 3,617,719 6,321,214
----------- ----------- -----------
Increase (decrease) in cash 139,468 (623,363) 1,208,633
Cash, beginning of year 893,452 1,516,815 308,182
----------- ----------- -----------
Cash, end of year $ 1,032,920 $ 893,452 $ 1,516,815
=========== =========== ===========
Continued on the following page.
See notes to consolidated financial statements
F-8
RENTECH, INC.
Consolidated Statements of Cash Flows
(Continued from previous page.)
For the Years Ended
September 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Cash payments for interest $ 267,618 $ 107,628 $ 136,833
=========== =========== ===========
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 in August 2001 (Note
2).
Working capital $ 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 satisfactions 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
==========
(Continued on following page.)
See notes to consolidated financial statements
F-9
RENTECH, INC.
Consolidated Statements of Cash Flows
(Continued from previous page.)
Excluded from the statements of cash flows were the effects of certain noncash
investing and financing activities as follows:
For the Years Ended
September 30,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Issuance of common stock from conversion of
preferred stock and dividends $ 777,780 $ 888,888 $1,261,660
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 common stock for stock subscription receivable $ 76,186 $ -- $ --
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 $ --
Issuance of common stock for unearned compensation $ -- $ -- $ 49,829
Issuance of common stock for prepaid expense and
services $ 269,153 $ -- $ 53,120
Issuance of common stock for acquisition of business $ -- $ -- $ 30,000
Increase in accrued liability for note receivable $ 325,795 $ -- $ --
Reclassification of goodwill to note receivable $ 229,561 $ -- $ --
Issuance of common stock for exercise of stock
options in partial settlement of accrued payroll $ 65,744 $ -- $ --
Issuance of stock options for services $ 67,579 $ -- $ 351,998
See notes to consolidated financial statements
F-10
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
- -------------------------------------------------------------------------------
Basis of Presentation
- ---------------------
Rentech, Inc. (the "Company" or "Rentech") was incorporated on December 18, 1981
in the state of Colorado to develop and market processes for conversion of
low-value, carbon-bearing solids or gases into valuable liquid hydrocarbons,
including high-grade diesel fuel, naphthas and waxes ("Rentech 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, 2002,
the Company has incurred losses in the amount of $30,903,641. For the year ended
September 30, 2002, the Company recognized a $5,332,613 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.
The Company has been successful in the past in obtaining equity financing. For
the years ended September 30, 2002, 2001 and 2000, the Company received net cash
proceeds from the issuance of common stock of $1,456,724, $2,332,005 and
$6,951,913. For the years ended September 30, 2002, 2001 and 2000, the Company
has received cash proceeds from the issuance of convertible preferred stock of
$500,000, $793,673 and $150,000.
In achieving its objectives as planned for fiscal 2003, the Company may issue
additional Series B convertible preferred stock to existing stockholders. The
Company may issue its common stock in a private placement to fund any working
capital requirements should the need arise. In addition, the Company is
negotiating to sell all or some of the assets of Sand Creek Energy, LLC, a
company in which Rentech has a 50% interest. The Company believes that its
current available cash, revenues from operations, additional equity financing
and the potential sale of assets will be sufficient to meet its cash operating
requirements through September 30, 2003.
F-11
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
(continued)
- -----------
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements 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 and Cash Equivalents
- -------------------------
The Company considers highly liquid investments 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
and $96,081 in capitalized software costs acquired from the acquisition of REN
(Note 2), net of accumulated amortization of $552,386. The Company has a 5%
interest in Dresser Engineering and Constructors, Inc., which is the parent
company of Dresser Engineering Company (Note 6). The capitalized software costs
are being amortized over a three-year period using the straight-line method.
Licensed Technology
- -------------------
Licensed technology represents costs incurred by the Company primarily for the
retrofit of a plant used 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
fifteen years.
Goodwill
- --------
Goodwill, which relates to the acquisition of OKON in 1997, the acquisition of
PML in 1999 and the acquisition of REN in 2001, is no longer being amortized,
and is tested annually for impairment in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets.
F-12
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
(continued)
- -----------
Production Backlog
- ------------------
In connection with the acquisition of REN in 2001 (Note 2), 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 Agreement
- ---------------------
In connection with the acquisition of Ren in 2001 (Note 2), the Company entered
into non-compete agreements with certain employees of REN. The non-compete
agreements are being amortized over the term of the non-compete agreements of
five years.
Property, Equipment, Depreciation and Amortization
- --------------------------------------------------
Property and equipment is stated at cost. Depreciation and amortization expense
are computed using the straight-line method over the estimated useful lives of
the assets, which range from three to 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 assets and accumulated depreciation or
amortization is removed from the accounts and the resulting gain or loss is
reflected in operations.
Investment in INICA, Inc.
- -------------------------
The Company has a 10% investment in INICA, Inc. (Note 5). The investment is
stated at cost. The investment is evaluated periodically for impairment and is
carried at the lower of cost or estimated net realizable value.
Investment in Sand Creek
- ------------------------
The Company has a 50% investment in Sand Creek Energy, LLC. 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 Rights
- -----------------
Technology rights are recorded at cost and are being amortized on a
straight-line method over a ten-year estimated life.
F-13
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
(continued)
- -----------
Long-Lived Assets
- -----------------
Long-lived assets and identifiable intangibles 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.
Accrued Liabilities
- -------------------
The Company accrues significant expenses that occur during the year in order to
match expenses to the appropriate period. These include audit and legal fees, as
well as payroll expenses such as bonuses and vacation.
Revenue Recognition
- -------------------
Sales of water-based stains sealers and coatings are recognized when the goods
are shipped to the customers, as all goods are shipped FOB shipping point.
Revenues from oil and gas field services are recognized at the completion of the
service.
Laboratory research revenues are recognized as the services are provided.
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 have been performed and no future obligation to perform
services exist.
Rental income is recognized monthly as per the lease agreement, and is included
in the alternative fuels segment as a part of service revenues.
Accounting for Fixed Price Contracts
- ------------------------------------
Revenues from fixed price contracts are recognized on 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.
