1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-19260
RENTECH, INC.
(Name of small business issuer in its charter)
Colorado 84-0957421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1331 17th Street, Suite 720
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (303) 298-8008
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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. [ ]
The aggregate market value of voting and non-voting common equity held
by nonaffiliates of the registrant as of November 1, 2000 was $80,997,699 based
upon the price of the stock on that date.
The number of shares outstanding of the issuer's common stock as of
November 30, 2000 was 63,232,199.
2
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS........................................................................................3
ITEM 2. PROPERTIES.....................................................................................43
ITEM 3. LEGAL PROCEEDINGS..............................................................................44
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........................................44
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS....................................................................44
ITEM 6. SELECTED FINANCIAL DATA........................................................................46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................................47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................................64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS...............................................................64
ITEM 11. EXECUTIVE COMPENSATION.........................................................................69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................................................72
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................73
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.......................................................................................73
2
3
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 or retrofit these 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 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 mud logging services provided by Petroleum Mud Logging, Inc.;
ability to obtain needed capital; and statements about business strategies,
future growth, operations and financial results. These statements often can be
identified by the use of terms such as "may," "will," "should," "expect,"
"believe," "anticipate," "estimate," "intend," "plan," "project," "approximate"
or "continue," or the negative thereof. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, we
caution readers not to place undue reliance on any forward-looking statements.
Those statements represent our best judgment as to what may occur in the future.
Forward-looking statements, however, are subject to risks, uncertainties and
important factors beyond our control that could cause actual results and events
to differ materially from historical results of operations and events and those
presently anticipated or projected. Important factors that could cause actual
results to differ from those reflected in the forward-looking statements include
the risks of overruns in costs of constructing, retrofitting and operating
commercial plants using the Rentech GTL Technology, problems with mechanical
systems in the plants that are not directly related to the Rentech GTL
Technology, dangers associated with construction and operation of gas processing
plants like those using the Rentech GTL Technology, risks inherent in making
investments and conducting business in foreign countries, protection of
intellectual property rights, competition, difficulties in implementing our
business strategies, and other risks described in this report.
As used in this Annual Report on Form 10-K, the terms "we," "our" and
"us" mean Rentech, Inc., a Colorado corporation and its subsidiaries, unless the
context indicates otherwise.
PART I
ITEM 1. BUSINESS
OVERVIEW
Rentech, Inc. is a Colorado corporation organized in 1981 and based in
Denver. We have developed and own a proprietary and patented gas-to-liquids
(GTL) process that converts carbon bearing gases, liquids and solids into
valuable liquid hydrocarbon products (the Rentech GTL Technology). The
technology works with various feedstocks, including natural gas and industrial
off-gas, heavy crude oil and refinery byproducts, and coal and petroleum coke,
among other carbon-bearing materials. Our technology produces a wide range of
products, including clean burning diesel fuel, naphthas, and speciality products
such as waxes, petrochemical feedstocks, fuel cell feedstocks and synthetic
lubricant base stock.
3
4
We believe there is the potential around the world for a significant
number of plants that would use Rentech GTL Technology. This opportunity stems
from the growing, worldwide demand for energy, especially environmentally clean
energy.
Our primary business is licensing the Rentech GTL Technology to oil and
gas companies, operators of industrial gas plants, and other members of the
energy industry. Licenses are granted in exchange for license fees and ongoing
royalties to be charged for each barrel of liquid hydrocarbons produced by
process plants that use the 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 their plants produce.
In October 1998, we granted an exclusive license to Texaco Energy
Systems, Inc. (Texaco), a division of Texaco, Inc., to use the Rentech GTL
Technology in plants where solid and liquid hydrocarbons are used as feedstock.
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, but not the right to sublicense the
technology in plants which use natural gas as feedstock.
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.
In some instances, we may invest with others to acquire equity
interests in plants that would use our technology. We hope to acquire interests
in one or more existing industrial plants, particularly existing underutilized
methanol plants, that may be converted to use the Rentech GTL Technology to
produce liquid hydrocarbons.
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. We are receiving advance royalty
payments from Texaco as required by our license to it. However, there are no
process plants now in operation that use the Rentech GTL Technology.
Consequently, we are not receiving royalties from production of liquid
hydrocarbons or revenues from sales of our catalyst.
The emergence of gas-to-liquids technology, as developed by us and a
few others, has been cited by the Battelle Memorial Institute to be one of the
ten most economically important energy innovations by the year 2010. This
conclusion was reached by a panel of energy experts from Battelle and the
national laboratories that it co-manages for the U.S. Department of Energy, and
reported by Energy User News,
4
5
September 2000. The labs include the Brookhaven National Laboratory, National
Renewable Energy Laboratory, Oak Ridge National Laboratory, and Pacific
Northwest National Laboratory.
We operate two separate businesses, not related to gas-to-liquids,
through two wholly-owned subsidiary corporations. One of these is OKON, Inc.,
which manufactures and sells environmentally clean stains, sealers and coatings.
The other is Petroleum Mud Logging, Inc., which provides well logging services
to the oil and gas industry. We also lease office and warehouse space located in
our research and development facility to third parties. We are engaged in these
businesses and others we may acquire to produce revenues and cash flow to
support our core business related to the Rentech GTL Technology until commercial
use is realized. We have also acquired interests from ITN Energy Systems, Inc.,
a privately held high technology and development company located in Wheat Ridge,
Colorado. These interests are described subsequently in this item under the
heading "Other Businesses." Financial information about our business segments is
given in note 11 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 then 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. That 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 160 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, principally 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.
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,
5
6
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. In
the process, hydrocarbon feedstocks are first reformed 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 that contains 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
gasification technology selected.