F-14
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
(continued)
- -----------
Accounting for Fixed Price Contracts (continued)
- ------------------------------------------------
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.
Cost of Sales Expenses
- ----------------------
Cost of sales expenses include direct materials, direct labor, indirect labor,
employee fringe benefits and other miscellaneous costs to produce water-based
stains, sealers and coatings, to manufacture industrial automation systems and
to complete oil and gas field services and technical services.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses include employee's salaries and fringe
benefits, travel, consulting, occupancy, public relations and other costs
incurred in each operating segment.
Research and Development Expenses
- ---------------------------------
Research and development expenses include direct materials, direct labor,
indirect labor, employee fringe benefits and other miscellaneous costs incurred
to develop and refine certain technologies employed in the respective operating
segment. These costs are expensed as incurred.
Advertising Costs
- -----------------
The Company recognizes advertising expense when incurred. Advertising expense
was approximately $50,700, $18,500 and $9,600 for the years ended September 30,
2002, 2001 and 2000.
Income Taxes
- ------------
The Company accounts for income taxes under the 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.
F-15
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
(continued)
- -----------
Net Loss Per Common Share
- -------------------------
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128") provides for the calculation of "Basic" and "Diluted" earnings per
share. Basic earnings per share includes no dilution and is computed by dividing
income (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.
For the years ended September 30, 2002, 2001, and 2000, total stock options of
5,104,766, 8,394,300 and 7,724,300, total stock warrants of 4,140,836, 3,992,977
and 4,452,671, total Series B convertible preferred stock of 0, 505,560 and 0
and total long-term convertible debt of 4,448,680, 0 and 0 in fiscal 2002, 2001
and 2000 were not included in the computation of diluted loss per share because
their effect was anti-dilutive.
Concentrations of Credit Risk
- -----------------------------
The Company's financial instruments that are exposed to concentrations of credit
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 Estimates
- ----------------
The preparation of financial statements in conformity 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-16
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
(continued)
- -----------
Fair Value of Financial Instruments
- -----------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value. 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.
Long-Term Debt and Long-Term Convertible Debt
- ---------------------------------------------
The carrying amount of convertible debt and other debt outstanding also
approximates their fair value as of September 30, 2002 and 2001, because
interest rates on these instruments approximate the interest rate on debt with
similar terms available to the Company.
Stock Option Plan
- -----------------
The Company applies Accounting Principles Board ("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.
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 Loss
- ------------------
Comprehensive loss is comprised of net loss and all 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, 2002, 2001, and 2000, 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.
F-17
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
(continued)
- -----------
Recent Accounting Pronouncements
- --------------------------------
In June 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 August 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44 and
64, Amendment of FASB No. 13, and Technical Corrections." SFAS rescinds FASB No.
4 "Reporting Gains and Losses from Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This statement also rescinds SFAS No. 44 "Accounting
for Intangible Assets of Motor Carriers" and amends SFAS No. 13, "Accounting for
Leases". This statement is effective for fiscal years beginning after May 15,
2002. The Company does not expect the adoption of this statement to have a
material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company does not
expect the adoption of this statement to have a material effect on the Company's
financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial
Institutions" SFAS No. 147 amends FASB Statements No. 72 and 144 and FASB
Interpretations No. 9. The Company does not expect the adoption of this
statement to have any material effect on the Company's financial statements.
F-18
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
(continued)
- -----------
Recent Accounting Pronouncements (continued)
- --------------------------------------------
In November 2002, the FASB published interpretation No, 45 "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The Interpretation expands on the
accounting guidance of Statements No. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being superseded.
The Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued
or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company is currently evaluating what effect the adoption of this
statement will have on the Company's financial statements.
In October 2002, the FASB issued an exposure draft "Accounting for Stock-Based
Compensation- Transition and Disclosure". This proposed statement would amend
FASB Statement No. 123, "Accounting for Stock-Based Compensation" to provide
alternative methods of transition for an entity that voluntary changes to the
fair value method of accounting for stock-based compensation. In addition, this
proposed Statement would amend the disclosure provision of that Statement to
require more prominent disclosure about the effects of an entity's accounting
policy decisions with respect to stock-based employee compensation on reported
net income. The proposed effective date for this Statement would be for fiscal
years ended after December 15, 2002. The Company is currently evaluating what
effect the adoption of this statement will have the Company's financial
statements.
Reclassifications
- -----------------
Certain reclassifications have been made to the 2001 financial statements in
order for them to conform to the 2002 presentation. Such reclassifications have
no impact on the Company's financial position or results of operations.
F-19
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 2 - Business Acquisition
- -----------------------------
On August 1, 2001, the Company received 7,127 shares of common stock of REN,
which represents a 56% majority interest, for a total purchase price of
$1,414,716. REN is in the business of manufacturing complex microprocessor
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 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 in
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 the 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 executed a promissory note under which they agreed to assign to the
Company their rights to an allocation of profits from REN until an amount of
profits was allocated to the Company equal to $229,561 plus 6% accrued interest
on the outstanding balance accruing on August 1, 2001. In accordance with the
stock purchase agreement, this amount would be a cash payment out of future
dividends that REN declares to the original shareholders. These cash payments
would be provided to the Company by the original shareholders, and the
investment in REN would be reduced by such payments. As of September 30, 2002,
no such distributions have been made.
F-20
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 2 - Business Acquisition (continued)
- -----------------------------------------
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.
During fiscal 2002, the Company chose to modify the purchase price allocation as
per the provisions of SFAS 142. The $229,561 receivable from the original REN
shareholders was reclassified from the investment in REN to a long-term note
receivable from the original REN stockholders. The Company believes that this
reclassification more accurately reflects the transaction as the receivable is
expected to be collectible in the future. As a result of the reclassification,
REN's goodwill was reduced from $504,814 to $275,253. Per the Stock Purchase
Agreement, the note receivable from the original REN stockholders accrues
interest at 6% per annum. Total principal and accrued interest as of September
30, 2002 was $245,599.
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.
For the 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)
Basic and diluted weighted average number of common shares
outstanding adjusted for acquisition 64,883,332 57,932,816
F-21
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 3 - Inventories
- --------------------
Inventories consist of the following:
September 30,
-------------------------
2002 2001
----------- -----------
Finished goods $ 77,603 $ 86,647
Work in process 375,392 384,563
Raw materials 304,398 267,028
----------- -----------
$ 757,393 $ 738,238
=========== ===========
Note 4 - Property and Equipment
- -------------------------------
Property and equipment consist of the following:
September 30,
-------------------------- Useful
2002 2001 Lives
----------- ----------- -----------
Land $ 205,428 $ 205,428 --
Buildings 1,665,497 1,586,706 30
Machinery and equipment 2,677,894 2,317,278 5
Office furniture and equipment 450,392 689,916 3-7
Construction-in-progress 14,000 90,961 --
Vehicles 91,879 113,394 3
Leasehold improvements 316,423 316,423 5
----------- -----------
5,421,513 5,320,106
Less accumulated depreciation and
amortization (1,300,598) (931,330)
----------- -----------
$ 4,120,915 $ 4,388,776
=========== ===========
Note 5 - Investment in INICA, Inc.
- ----------------------------------
On May 6, 1998, the Company and INICA, Inc. ("INICA") 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.
F-22
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 5 - Investment in INICA, Inc. (continued)
- ----------------------------------------------
On May 29, 1998, the Company acquired a 10% ownership in INICA for $3,079,107.
In the agreement to acquire an ownership interest in INICA, the Company agreed
to repurchase its shares used as part of the purchase price if the market value
falls below $0.40. As of September 30, 2002, the Company has not re-acquired any
shares under this provision and the Company does not believe that there will be
an obligation to re-acquire its shares in the future. 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%. The Company and INICA have reached an agreement under which the
Company would exchange its 10% ownership in INICA to a 4% ownership in Global
Solar Energy LLC and a 4% ownership in Infinite Power Solutions, Inc. The
exchange is subject to approval by Millenium Energy Holdings, Inc.
Note 6 - Investment in Dresser
- ------------------------------
On September 28, 1999, the Company issued 3,680,168 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 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 for the repayment of this amount. The note receivables
matured on December 31, 2001. As of December 31, 2001, the Company wrote-off the
note receivables from Dresser as a bad debt expense as the Company determined
that the notes were not collectible.
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 the Company's
inability to determine Dresser's liquidity and the state of its progress on its
business plan, the Company 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. As of September
30, 2002, the carrying value of the Dresser shares is $0.
F-23
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 7 - Investment in Sand Creek
- ---------------------------------
On January 7, 2000, the Company and Republic 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 the Company may sell some or all of the assets of SCE.
The 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
guarantee the full and punctual performance and payment by SCE of all SCE's
obligations with respect to this facility. SCE received an unconditional release
from Public Service Company of Colorado and Conoco on October 16, 2001 for
certain natural gas purchase obligations of the facility. As a result, the
aggregate liability of the Company under this guaranty was reduced from
$4,000,000 to $0.
For the years ended September 30, 2002 and 2001, the Company has contributed
$248,820 and $372,794 to SCE and has recognized $252,013 and $386,047 related to
its equity in SCE's losses. As of September 30, 2002 and 2001, the Company had a
$17,966 and a $69,293 receivable due from SCE. As of September 30, 2002 and
2001, SCE had no short-term or long-term debt.
Note 8 - Long-Term Debt
- -----------------------
Long-term debt consists of the following:
September 30,
--------------------------
2002 2001
----------- -----------
Mortgage dated February 8, 1999; monthly principal and interest
payments of $7,729 with interest of 7.5% unpaid principal and
accrued interest due March 1, 2029; collateralized by land and
building $ 1,054,319 $ 1,064,181
Various promissory notes; monthly principal and interest
payments of $12,638 with interest of 5.9% to 9.6%, unpaid
principal and interest maturing from February 2003 through July
2005; collateralized by certain fixed assets of the
Company 151,187 227,455
----------- -----------
Total long-term debt 1,205,506 1,291,636
Less current maturities (127,103) (143,863)
----------- -----------
Long-term debt $ 1,078,403 $ 1,147,773
=========== ===========
F-24
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 8 - Long-Term Debt (continued)
Future maturities of long-term debt are as follows:
Year Ending September 30,
------------------------
2003 $ 127,103
2004 42,691
2005 23,324
2006 16,309
2007 17,593
Thereafter 978,486
------------
$ 1,205,506
============
Note 9 - Long-Term Convertible Debt
- -----------------------------------
On January 18, 2002, the Company entered into four convertible long-term notes
totaling $2,250,000, dated February 25, 2002, with existing stockholders of the
Company. The notes bear interest at 8.5% and mature on February 25, 2006, with
all unpaid principal and interest due at that time. Monthly payments on the
notes of $19,526 commenced on April 1, 2002. The notes are convertible into no
more than 4,500,000 shares of the Company's common stock, less two shares for
every dollar of principal reduction of the notes paid in the form of cash. Until
the first anniversary date of the notes, the Lenders may elect to convert part
or all of the principal balance into common stock at a conversion price of $.50
per share if the market price of the common stock on the conversion date is $.50
per share or higher. Conversion will not be permitted during the first year if
the market price on the conversion date is less than $.50 per share. At any time
following the first anniversary date of the notes, the Lenders may elect to
convert part or all of the principal balance into common stock at a conversion
price of $.50 per share, provided, however, that no conversions shall be made if
the market price is less than $.50 per share on the conversion date. Starting on
the first day of the thirteenth calendar month following the date of the notes,
and continuing on the first day of each succeeding month until the notes are
paid in full, principal in the amount of one-thirty-sixth of the declining
principal balance of the notes shall automatically convert into the Company's
common stock at a conversion price of $.50 per share. If the average daily
market price for the seven trading days preceding the first day of such calendar
month is less than $.50 per share, the difference between $.50 per share and the
average of the seven trading days preceding the date of conversion shall be
multiplied by the number of shares issued to the Lenders as a result of the
conversion, and the resulting dollar amount shall be added to the principal
balance of the notes. The notes are secured by the assets of OKON, Inc.,
including the capital stock of that company.