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 initial
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 the 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 source of feedstock gas and the construction and
operation of the plant. We designed the F-T reactors and provided our catalyst
for use in the F-T reactors. Fuelco decided to construct the plant at the Pueblo
municipal landfill. Fuelco selected that location to allow it to use, at minimal
cost, the methane in the landfill gas that was generated each day from the
decomposition of the landfill material, and also to take advantage of tax
credits then available for preventing release of these carbon-bearing gases into
the atmosphere. When Fuelco started the plant, Fuelco determined that the volume
of landfill gas 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 its reduced capacity and produced liquid
hydrocarbons through use of our technology.
6
7
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 several factors
that are key to the use of the technology. These were control of the reactor
temperature and its hydrodynamics, the amount of feedstock that was converted to
liquid hydrocarbons and the 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 developed in Germany. Our technology
is based on the original Fischer-Tropsch technology, with special developments
which make it unique. Key aspects of our technology are the formulation of the
catalyst, 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. 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, we do not have definitive cost figures for
our liquid hydrocarbons. Those costs will not be reliably established until a
commercial-scale plant using the technology is in production.
One of our potential licensees has had an independent study made of the
capital cost of plants that might be constructed for it to use Rentech GTL
Technology. Based on this independent cost estimate and additional studies of
our technology by other independent third parties, we anticipate that our
technology is not significantly more costly, and may be no more expensive, than
the GTL technology offered by the most cost effective of the other GTL
processes. These independent cost estimates also indicate that the Rentech
7
8
GTL Technology would be cost-competitive with conventional fuels at crude oil
prices in the range of $25 per barrel for plants with capacities of 10,000
barrels per day of production.
Our liquid hydrocarbon products are similar to analogous products
derived from crude oil refining, but have environmental benefits that
traditional refinery products do not possess. Because of the way they are
produced, GTL products are less polluting, and the products are substantially
free of contaminants usually found in crude oil, such as sulphur, aromatics,
nitrogen and heavy metals. The absence of these contaminants substantially
reduces harmful air emissions from vehicles that use these products.
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), and
are 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. The environmental benefits may lead to sales of our diesel
fuel at a premium, over conventional diesel fuel.
The Rentech GTL Technology uses an iron-based catalyst. An important
aspect of our catalyst is that it operates on feedstock having wide ranges of
hydrogen-to-carbon ratios. This enables our technology to work with most
carbon-bearing materials. We believe that cobalt catalysts can only be used
efficiently to convert so-called sweet (sulphur-free) natural gas to liquid
hydrocarbons. The capabilities of our iron-based catalyst, which to our
knowledge is shared only by Sasol, enable the Rentech GTL Technology to convert
either gases, liquids or solids that contain carbon materials into liquid
hydrocarbons.
We believe the Rentech GTL Technology has unique and favorable
qualities when compared to the other GTL technologies. Many of these
advantageous properties result from the fact that our catalyst is iron-based,
rather than being derived from cobalt, as are all the other catalysts except the
iron catalyst used by Sasol. Compared to cobalt-based catalysts, we believe our
iron-based catalyst:
o Is less expensive because the raw materials for the catalyst are
readily available.
o Works with gas, liquid and solid feedstocks because it can convert
synthesis gas with a wide range of hydrogen-to-carbon monoxide ratios.
o Is more tolerant of sulphur contained in the feedstock, which makes it
perhaps the only feasible catalyst for industrial off-gases, natural
gas reserves with excessive amounts of carbon dioxide, nitrogen or
other diluents, and with refinery residues.
o Does not generate a hazardous waste.
o Produces more olefinic products, which may create better fuels and
petrochemical feedstocks.
o Has the disadvantage of a shorter catalyst life, which is offset by the
lower cost of the catalyst.
8
9
Another advantage of the Rentech GTL Technology is use of the slurry
reactor for the key F-T conversion step. We believe that a slurry reactor,
unlike the fixed bed and fluidized bed reactors used by most of our competitors,
offer the following advantages:
o Lower capital cost.
o Lower operating cost.
o Lower pressure drop from the inlet to the outlet of the F-T reactor,
under some design conditions.
o On-line catalyst replacement.
o No anticipated patent infringement when used with our iron-based
catalyst.
SOURCES OF FEEDSTOCKS FOR THE RENTECH GTL TECHNOLOGY
Economic use of the Rentech GTL Technology requires substantial
quantities of inexpensive carbon-bearing gases, liquids or solids that can be
economically converted into feedstock gases. The licensees of our technology are
responsible for obtaining their own supplies of carbon-bearing feedstock.
Many types of carbon-bearing materials are suitable sources of
feedstock for the Rentech GTL Technology. Several of these materials are in
abundant supply worldwide.
Natural gas is one of the most important feedstocks for the Rentech GTL
Technology, and 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, 1999. Industry
participants 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.
The Rentech GTL Technology may provide a means of utilizing
carbon-bearing resources that are currently unmarketable for several reasons.
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 or because of diluents.
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 the market
where it might be used.
The stranded reserves may be suitable sources of low-cost feedstock for
plants using our technology that may be constructed near the reserves. After
conversion of the natural gas or other feedstock into liquid hydrocarbons, the
liquid products can be transported in trucks, tankers and pipelines like
conventional liquid hydrocarbons.
Other natural gas produced in association with oil fields may be vented
or flared into the atmosphere or reinjected into the oil field because of its
lack of value due to its remote location. The fact that they are stranded makes
them potential sources of inexpensive feedstock for the Rentech GTL Technology.
9
10
Still other natural gas reserves are unmarketable due to the presence
of diluents, including carbon dioxide or nitrogen. These low-energy content
gases may be suitable feedstock for the Rentech GTL Technology because our
iron-based catalyst can use a wide variety of feedstocks.