F-25
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 9 - Long-Term Convertible Debt (continued)
- -----------------------------------------------
Future maturities of long-term convertible debt are as follows, depending on
future events and assuming no conversions to common stock:
Year Ending September 30,
-------------------------
2003 $ 47,048
2004 51,207
2005 55,733
2006 2,070,352
-------------
$ 2,224,340
=============
Note 10 - Lines of Credit
- -------------------------
On February 25, 2002, the Company entered into a $1,000,000 business line of
credit agreement with Premier Bank through its 56% owned subsidiary, REN. The
line of credit matures on March 1, 2003, at which time all unpaid principal and
interest is due. The line of credit bears interest at prime plus 1.5% (6.25% at
September 30, 2002), and interest is accrued monthly. Payments of principal are
tied to the receipt of accounts receivable from Caterpillar, Inc. by REN. On
February 27, 2002, the Company purchased a $500,000 certificate of deposit with
Premier Bank, to be used as collateral on the line of credit. The $500,000
certificate of deposit is shown as restricted cash on the Company's balance
sheet. Interest on the certificate of deposit is paid to the Company on a
monthly basis, and the certificate matures on December 31, 2002. The line of
credit is also collateralized by the first deed of trust on the real property of
PML and REN. The line of credit is guaranteed by Rentech, Petroleum Mud Logging,
Inc. and the minority shareholder of REN. The balance of this line of credit at
September 30, 2002 was $993,839.
On September 27, 2002, the Company entered into a $500,000 business line of
credit agreement with the Bank of Denver. The line of credit is due on demand.
If no demand is made, the line of credit matures on December 1, 2002, at which
time all unpaid principal and interest is due. The line of credit bears interest
at the Bank of Denver Base Rate plus 0.5% (7.25% at September 30, 2002), and
interest is accrued monthly. The line of credit is collateralized by all
inventory, accounts receivable and equipment of Rentech. In addition, the line
of credit it guaranteed by the building in which our research and development
laboratory resides, 1,000,000 shares of the Company's common stock consisting of
200,000 shares each owned by five officers of the Company and the residence of
one of the officers of the Company. The balance of this line of credit at
September 30, 2002 was $500,000. On November 19, 2002, the Company and the Bank
of Denver signed a change in terms agreement under which the interest rate was
reduced to 6.75% and the maturity date was extended to June 1, 2003.
F-26
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 11 - Stockholders' Equity
- ------------------------------
Stockholder Rights Plan
- -----------------------
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.
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, issued during fiscal 1999 and fiscal 2000,
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.
During fiscal 2002, 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 fiscal 2002, certain holders of the Series B Preferred Stock
converted 77,778 of their shares plus $35,804 in dividends into 1,591,593 common
shares of the Company.
F-27
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 11 - Stockholders' Equity (continued)
- ------------------------------------------
Preferred Stock (continued)
- ---------------------------
As of September 30, 2002, 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, 491,664 had been exercised as of September 30, 2002,
leaving 108,336 warrants available for issuance at the option of the Company.
The Series B Preferred Stock was 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.
Common Stock
- ------------
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.
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.
F-28
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 11 - Stockholders' Equity (continued)
- ------------------------------------------
Common Stock (continued)
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 (Note 2).
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
2001 and 2002. For the years ended September 30, 2002 and 2001, 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 (Note 2).
During fiscal 2002, the Company offered for sale its common stock in a private
placement memorandum for the purpose of raising up to $2,250,000. The Company
granted non-exclusive rights to several placement agents to sell the shares
under the memorandum. The Company offered for sale shares of its $.01 par value
common stock at a purchase price of $0.50 per share. In addition, the Company
offered to the brokers a warrant to purchase one share of the Company's common
stock for every three shares of the Company's common stock sold, at an exercise
price of $1.00, exercisable for a period of five years from the date of the
memorandum. The Company issued 2,926,969 shares of its common stock for
$1,340,606, net of $122,644 in offering costs under the private placement
memorandum. The Company also issued nine warrants to purchase 1,002,803 shares
of the Company's common stock to brokers related to the memorandum.
F-29
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 11 - Stockholders' Equity (continued)
- ------------------------------------------
Common Stock (continued)
- ------------------------
During fiscal 2002, the Company issued 292,508 shares of its common stock upon
the exercise of stock options and warrants for cash proceeds of $69,659. The
Company also issued 313,966 shares of its common stock upon the exercise of
stock options in partial settlement of accrued payroll of $65,744.
Stock Options and Stock Warrants
- --------------------------------
At September 30, 2002, 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, 2002 and 2001,
100,000 and 570,000 stock options were outstanding under this plan.
During 1994, the Company's board of directors adopted the 1994 Stock Option
Plan, which allows for the issuance of incentive stock options, within the
meaning of the 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, 2002 and 2001, 8,000 and 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, 2002
and 2001, 50,000 and 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, 2002
and 2001, 500,000 and 448,000 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, 2002
and 2001, 500,000 and 320,000 stock options were outstanding under this plan.
F-30
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 11 - Stockholders' Equity (continued)
- ------------------------------------------
Stock Options and Stock Warrants (continued)
- --------------------------------------------
In addition to the five stock option plans described above, the Company issues
options to purchase the Company's $0.01 par value common stock pursuant to
minutes of the option committee of the board of directors. At September 30, 2002
and 2001, 3,858,766 and 6,536,300 of these stock options were outstanding.
During 2002, the Company proposed a 2003 Stock Option Plan which would allow for
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 will reserve shares of the Company's $0.01 par
value common stock for issuance under the plan. At September 30, 2002, 88,000
options were outstanding under this proposed plan. This proposed plan is subject
to stockholder approval.
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.
During fiscal 2002, the Company issued options to purchase 460,000 of the
Company's $.01 par value common shares in connection with consulting services.
These options may be exercised between $0.41 and $0.86 per share through July
10, 2007. The Company recorded the $67,579 fair value of the options to
consulting expense.