Potential feedstocks of growing significance for the Rentech GTL
Technology are the heavy high-sulphur residual fuels provided at crude oil
refineries. These materials are commonly referred to as refinery residues or
refinery bottoms. Some refinery residues, unless they are treated at
considerable expense, must be disposed of as hazardous materials. By
incorporating the Rentech GTL Technology into the refinery, the residues can be
gasified, that is, transformed into synthesis gas, and converted into valuable
end products. Based on predictions of industry analysts, we believe that within
the next ten years, a surplus of high-sulphur residues will be accumulated at
refineries in amounts that cannot be absorbed by the market. The synthesis gas
resulting from refinery residues is characterized by a low hydrogen-to-carbon
monoxide ratio. That makes it an excellent feedstock source for conversion into
liquid hydrocarbons by the application of our iron-based Rentech GTL Technology.
Other important sources of feedstock 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 also be economic for use as
feedstock for the Rentech GTL Technology.
APPLICATIONS OF THE RENTECH GTL TECHNOLOGY
The Rentech GTL Technology can convert a broad range of feedstocks,
whether they are gases, liquid, or solids, that are carbon bearing, into liquid
hydrocarbon products. The gas feedstocks include natural gas and industrial
off-gases. The liquid feedstocks include heavy crude oil and refinery
byproducts. The solid feedstocks include coal and petroleum coke.
The Rentech GTL Technology can be applied in both new and existing
petrochemical and industrial plants. For example, our technology would enable
refineries to more fully utilize heavier crude oil and refinery bottoms to
produce an improved slate of high-value products. Potential benefits to the
refiner include co-production of gas-to-liquids products, steam and electrical
power; a reduction in waste disposal costs; and as a result, increased profit
margins on operations of the refinery.
Currently, many methanol production plants are uneconomic, and several
are closed. This is due to a worldwide oversupply of methanol as well as low
prices. The oversupply may worsen in the future as use of the gasoline additive
MTBE, the largest end-market for methanol, is phased out of many markets,
including the large market in California. We believe that some of these plants,
particularly those with larger production capacities, can be converted to use
our technology and operate profitably to produce GTL products.
A high priority for the Rentech GTL Technology includes remote or
stranded reserves of natural gas as well as natural gases associated with
producing crude oil fields that are currently being flared, re-injected into the
reservoir or merely left in the ground unproduced. We believe that increasing
environmental and regulatory pressures to reduce the wasteful flaring of natural
gas, the economic attractiveness of monetizing stranded assets, and the growing
need for cleaner fuels will lead to increased interest of oil and gas producers
in this application. Our technology makes feasible on-site conversion of these
resources into liquid hydrocarbons that can be more easily and cost-effectively
transported to market.
10
11
We believe that the Rentech GTL Technology could provide significant
benefits to consumers and businesses around the world in a variety of ways. The
potential benefits of the Rentech GTL Technology include:
o Improving transportation fuels, through blending with conventional
diesel, to reduce the sulfur content which produces harmful air
emissions. It can also reduce the aromatics released into the
atmosphere, which are believed to be carcinogenic.
o Improving refinery economics through more efficient use of heavy and
sour crude oil and refinery residues.
o Enhancing the value of uneconomic methanol or other industrial plants
that have costly gas reforming systems in place that can be
alternatively used to make synthesis gas for the production of GTL
products.
o Allowing natural gas producers to economically develop and produce
remote and substandard gas resources, thus increasing their proved
reserves and revenues.
o Facilitating efficient co-production of electricity and GTL products
from coal and other feedstocks while significantly reducing harmful
emissions.
o Broadening available supplies of clean energy and transportation fuel
to help meet the rapidly growing worldwide demand.
o Producing high-value, high-purity specialty products to meet
increasingly stringent environmental standards and product
specifications.
o Enhancing U.S. energy security by facilitating expanded use of
relatively abundant coal and natural gas resources for needs
traditionally met by increasing amounts of imported crude oil and fully
refined products.
BUSINESS STRATEGY FOR THE RENTECH GTL TECHNOLOGY
Our business strategy is to achieve commercial use of our technology in
commercial gas-to-liquids projects. That commercial use would expand our revenue
and earnings through increased license fees and engineering contracts, as well
as royalties on production of liquid hydrocarbons and revenues from sales of our
catalyst.
Our business goal is to achieve successful use of the 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 the Rentech
GTL Technology, and the commercialization of the Rentech GTL Technology would
probably be accelerated.
We are seeking to implement our goal of bringing one 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.
11
12
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 methanol plants, ammonia plants or other industrial
gas plants to use our technology.
We believe that our concept of retrofitting existing industrial gas
plants to use the 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, such as boiler feed
water systems, control rooms, fire protection, product transportation
facilities, security fencing and permits. To retrofit a plant, we would add our
synthesis gas conversion reactors to the existing front-end system.
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
owning 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 are targeting two types of industrial gas plants for our studies on
the feasibility of converting them to use the Rentech GTL Technology. One type
is mothballed plants that have been closed because they no longer economically
produce methanol, ammonia or other products, or are operating only at marginally
economic rates. The feedstock for our technology would be obtained from the
natural gas pipeline that already runs to the site.
We are also studying the economic feasibility of converting several
industrial gas plants that presently are operating and producing industrial
off-gases to use the Rentech GTL Technology. These plants would use the
off-gases as feedstock. We are studying both the cost of adding equipment and
systems to apply our technology to the industrial off-gas as well as the market
for the liquid hydrocarbon products.
While we preliminarily estimate that some industrial plants could be
retrofitted to use our technology at significantly less expense than
constructing a new plant to use the Rentech GTL Technology, we have not
completed feasibility studies on the costs of the retrofits or the full impact
of these costs on the economics of the production.
In order to improve the economics of retrofitting an existing
industrial gas plant, we may consider entering into a joint venture with the
plant owner. We might consider making a capital investment or contributing use
of our technology to acquire an ownership interest. We do not have adequate
capital to make this type of capital contribution. In other situations, if
project financing is available, we may be able to earn a part ownership interest
in a retrofitted plant through contribution of some aspect of our technology.
Our business strategy also includes planning for the Sand Creek
methanol plant in the Denver area. We own a 50% interest in this plant, which is
currently mothballed. We have completed the basic engineering and design work
required to convert this plant from a methanol facility to a GTL facility that
12
13
uses the Rentech GTL Technology. While our studies are not complete, we are
considering converting the plant into a pilot plant for making further
improvements to our technology.
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 licenses would construct their
own new plants.
We believe that there are substantial numbers of potential users of the
Rentech GTL Technology who could benefit from its use, particularly because of
several trends impacting the energy, transportation and environmental
industries. These factors include:
o Increasingly stringent requirements to reduce tailpipe
emissions and strengthen clean-air standards.
o The contradictory need of refiners to cost-effectively produce
cleaner fuel from increasingly poor quality crude oils.
o The regulatory curtailment of natural gas flaring.
o Economic incentives to profitably develop vast, remote
resources of natural gas.
o Steadily increasing power demand around the world.
o A need to utilize coal to generate power without the emissions
generated at coal-fired power plants.
o The search for a practical fuel source for fuel cells that
would produce electricity.
For new plants, we intend to pursue small to medium-sized projects,
ranging from 500 to 20,000 barrels per day of GTL products. While our technology
would enable us to pursue larger projects, we believe that small to medium size
projects are economic and represent a substantial portion of the near-term GTL
market.
MARKETING
We market licenses of the Rentech GTL Technology for use 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.
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
13
14
off-gas. The projects would be located at sites scattered around the world. The
plants being discussed would range in production capacity from about 2,000 to
50,000 barrels per day of liquid hydrocarbons. None of these possibilities have
developed into specific proposals or license negotiations. We have contracted to
perform studies on the feasibility of the proposals for a few of these potential
licensees. It is too early in the study process for us to know whether one or
more of these proposals will result in a license followed by construction of a
plant to use the Rentech GTL Technology.
In order to increase our marketing capability, we have formed strategic
alliances with four significant engineering firms. Each of these firms has an
international presence and has experience in fields related to the Rentech GTL
Technology. Each of them is seeking situations where our technology could be
used in GTL plants and they could obtain contracts to provide their respective
engineering services.
o BC PROJECTOS, LTD.
We have designated BC Projectos, Ltd., a Brazilian engineering firm, as
our exclusive engineering representative in Brazil. BC Projectos is one of
Brazil's foremost engineering firms in the field of cogeneration plants,
thermoelectric power generation and energy optimization studies. Its staff has
designed Brazil's first combined cycle plant (a highly efficient electric plant
powered by natural gas and steam). It has also designed more than 70% of
Brazil's capacity of thermoelectric plants using gas turbines. BC Projectos has
provided services to Amoco, Consolidated Natural Gas, Enron, Shell, Total, Union
Carbide, Petrobas, the national oil and gas company of Brazil, and numerous
other South American customers.
Together with BC Projectos, we intend to jointly identify projects for
use of the Rentech GTL Technology, especially in Brazil. We will conduct
feasibility studies, identify potential joint venture parties and financing, and
cooperatively provide detailed engineering support for the projects.
o DRESSER ENGINEERING
We have an arrangement with Dresser Engineering Company of Dallas,
Texas, for joint marketing of our technology with the engineering services of
Dresser Engineering. Since 1926 Dresser Engineering has been providing
engineering, procurement and construction management services to the gas
processing and refining industries. The marketing arrangement allows our two
companies to take advantage of each other's strengths for marketing the Rentech
GTL Technology on a worldwide basis. Dresser Engineers is in the process of
beginning feasibility studies and preliminary engineering for three
gas-to-liquids projects located in Africa. We expect that any of these projects
that proceed would use the Rentech GTL Technology.
In 1999, Dresser Engineering's parent company, Dresser Engineers &
Constructors, Inc., and we exchanged ownership of minority blocks of our shares
on a tax-free exchange basis. Dresser Engineers & Constructors acquired 7.5% of
our common stock outstanding as of September 30, 1999, and we acquired 5% of the
common stock of privately held Dresser Engineers & Constructors, Inc. For
additional consideration, we later acquired another 5%, for a total of 10% of
its common stock.
In 2000, Dresser prepared a preliminary cost study of the feasibility
of converting the Sand Creek methanol plant into a GTL plant using our
technology. We capitalized these costs as capitalized software.
14
15
We are using this software program as a generic model for conducting feasibility
studies and providing data for our engineering designs for plants. We own a 50%
interest in the Sand Creek plant.
o JACOBS ENGINEERING UK
In February 2000 we signed an agreement with Jacobs Engineering UK
Limited for joint marketing of the Rentech GTL Technology and Jacobs'
engineering services. We are marketing our combined capabilities to potential
customers in several locations throughout the world.
We are targeting customers who would use our joint services in new
natural gas plants as well as in existing industrial gas plants that would be
retrofitted for our technology.
The Jacobs Engineering Group, headquartered in Pasadena, California, is
the parent company. It is an international engineering and construction company
with approximately 23,000 employees and annual revenues of U.S.$3 billion. It
has offices located throughout the world.
Jacobs is experienced in engineering for gas synthesis technology. It
provides a full range of consulting and construction engineering services from
inception of a project through construction, start-up, operations and
maintenance.
o COMART
In November 2000 we granted rights to COMART, an Italian engineering
firm located in Livorno, Italy, to market our Rentech GTL Technology for use
with natural gas feedstock. COMART is authorized to license our technology
worldwide, excluding India, on a non-exclusive basis. We also granted COMART the
exclusive right to market our technology to ENI SpA, Italy's largest oil and gas
company, and Edison SpA, Italy's largest private producer of electric energy,
for projects using natural gas, worldwide, under the same terms.
COMART has 800 employees. It is a consortium created by two of Italy's
leading energy design and construction companies. These are Calderia
Construzioni Termo-meccaniche S.r.l. (CCT), a subsidiary of the Gruppo
Marcegaglia, an Italian conglomerate with 3,600 employees and over US$1.5
billion in revenue, and Tozzi Sud S.p.A. (Tozzi).