F-31
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 11 - Stockholders' Equity (continued)
Stock Options and Stock Warrants (continued)
The following tables summarizes information on stock option and warrant
activity:
Options Warrants
------------------------------- ------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- -------------- -------------- --------------
Outstanding, September 30, 1999 3,265,700 $ 0.31 1,163,347 $ 1.04
Granted 6,711,300 2.36 3,572,200 2.07
Exercised (2,252,700) 0.45 (71,827) 0.26
Canceled -- -- (211,049) 0.96
-------------- -------------- -------------- --------------
Outstanding, September 30, 2000 7,724,300 2.05 4,452,671 1.90
Granted 770,000 1.05 -- --
Exercised (100,000) 0.80 (418,027) 1.09
Canceled -- -- (41,667) 1.20
-------------- -------------- -------------- --------------
Outstanding, September 30, 2001 8,394,300 1.97 3,992,977 2.00
Granted 1,357,000 0.49 1,002,803 0.99
Exercised (502,000) 0.21 (104,474) 0.30
Canceled (4,144,534) 1.13 (750,470) 1.13
-------------- -------------- -------------- --------------
Outstanding, September 30, 2002 5,104,766 $ 0.92 4,140,836 $ 1.95
============== ============== ============== ==============
Exercisable, September 30, 2002 5,104,766 $ 0.92 4,140,836 $ 1.95
Exercisable, September 30, 2001 8,343,300 $ 1.97 3,992,977 $ 2.00
Exercisable, September 30, 2000 7,652,300 $ 2.05 4,452,671 $ 1.90
Options Warrants
-------------- --------------
Weighted average fair value of options and warrants granted
during 2002 $ 0.16 $ 0.09
Weighted average fair value of options and warrants granted
during 2001 $ 0.86 $ --
Weighted average fair value of options and warrants granted
during 2000 $ 1.68 $ 1.49
F-32
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 11 - Stockholders' Equity (continued)
- ------------------------------------------
Stock Options and Stock Warrants (continued)
- --------------------------------------------
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 2002, 2001
and 2000, respectively; dividend yield of 0 percent for all years; expected
volatility of 33 to 53 percent in 2002, 90 to 154 percent in 2001 and 90 to 99
percent in 2000, risk-free interest rates of 2.56 to 4.19 percent in 2002, 4.72
to 6.61 percent in 2001 and 5.62 to 6.71 percent in 2000; and expected lives of
3 to 5 years in 2002, 1.63 to 5 years in 2001 and 1.79 to 5 years in 2000 for
the Plans and stock awards.
Under the accounting provisions for SFAS No. 123, the Company's net loss and net
loss per share would have been increased by the pro forma amounts indicated
below:
For the Years Ended September 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Loss applicable to common stock
As reported $(5,469,545) $(7,254,306) $(4,189,006)
Pro forma $(5,624,467) $(7,735,772) $(4,275,273)
Loss per common share
As reported $ (.08) $ (.11) $ (.07)
Pro forma $ (.08) $ (.12) $ (.07)
F-33
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 11 - Stockholders' Equity (continued)
- ------------------------------------------
Stock Options and Stock Warrants (continued)
- --------------------------------------------
The following information summarizes stock options outstanding and exercisable
at September 30, 2002:
Outstanding Exercisable
------------------------------------------------------- -----------------------------------
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Prices Outstanding Life in Years Exercise Price Exercisable Exercise Price
--------------- --------------- --------------- --------------- --------------- ---------------
$0.30 36,000 0.32 $ 0.30 36,000 $ 0.30
$0.41-$0.60 1,157,000 4.28 0.45 1,157,000 0.45
$0.63-$0.90 980,000 1.54 0.72 980,000 0.72
$1.05-$1.09 660,000 3.46 1.07 660,000 1.07
$1.25-$1.78 200,000 0.41 1.30 200,000 1.30
$1.93 42,000 2.65 1.93 42,000 1.93
$5.00 2,029,766 2.25 5.00 2,029,766 5.00
--------------- --------------- --------------- --------------- ---------------
$0.30-$5.00 5,104,766 2.65 $ 0.92 5,104,766 $ 0.92
=============== =============== =============== =============== ===============
The following information summarizes stock options outstanding and exercisable
at September 30, 2001:
Outstanding Exercisable
------------------------------------------------------- -----------------------------------
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Prices Outstanding Life in Years Exercise Price Exercisable Exercise Price
--------------- --------------- --------------- --------------- --------------- ---------------
$0.19-$0.25 602,000 0.38 $ 0.21 602,000 $ 0.21
$0.30 466,000 0.97 0.30 466,000 0.30
$0.63-$0.90 795,000 2.04 0.71 795,000 0.71
$1.05-$1.09 670,000 4.46 1.07 670,000 1.07
$1.25-$1.78 3,789,534 0.30 1.26 3,759,534 1.26
$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
--------------- --------------- --------------- --------------- ---------------
$0.19-$5.00 8,394,300 1.08 $ 1.97 8,343,300 $ 1.97
=============== =============== =============== =============== ===============
F-34
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 11 - Stockholders' Equity (continued)
- ------------------------------------------
Stock Options and Stock Warrants (continued)
- --------------------------------------------
The following information summarizes stock warrants outstanding and exercisable
at September 30, 2002:
Outstanding Exercisable
------------------------------------------------------- -----------------------------------
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Prices Outstanding Life in Years Exercise Price Exercisable Exercise Price
--------------- --------------- --------------- --------------- --------------- ---------------
$ 0.66 98,668 2.04 $ 0.66 98,668 $ 0.66
$1.00-$1.20 1,600,501 1.73 1.08 1,600,501 1.08
$1.64-$2.64 2,441,667 0.51 2.58 2,441,667 2.58
--------------- --------------- --------------- --------------- ---------------
$0.66-$2.64 4,140,836 1.02 $ 1.95 4,140,836 $ 1.95
=============== =============== =============== =============== ===============
The following information summarizes stock warrants outstanding and exercisable
at September 30, 2001:
Outstanding Exercisable
------------------------------------------------------- -----------------------------------
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Prices Outstanding Life in Years Exercise Price Exercisable Exercise Price
--------------- --------------- --------------- --------------- --------------- ---------------
$ 0.30 104,944 $ 0.43 $ 0.30 104,944 $ 0.30
$0.66 71,366 3.29 0.66 71,366 0.66
$1.00-$1.25 1,375,000 0.37 1.16 1,375,000 1.16
$1.64-$2.64 2,441,667 1.51 2.58 2,441,667 2.58
--------------- --------------- --------------- --------------- ---------------
$ 0.30-$2.64 3,992,977 $ 1.12 $ 2.00 3,992,977 $ 2.00
=============== =============== =============== =============== ===============
F-35
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 12 - Commitments and Contingencies
- ---------------------------------------
Employment Agreements
- ---------------------
The Company has entered into various employment agreements with five of its
officers that extend from January 1, 2001 to December 31, 2003. 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, whichever is greater. In addition, the
Company has employment agreements with three other officers with expiration
dates from March 31, 2003 through August 31, 2004. These three employment
agreements with the other officers provide for various settlements upon
termination 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 $238,383 each. The Company's total
future obligations under employment agreements as of September 30, 2002 are
$1,046,619 (2003) and $273,026 (2004). Compensation is adjusted annually based
on the cost of living index.