CCT, founded in 1955, designs and markets steam generators and boilers.
It also designs, constructs and assembles environmentally friendly power plants.
Tozzi, with 40 years of experience, is one of Italy's leading designers
and producers of electric switchboards and electro-instrumentation plants.
Additionally, Tozzi Engineering and Development (Ted) a division of Tozzi,
offers complete turnkey engineering and construction services, mainly to the
oil, gas, and chemical industries.
COMART holds the exclusive worldwide rights to license four gas
processing technologies owned by Gas Conditioners International Co. (GCI) a U.S.
company. One of these processing technologies is the "Coldfinger" process.
Coldfinger is an exhauster for removing trace quantities of water from glycol
solutions. It is used by such COMART clients as Amereda Hess, BP Amoco, Chevron,
Exxon/Mobil,
15
16
Texaco, and Valero Energy, among others. Coldfinger, along with the three other
GCI technologies, conditions gas in over 100 facilities around the world.
o POTENTIAL CUSTOMERS AND MARKETS
The potential customers and markets for our Rentech GTL Technology are
diversified and worldwide. Industries and other business segments most likely to
use the Rentech GTL Technology include the following:
o Existing industrial plants, such as underutilized methanol or
ammonia plants that are 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.
o Owners of substandard natural gas that is not useable through
traditional means because it contains excessive amounts of
carbon dioxide, nitrogen or other diluents.
o Owners of oil fields where flaring of natural gas is outlawed
or penalized, or where natural gas is reinjected into oil
wells but interferes with oil production from the wells.
o Municipalities that are required by clean air laws to operate
fleets of cleaner buses and other vehicles.
o TEXACO ENERGY SYSTEMS, INC. LICENSE FOR LIQUIDS AND SOLIDS
Texaco Energy Systems, Inc. (Texaco) 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 an increasingly heavier crude oil supply and growing
inventory of refinery bottoms as feedstock.
o Owners of coal resources, including low grade and high sulfur
coal deposits.
o Owners of heavy oil and tar sands properties.
16
17
LICENSES, CONTRACTS AND JOINT VENTURES FOR THE RENTECH GTL TECHNOLOGY
We have granted licenses to several companies to use the Rentech GTL
Technology. They are presently developing their own plans on how to proceed. To
accelerate our efforts and leverage our technology, we have also formed several
strategic relationships with owners of complementary technologies, engineering
capabilities, financial strength and potential projects. These relationships are
designed to broaden application of our technology and accelerate its deployment
in commercial GTL facilities.
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 the Rentech GTL Technology or upon some other measure of product
value. Licenses may be granted either exclusive or non-exclusive rights to use
the Rentech GTL Technology in identified countries or other geographic areas.
The license fees and terms are individually negotiated and may vary.
Plants are generally 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. In
the future, 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 an exclusive, worldwide license (except in
India, for which Donyi Polo Petrochemicals Ltd. holds an exclusive license), to
use and sublicense Rentech GTL Technology for conversion of solid and liquid
feedstocks in plants where a gasification process is used. We are to share in
revenues received by Texaco from its exclusive license to use the Rentech GTL
Technology in projects where solids and liquids are used as feedstock.
We retain rights to license the Rentech GTL Technology in the entire
range of use for natural gas conversion projects. We are, for our own account,
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 design, construct and operate commercial scale
plants using the technology. Their ability to obtain low-cost feedstock is
essential. 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. 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
full-scale conversion plants using the technology can be profitably operated
depends upon several factors, including the availability of low cost
17
18
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 the like; 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 also 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 20%, 19% and 0% of our revenues during the fiscal years ended
September 30, 2000, 1999 and 1998, respectively.
o TEXACO ENERGY SYSTEMS, INC. LICENSE
In October 1998, we granted an exclusive technology license to Texaco
Natural Gas, Inc. (now Texaco Energy Systems, Inc., a division of Texaco, Inc.)
to use and sublicense the Rentech GTL Technology in projects where solid and
liquid hydrocarbons are used as feedstock. The license also granted Texaco a
non-exclusive license for conversion of natural gas to liquids.
Under the license, Texaco can use Rentech GTL Technology in combination
with Texaco's proprietary gasification technology to produce liquid hydrocarbon
products such as transportation diesel fuel, naphtha, and specialty products.
The Texaco gasification process is a proprietary technology for producing
synthesis gas from a broad range of feedstocks such as 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 such as Lurgi, Royal Dutch/Shell and others.
Under the terms of the agreement, Texaco has an exclusive, worldwide
license, except in India, to use for its own account, and sublicense the 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 advance royalty fees. These advance fees are not recoverable by Texaco except
as offsets against 50% of the production royalties and catalyst payments that
Texaco may owe in the future for use of
18
19
the technology for production of liquid hydrocarbons. Texaco is to pay for all
costs of further developing, marketing and deploying its use of the Rentech GTL
Technology. Texaco and we will share revenues from plants licensed under the
Texaco license agreement. The license to Texaco enables it to terminate the
agreement upon certain payments to us.
o TEXACO ENERGY SYSTEMS, INC. TECHNICAL SERVICES AGREEMENT.
On June 15, 1999, Texaco entered into a technical services agreement
with us to follow up our 1998 licensing agreement. Under the 1999 contract, we
are undertaking the necessary tasks required for the integration of the Rentech
GTL Technology with Texaco's gasification process. The combination of these
technologies will allow for the use of a broad range of feedstocks such as coal,
petroleum coke, residual oils and byproducts generated in refineries and
chemical plants.
The 1999 agreement provides that we will perform technical and
development work at our development and testing laboratory in Denver. Our work
is being conducted in cooperation with Texaco's personnel. Texaco is paying us
for its technical services and costs. Based on the tasks to be performed, we
estimate that these payments will, over a period of several years, approximate
$2 million.
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 (DOE) to develop the data and designs for what the
DOE calls a coproduction facility, or more specifically, an "Early Entrance
Coproduction Plant". Texaco plans to combine its gasification technology with
the Rentech GTL Technology to enable it to produce both high quality
transportation fuels and electricity from coal and petroleum coke at a
coproduction plant.
The Texaco proposal was one of three proposals selected by the DOE in
August 1999 to proceed on this program. The DOE's contract is intended to
encourage private industry to develop a set of entirely new multi-purpose energy
plants that combine several energy processes into a single facility. The DOE
contract requires designs that enable highly efficient conversion of the energy
in fossil fuels into electricity or heat as well as transportation fuels and
chemicals.
The DOE is making a contract award of approximately $8 million to
Texaco's project team. The work is anticipated to continue for several years.
The team members will use 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 a
feasibility study and successful completion of an integrated design, the team
will develop an engineering design package for a fossil fuel plant to use the
combined technology.
We have completed our part of the first phase of the DOE contract. Our
work to date consisted primarily of preparing a preliminary engineering design
for the plant that would use the Rentech GTL Technology. As part of this effort,
we participated in November 2000 in a privately funded program to demonstrate
use of the Rentech GTL Technology. The program was carried out at the U.S.
Department of Energy's slurry reactor facility in La Porte, Texas. Our
preliminary review of the test data confirms the expected performance of our
patented and proprietary Fischer-Tropsch catalyst. Key reactor operating
19
20
parameters were also demonstrated. The preliminary data indicated that the
technology for separating waxes and catalyst met expectations. We collected
representative products for use in the next phase of work on the Early Entrance
Coproduction Plant project, for which we are contributing our technology.
We consider the DOE contract award to be an important recognition of
the significance of utilizing the Rentech GTL Technology with Texaco's
gasification process to produce synthetic liquid hydrocarbons from non-gaseous
fossil fuels. We believe the DOE contract will help lead to commercial use of
the Rentech GTL Technology, not only with this type of feedstock, but also with
other potential feedstocks.
o IMPORTANCE OF OUR TEXACO AGREEMENTS
Our agreements with Texaco Energy Systems, Inc. are important to us in
several ways. Revenues from Texaco provided 20% and 19% of our total revenues
for the years ended September 30, 2000 and 1999. Texaco's decision to study use
of the Rentech GTL Technology also has the potential to lead to additional
revenues for us in the future.
o We are presently receiving revenues from Texaco as minimum
payments for continuing our technology license and providing
our technical services.
o We anticipate receiving new revenues from our participation
with Texaco as part of the team it has organized to work on
the DOE contract to develop an early entrance coproduction
plant. If this development work results in an engineering
design package that can be used in coproduction plants, it
could lead to use of our technology in plants of this type.
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 technology.
o Texaco's license of our technology and its contract for us to
provide technical services related to Texaco's potential use
of our technology provides us a degree of credibility in the
energy industry and financial markets. This imprimatur may
encourage other energy companies to license our technology. It
could also make it easier for us to raise capital from
investors.
If Texaco should decide to terminate its various agreements with us, we
would lose revenues that we are presently receiving from it, potential future
revenues from projects with which we are associated with it, and credibility in
the energy industry and financial market. Loss of this customer could have a
material adverse impact upon our revenues and our future prospects.
o OROBOROS AB LICENSE
We entered into a letter of intent in October 1999 to grant a license
to Oroboros AB, a Swedish corporation headquartered in Gateborg, Sweden. The
license would allow Oroboros to use the Rentech GTL Technology for the
industrial off-gas produced by Oroboros's steel plant located at Oxelosund,
Sweden, or other steel mills.
20
21
The Oxelosund steel plant currently generates approximately 140 million
normal cubic meters per year of off-gases. These industrial off-gases are now
flared into the atmosphere. The flaring, which occurs daily, produces about
100,000 tons of carbon dioxide, which is a greenhouse gas, and 20,000 tons of
de- ionized water per year. By using the Rentech GTL Technology, these
industrial off-gases, a mixture of hydrogen and carbon monoxide, can be
converted into clean burning, synthetic fuels and other useful products rather
than polluting the atmosphere. Oroboros has estimated that use of our technology
in this one steel plant could reduce carbon dioxide emissions in Sweden by
100,000 tons per year or the equivalent of one-quarter of 1% of the total annual
carbon dioxide emissions in Sweden.
Oroboros plans to produce what it refers to as eco-paraffin, sometimes
called ecodiesel. According to an assessment by Oroboros, the cost of producing
eco-paraffin will be lower than for other alternative fuels, such as
reformulated diesel fuel, currently available in Sweden. Additionally, Oroboros
has stated that no engine modifications are necessary for vehicles that use
eco-paraffin.
The proposed license agreement has not yet been signed by the parties.
No schedules have been announced for beginning construction, completing
construction, or start up of operations of a proposed GTL plant for Oroboros.
o PERTAMINA FEASIBILITY STUDY
We reached an agreement in December 2000 to conduct a feasibility study
with Pertamina, the Indonesian state oil and gas company. This joint study will
evaluate the cost, feasibility and potential markets for products that could be
realized by a small gas-to-liquids plant located in Indonesia. The plant under
study would have a design capacity ranging from 5,000 to 15,000 barrels per day
of liquid hydrocarbons. We anticipate that the study would take four to six
months. If it indicates that the project would be feasible, we anticipate
negotiating a license agreement with Pertamina. Pertamina is one of the world's
largest oil companies with approximately 30,000 employees. Through Indonesia's
Production Sharing Contract, Pertamina holds a substantial interest in the
country's daily production of 1.6 million barrels of oil and 8.7 billion cubic
feet of gas. The production is generated by 35 operators from fields all over
Indonesia, both onshore and offshore.
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 who intend to provide their engineering services or financing
capabilities to the proposed projects. Some of these talks are directly with
owners of natural gas resources. These discussions are in preliminary stages,
and no plans to proceed have been made at this time.