During fiscal 2000, the Company began to defer the payment of a portion of the
compensation of certain officers of the Company. The deferral was continued
through fiscal 2001 and 2002. As of September 30, 2002 and 2001, the Company had
deferred compensation of $419,036 and $346,000.
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 exceed $500,000. No distributions have been
granted since the inception of the plan. In March 2001, the board of directors
terminated this plan.
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 $134,094, $120,238 and $26,421 to the plan for
the years ended September 30, 2002, 2001, and 2000.
F-36
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 12 - Commitments and Contingencies (continued)
- ---------------------------------------------------
Operating Leases
The Company leases office space under a non-cancelable 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, 2002 are as follows:
Year Ending September 30,
-------------------------
2003 $ 226,939
2004 103,782
2005 39,950
----------------
$ 370,671
================
Total lease expense for the years ended September 30, 2002, 2001, and 2000 was
approximately $259,000, $267,000 and $259,000, respectively.
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, 2002 is as
follows:
Year Ending September 30,
-------------------------
2003 $ 51,478
================
F-37
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 12 - Commitments and Contingencies (continued)
---------------------------------------------------
Litigation
----------
The Company's subsidiary, REN, is involved in a lawsuit with a customer, Case
Corporation. A judgment was entered on October 29, 2002 in a civil action REN
brought against Case Corporation to collect an account receivable. The contract
had been awarded in January 1998, before the Company acquired its interest in
REN. The judgment, entered in the U.S. District Court for Oklahoma, denied REN's
collection claim and awarded judgment in favor of Case Corporation on its claim
against REN for a breach of a condition of the contract. The judgment is in the
amount of $325,795 plus costs and interest. REN intends to appeal the judgment.
Judgment amounts payable after appeal, if any, are payable out of the 44% of REN
that is not owned by the Company.
Note 13 - Costs and Estimated Earnings on Uncompleted Contracts
- ---------------------------------------------------------------
The costs and estimated earnings relating to uncompleted contracts are
summarized as follows at September 30, 2002:
Cost incurred on uncompleted contracts $ 1,078,235
Estimated earnings 551,820
-----------
Total costs incurred and estimated earnings 1,630,055
Less billings to date (986,113)
-----------
$ 643,942
===========
Included in the accompanying balance sheet as of September 30, 2002 under the
following captions:
Costs and estimated earnings in excess of billings on uncompleted
contracts $ 788,727
Billings in excess of costs and estimated earnings on uncompleted
contracts (144,785)
-----------
$ 643,942
===========
There were no amounts included in accounts receivable at September 30, 2002 for
amounts billed but not collected in accordance with retainage provisions of
contracts.
F-38
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 14 - Goodwill and Other Intangibles
- ----------------------------------------
Effective October 1, 2001, the Company elected early adoption of SFAS No. 142,
which is permitted for entities with fiscal years beginning after March 15,
2001. As of October 1, 2001, the Company had $1,511,368 in unamortized goodwill.
In accordance with the provisions of SFAS No. 142, the Company has ceased
amortization of goodwill from the acquisitions of OKON and PML and has not
amortized goodwill from the acquisition of REN. In accordance with SFAS No. 142,
the Company has six months from the initial date of adoption to complete a
transitional impairment test of goodwill. The second step of the goodwill
impairment test measures the amount of the impairment loss (measured as of the
beginning of the year of adoption), if any, and must be completed by the end of
the Company's fiscal year. The Company completed its impairment test as of March
31, 2002 and determined that there is no impact on the Company's financial
position and results of operations, as goodwill is not impaired. Goodwill will
be tested annually and whenever events and circumstances occur indicating that
goodwill might be impaired.
Upon the adoption of SFAS No. 142, the Company evaluated the useful lives of its
existing identifiable intangible assets and determined that the existing useful
lives are appropriate. Therefore, there was no impact on the Company's results
of operations for the year ended September 30, 2002.
The Company recorded $744,936 in amortization expense during the year ended
September 30, 2002, and estimates expense of approximately $606,000, $369,000,
$290,000 and $290,000 in each of the fiscal years ending September 30, 2003,
2004, 2005 and 2006.
The following table summarizes the activity in goodwill for the periods
indicated:
For the Years Ended
September 30,
---------------------
2002 2001
--------- ---------
Paints
Beginning balance $ 839,841 $ 925,018
Additions -- --
Amortization -- (85,177)
--------- ---------
$ 839,841 $ 839,841
========= =========
Oil and gas field services
Beginning balance $ 166,713 $ 179,887
Additions -- --
Amortization -- (13,174)
--------- ---------
$ 166,713 $ 166,713
========= =========
F-39
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 14 - Goodwill and Other Intangibles (continued)
- ----------------------------------------------------
For the Years Ended
September 30,
--------------------------
2002 2001
----------- -----------
Industrial automation systems
Beginning balance $ 504,814 $ --
Additions -- 504,814
Reclassifications (Note 2) (229,561) --
Amortization -- --
----------- -----------
$ 275,253 $ 504,814
=========== ===========
For the Years Ended
September 30,
--------------------------
2002 2001
----------- -----------
Total goodwill
Beginning balance $ 1,511,368 $ 1,104,905
Additions -- 504,814
Reclassifications (Note 2) (229,561) --
Amortization -- (98,351)
----------- -----------
$ 1,281,807 $ 1,511,368
=========== ===========
The following table summarizes the activity for intangible assets subject to
amortization:
For the Years Ended
September 30,
--------------------------
2002 2001
----------- -----------
Licensed technology and technology rights
Gross carrying amount $ 3,718,895 $ 3,718,895
Accumulated amortization (2,221,401) (1,963,845)
----------- -----------
$ 1,497,494 $ 1,755,050
=========== ===========
Aggregate amortization $ 257,556 $ 250,368
=========== ===========
Other intangibles
Gross carrying amount $ 1,276,310 $ 1,276,310
Accumulated amortization (757,003) (269,623)
----------- -----------
$ 519,307 $ 1,006,687
=========== ===========
F-40
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 14 - Goodwill and Other Intangibles (continued)
- ----------------------------------------------------
For the Years Ended
September 30,
--------------------------
2002 2001
----------- -----------
Aggregate amortization $ 487,380 $ 269,623
=========== ===========
Total intangible assets subject to amortization
Gross carrying amount $ 4,995,205 $ 4,995,205
Accumulated amortization (2,978,404) (2,233,468)
----------- -----------
$ 2,016,801 $ 2,761,737
=========== ===========
Aggregate amortization $ 744,936 $ 519,991
=========== ===========
The following table summarizes the effect of SFAS No. 142 on loss applicable to
common stock per share loss:
Three Months Ended For the Years Ended
September 30, September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
Reported loss applicable to
common stock $ (1,235,671) $ (4,111,088) $ (5,469,545) $ (7,254,306)
Add back: goodwill
amortization -- 27,993 -- 98,351
------------- ------------- ------------- -------------
Adjusted loss applicable to
common stock $ (1,235,671) $ (4,083,095) $ (5,469,545) $ (7,155,955)
============= ============= ============= =============
Reported per share loss $ (0.02) $ (0.06) $ (0.08) $ (0.11)
Add back: goodwill
amortization -- -- -- --
------------- ------------- ------------- -------------
Adjusted per share loss $ (0.02) $ (0.06) $ (0.08) $ (0.11)
============= ============= ============= =============
F-41
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 14 - Goodwill and Other Intangibles (continued)
- ----------------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Reported loss applicable to
common stock $ (1,092,019) $ (692,873) $ (4,233,874) $ (3,143,218)
Add back: goodwill
amortization -- 23,453 -- 70,358
------------- ------------- ------------- -------------
Adjusted loss applicable to
common stock $ (1,092,019) $ (669,420) $ (4,233,874) $ (3,072,860)
============= ============= ============= =============
Reported per share loss $ (0.02) $ (0.01) $ (0.06) $ (0.05)
Add back: goodwill
amortization -- -- -- --
------------- ------------- ------------- -------------
Adjusted per share loss $ (0.02) $ (0.01) $ (0.06) $ (0.05)
============= ============= ============= =============
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Reported loss applicable to
common stock $ (1,697,853) $ (1,106,539) $ (3,141,856) $ (2,450,346)
Add back: goodwill
amortization -- 23,452 -- 46,905
------------- ------------- ------------- -------------
Adjusted loss applicable to
common stock $ (1,697,853) $ (1,083,087) $ (3,141,856) $ (2,403,441)
============= ============= ============= =============
Reported per share loss $ (0.02) $ (0.02) $ (0.05) $ (0.04)
Add back: goodwill
amortization -- -- -- --
------------- ------------- ------------- -------------
Adjusted per share loss $ (0.02) $ (0.02) $ (0.05) $ (0.04)
============= ============= ============= =============
F-42
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 14 - Goodwill and Other Intangibles (continued)
- ----------------------------------------------------
Three Months Ended
December 31,
------------------------------
2002 2001
------------- -------------
(Unaudited) (Unaudited)
Reported loss applicable to common stock $ (1,444,003) $ (1,343,807)
Add back: goodwill amortization -- 23,453
------------- -------------
Adjusted loss applicable to common stock $ (1,444,003) $ (1,320,354)
============= =============
Reported per share loss $ (0.02) $ (0.02)
Add back: goodwill amortization -- --
------------- -------------
Adjusted per share loss $ (0.02) $ (0.02)
============= =============
For the Years Ended
September 30,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Reported loss applicable to common stock $(7,254,306) $(4,189,006) $(3,974,593)
Add back: goodwill amortization 98,351 94,477 84,369
----------- ----------- -----------
Adjusted loss applicable to common stock $(7,155,955) $(4,094,529) $(3,890,224)
=========== =========== ===========
Reported per share loss $ (0.11) $ (0.07) $ (0.09)
Add back: goodwill amortization -- -- --
----------- ----------- -----------
Adjusted per share loss $ (0.11) $ (0.07) $ (0.09)
=========== =========== ===========
Note 15 - Income Taxes
- ----------------------
There was no provision for income taxes required for the years ended September
30, 2002, 2001 and 2000 due to operating losses in those years. At September 30,
2002, the Company had available net operating loss carry forwards of
approximately $24,060,000 for tax reporting purposes. The operating loss carry
forwards expire through 2022. 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, 2002 and 2001.