One of the proposals is to construct a floating gas-to-liquids plant
for use offshore to process natural gas that is now flared from offshore oil
wells now in production. This type of gas resource is now stranded because there
are no current means to bring it to market. We are cooperating with GTL
Resources PLC and Worley Engineers Ltd in studying the capital costs and
operating costs and overall economic feasibility of developing floating GTL
plants designed for use of our technology.
Several other discussions involve deposits of natural gas or existing
industrial gas plants. The sites where these possibilities exist are located
around the world, and include most of the continents.
21
22
o THERMAL CONVERSION CORPORATION
In August 1998, we entered into a research and development venture with
Thermal Conversion Corporation (TCC) whose offices are located in central
Washington. In August 2000, TCC became a wholly-owned subsidiary of Nuvotec,
Inc. of Richland, Washington. Nuvotec is a privately held company engaged in
developing clean energy systems. Among other technologies, TCC is developing and
marketing its patented technology for reforming natural gas into synthesis gas
to be used as feedstock for Fischer-Tropsch plants.
TCC's technology creates an electrically generated high-power electric
current inside a high temperature reactor to convert carbon bearing gases
induced into the reactor into synthesis gas. The TCC technology is a thermal and
chemical process referred to as plasma technology. Tests have been conducted by
TCC to determine whether TCC's plasma technology, when used with our catalyst,
economically converts natural gas into synthesis gases of predetermined
compositions. If so, the synthesis gases produced by this process could be
suitable for use in plants that use the Rentech GTL Technology, avoiding the
expense of an oxygen unit to prepare the synthesis gas. Successful combination
of TCC's plasma technology with the Rentech GTL Technology would enable users of
our technology to use smaller scale and less expensive gas conversion plants
than are now required. This could provide a cost-effective solution to the need
for conversion plants that are small enough to be mounted and economically used
on barges for production of liquid hydrocarbons from offshore natural gas wells.
The initial demonstration of using our catalyst with TCC's plasma
technology has yielded positive results. The energy lost in the conversion of
methane to synthesis gas was as low as 1%. Syngas mixtures were controlled close
to the compositions predicted by chemical equilibrium calculations. Carbon
deposition (or soot), a wasteful byproduct of syngas produced by other thermal
methods, was controlled to insignificant levels. Continuing tests are now needed
to focus on optimizing the process for energy efficiency and cost.
The U.S. Department of Energy made a $175,000 grant in July 1999 to
support the Rentech-TCC demonstration project. The DOE's grant funds were used
to test whether introducing steam to natural gas feedstocks of various
compositions increases the energy efficiency and cost effectiveness of the
combined Rentech-TCC technologies. We expect to meet with TCC's officers in the
next few months to design a joint plan for further efforts to combine the
Rentech GTL Technology with TCC's plasma technology.
If this joint venture is successful, we will be entitled to a
nonexclusive license to use the TCC plasma technology with the Rentech GTL
Technology. We are also to receive, for 10 years, 5% of any future license fees,
royalties or other payments in lieu thereof that are received by TCC for use of
its plasma technology in any other Fischer-Tropsch projects. To date no revenues
have been earned related to this license.
o DONYI POLO PETROCHEMICALS
In September 1992, we granted exclusive rights to ITN, Inc., a Colorado
corporation, to market the Rentech GTL Technology in India. ITN, Inc. is owned
by Dr. Mohan S. Misra, who also owns a majority of ITN Energy Systems, Inc. See
"ADVANCED TECHNOLOGIES--ITN Energy Systems, Inc. (ITN/ES). ITN, Inc. is
entitled to 20% of our royalty, license fee or other revenues from plants in
India.
22
23
Through the efforts of ITN, Inc., we granted a license to Donyi Polo
Petrochemicals Ltd. for a plant in India using the Rentech GTL Technology. The
proposed plant is to be a 360 barrel per day plant, designed to use flared gas
in the state of Arunachal Pradesh in northeastern India. Gas feedstock that is
presently flared from oil wells has been allocated to this project by the state
government of Arunachal Pradesh. We completed a $300,000 contract for the basic
design of the plant in 1995. Also in 1995, Donyi Polo purchased our Synhytech
plant in Pueblo, Colorado. In 1996, it moved the components to India for
reassembly. In addition to a $250,000 contract for preliminary engineering
services awarded to us, Donyi Polo Petrochemicals contracted with Humphries &
Glasgow, Mumbai, India, for the prime engineering contract. In 1998, the
detailed engineering design of the plant was completed by Humphries & Glasgow.
We have earned $120,000 as payments due toward our license fee. The license
agreement provides for royalty payments to us for seven years after commencement
of production from the plant. The licensee is to construct and operate its own
manufacturing plant, using our patents, to produce catalyst for its plant.
Donyi Polo has not announced a decision to proceed with completion of
the Indian plant. We do not expect additional engineering design contracts,
license fees or other revenues from it in the foreseeable future.
PRODUCTS AND MARKETS FOR GTL PRODUCTS
Plants using the Rentech GTL Technology can be designed and configured
to produce a variety of liquid hydrocarbon products. The principal products of
the Rentech GTL Technology process are:
o Clean-burning and premium-grade diesel fuel.
o Naphthas useful as a feedstock for chemical processing and for
refining into varnishes and mineral spirits.
o Specialty products such as waxes useful in hot-melt adhesives,
inks and coatings.
o Base oil for lube oils.
o Normal paraffins.
o A variety of other wax-based products.
Our sulfur-free diesel fuel and naphthas might be good feedstocks for
fuel cells when those potential new products are ready for the market. This is
not expected to occur in the next few years.
The products resulting from use of the Rentech GTL Technology will
compete with traditional petroleum products and synthetic liquid hydrocarbon
products produced by other F-T technologies. To a great extent, competition will
be based upon price, and the price at which liquid hydrocarbons can be produced
by use of the Rentech GTL Technology has not yet been established. Experience
with F-T technology by others since its development in the 1920s has indicated
that earlier versions of the technology could not economically produce synthetic
fuels. We believe that our enhancements and variations of the basic F-T
technology allow the Rentech GTL Technology to be cost-effective in some
situations.