F-43
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 15 - Income Taxes (continued)
- ----------------------------------
The tax effect on the components is as follows:
September 30,
----------------------------
2002 2001
------------ ------------
Net operating loss carry forwards $ 9,023,000 $ 7,613,000
Capital loss carry forwards --
Accruals for financial statement purposes not allowed for income
taxes - cash basis 421,000 201,000
Basis difference in investment in Dresser 691,000 691,000
Basis difference in capitalized software (148,000) (267,000)
Basis difference in other intangible assets 2,000 163,000
Basis difference relating to licensed technology 497,000 444,000
Basis difference in property and equipment (115,000) (218,000)
Basis difference in other assets 4,000 3,000
Basis difference in goodwill (10,000) 213,000
Basis difference in technology rights 19,000 16,000
Basis difference relating to Synhytech plant held for sale 75,000 75,000
Basis difference in investment in Sand Creek 84,000 84,000
------------ ------------
10,543,000 9,018,000
Valuation allowance (10,543,000) (9,018,000)
------------ ------------
$ -- $ --
============ ============
A reconciliation of the income taxes at the federal statutory rate to the
effective tax rate is as follows:
For the Years Ended
September 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Federal income tax benefit computed at the Federal statutory
rate $(1,813,000) $(2,281,000) $(1,394,000)
State income tax benefit net of Federal benefit (187,000) (235,000) (143,000)
Purchase price adjustment not effecting net loss -- (359,000) --
Other - permanent differences 475,000 188,000 83,000
Change in valuation allowance 1,525,000 2,687,000 1,454,000
----------- ----------- -----------
Income tax benefit $ -- $ -- $ --
=========== =========== ===========
F-44
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 16 - Segment Information
- -----------------------------
The Company operates in four business segments as 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.
For the Years Ended
September 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Revenues
Alternative fuels $ 2,709,787 $ 2,574,431 $ 1,139,059
Paints 1,927,854 2,367,689 2,096,159
Oil and gas field services 2,021,957 3,031,139 1,831,389
Industrial automation systems 2,900,737 193,317 --
----------- ----------- -----------
$ 9,560,335 $ 8,166,576 $ 5,066,607
=========== =========== ===========
For the Years Ended
September 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Operating income (loss)
Alternative fuels $(4,264,609) $(4,940,020) $(4,047,295)
Paints (191,485) 66,387 232,685
Oil and gas field services (223,121) 378,036 10,221
Industrial automation systems (183,345) (81,982) --
----------- ----------- -----------
$(4,862,560) $(4,577,579) $(3,804,389)
=========== =========== ===========
F-45
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 16 - Segment Information (continued)
- -----------------------------------------
For the Years Ended
September 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Depreciation and amortization
Alternative fuels $ 793,378 $ 710,366 $ 390,827
Paints 59,422 115,309 108,151
Oil and gas field services 129,286 122,322 113,009
Industrial automation systems 247,886 35,161 --
----------- ----------- -----------
$ 1,229,972 $ 983,158 $ 611,987
=========== =========== ===========
For the Years Ended
September 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Equity in net loss of investees:
Alternative fuels $ 252,013 $ 386,047 $ 276,585
Expenditures for additions of long-lived assets
Alternative fuels $ 118,753 $ 355,016 $ 1,158,997
Paints 21,342 18,291 46,603
Oil and gas field services 64,634 404,167 146,371
Industrial automation systems 22,625 1,322,083 --
----------- ----------- -----------
$ 227,354 $ 2,099,557 $ 1,351,971
=========== =========== ===========
For the Years Ended
September 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Investment in equity method investees $ (5,864) $ (2,669) $ 10,584
F-46
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 16 - Segment Information (continued)
- -----------------------------------------
For the Years Ended
September 30,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
Total assets
Alternative fuels $ 9,672,083 $ 9,828,467 $13,328,647
Paints 1,471,671 1,518,186 1,474,744
Oil and gas field services 1,954,789 2,267,524 1,659,201
Industrial automation systems 3,064,685 2,501,278 --
----------- ----------- -----------
$16,163,228 $16,115,455 $16,462,592
=========== =========== ===========
Note 17 - Significant Customers
- -------------------------------
As of September 30, 2002, three customers accounted for 40%, 10% and 10% of
total accounts receivable while three customers accounted for 20%, 19% and 10%
of total revenues. As of September 30, 2001, two customers accounted for 19% and
15% of total accounts receivable while 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 while three customers accounted for
20%, 17% and 16% of total revenues.
Note 18 - Valuation and Qualifying Accounts
- -------------------------------------------
Balance at Deductions Balance at
Beginning of Charged to and Write- End of
Period Expense Offs Period
------------ ------------ ------------ ------------
Year Ended September 30, 2002
Allowance for doubtful
accounts $ 7,325 $ 4,675 $ -- $ 12,000
Deferred tax valuation account $ 9,018,000 $ 1,525,000 $ -- $ 10,543,000
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
F-47
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 19 - Contract Liability
- ----------------------------
On January 18, 2001, the Company was granted a services contract by the Wyoming
Business Council, Energy Section, Investment Ready Communities Division ("WBC").
Under the contract, Rentech received $800,000 to finance a Gas-to-Liquids
("GTL") feasibility study within the State. On February 9, 2001, the Company
received the first $750,000 payment as per the terms of the contract. The WBC
funding was used to evaluate two potential GTL projects utilizing Rentech's
patented and proprietary Fischer-Tropsch Gas-to-Liquids technology. Phase I
involved studying the feasibility of retrofitting a portion of an existing
methanol facility in Wyoming. Phase II involved the study of the feasibility of
constructing a separate greenfield plant at the same site. The Company delivered
the feasibility study in December 2001 and recognized $800,000 in revenue under
the contract. The Company determined that it was not feasible to proceed with
the conversion of the Wyoming facility as well as conversions of methanol
facilities worldwide. Therefore, since the Company has fulfilled its
obligations, the Company has recognized $800,000 as revenue under the contract
during the six months ended March 31, 2002 in accordance with SFAS No. 68
"Research and Development Arrangements". If in fact the Company chooses to
proceed with the conversion of a methanol facility worldwide at any time in the
future, the Company would be required to repay to the WBC the grant at the rate
of 120% of the original $800,000 for a total amount not to exceed $960,000, over
a period of time not to exceed six years. The repayment would only be from a 5%
share of royalties from the conversion of methanol facilities to the Rentech GTL
Technology worldwide. Based on the conclusions reached in the study, the Company
does not intend to proceed with an application of its technology in a methanol
facility.
Note 20 - Related Party Transactions
- ------------------------------------
In addition to the related party disclosures in Notes 2, 7, 9 and 12, for the
years ended September 30, 2002, 2001 and 2000, the Company incurred $10,000,
$26,995 and $0 in consulting services, which were paid to a director of the
Company.
As of September 30, 2001, the Company owed an officer of the Company $30,600.
This payable did not bear interest and was repaid during fiscal 2002.
F-48