23
24
Products resulting from the Rentech GTL Technology, like other F-T
processes, are environmentally benign relative to analogous products produced
from crude oil refining. GTL products are free of the sulphur, aromatics,
nitrogen and heavy metals that are typically found in crude oil. For example,
our clean burning diesel fuel has excellent combustion qualities and can help
reduce harmful exhaust emissions. Likely uses of our diesel include use as a
blending stock to improve the quality of commonly available diesel fuel and as a
blending component for upgrading low quality stock that would otherwise be used
in lower value fuel oil.
Rentech Diesel Fuel
Laboratory tests made to determine the properties of the diesel
produced by the Rentech GTL Technology have been conducted by independent
testing agencies. These tests indicate that our diesel fuel is a high-grade
diesel fuel with environmental advantages compared to diesel fuel derived from
crude oil. Compared to Commercial No. 2 diesel fuel, our diesel fuel has four
properties that make it less polluting. These are an absence of sulphur, zero
percent aromatics by volume, a higher cetane number, and a lower 90%
distillation temperature. Emissions of hydrocarbons, carbon monoxide, oxides of
nitrogen, and particulate matter seem to be reduced by the reduction in fuel
aromatics. Higher cetane numbers were also found to reduce hydrocarbon and
carbon monoxide emissions. Lowering the sulphur content of diesel fuel helps
reduce particulate matter emissions.
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.
Extensive testing by others indicates that GTL fuels reduce overall
emissions by a minimum of 25%. The reductions include 50% less carbon monoxide,
six times less hydrocarbons, 66% less particulate matter without traps, and
approximately 50% less nitrogen oxide without traps.
We believe our clean burning diesel fuel could help users meet the
increasingly stringent requirements for cleaner fuels. A series of federal
statutes known as the Clean Air Act Amendments of 1990 and the Energy Policy Act
of 1992 and related executive orders have established benchmarks for reductions
in harmful exhaust emissions within the United States. We believe our diesel
fuel exceeds all current and proposed state and federal diesel emissions
requirements. This includes the stringent requirements adopted by the California
Air Resources Board, as well as new requirements proposed or adopted by the U.S.
Environmental Protection Agency.
The state of California, and several other state and local governments,
have adopted legislation establishing allowable levels of exhaust emissions for
vehicles and businesses. Limits adopted by the California Air Resources Board
include 0.05% sulphur weight maximum and lowering aromatics content to a maximum
of 10% by volume.
In December 2000 the EPA adopted a requirement that oil refineries in
the U.S. must reduce the sulfur content of their diesel fuel by 97% by mid-2006.
This emission standard would reduce the sulfur content of diesel from 500 parts
per million to 15 parts per million by mid-2006, a 97% reduction. The EPA said
the proposal would reduce harmful air emissions from tractor-trailers, buses and
other heavy trucks by more than 90%. According to the EPA, the result would be
significantly healthier air for all persons in the
24
25
United States, with less sooty, thin particular matter that causes respiratory
illness. We believe this requirement may provide two core reasons for owners of
domestic refineries to add our technology to their refinery processes. Our
technology can convert refinery bottoms into a clean-burning diesel, and it can
produce sulfur-free diesel that meets the new-low-sulfur requirement. The
refinery could directly market our clean diesel or, more likely, use it to
upgrade conventional diesel.
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 GTL 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. GTL 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.
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.
We petitioned the U.S. Department of Energy in July 1999 to designate
our diesel as an alternative fuel under the Energy Policy Act of 1992. An
alternative fuel, under that act, is one that is substantially not petroleum and
would yield benefits in energy security and environmental protection. United
States agencies are required by the act to promote the use of alternative fuels.
They are to do this by educating the public about alternative fuels, and,
beginning in 1997, by using alternative fuels in increasing proportions in their
government vehicle fleets. The act specifies that 75% of all federal and state
government-purchased vehicles for major urban areas must be alternative fuel
vehicles. The DOE has determined that these mandates are not being met.
Designation by the DOE of the fuel produced by the Rentech GTL Technology as
alternative fuel could create a demand for our diesel by government and state
customers.
25
26
In an alternative action, the U.S. Congress adopted legislation in
December 2000 designating domestically produced gas-to-liquids fuels made from
natural gas as an alternative fuel as defined by the Energy Policy Act of 1992.
We anticipate that the designation of GTL fuels as alternative fuels might lead
to the reduction or elimination of federal excise and road taxes on GTL fuels.
This would provide an incentive for users of conventional diesel fuel to switch
to GTL diesel fuel. Other inducements to use the GTL fuels instead of
conventional fuels result from its clean-burning characteristics, the ability
they provide for catalytic converters to trap more harmful emissions, and their
ability to extend the useful and effective life of proposed particulate traps
that would be required to meet increasingly restrictive emissions standards.
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
base oils as blending stock for manufacture of premium lubricating oils. The
hydrocarbons with
26
27
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 12 employees. We believe that this facility provides us with a resource for
development and testing that is unmatched in the field of gas-to-liquids
technology.
Two of our founders, Dr. Charles Benham and Dr. Mark Bohn, are directly
responsible for development of the Rentech GTL Technology. These two scientists
and our research and development engineers and technicians continue to work
toward improving our technology and developing new applications.
Our principal efforts at the laboratory are now focused on integration
of Texaco's gasification technology with our GTL technology. We are also
developing additional catalysts and attempting to increase the amount of the
feedstock that is converted into liquid hydrocarbons.
We have also joined with Texaco Energy Systems, Inc., our licensee, to
demonstrate use of our technology at the La Porte plant in Texas. Texaco leased
the use of this plant from the U.S. Department of Energy on a short-term basis
in late 2000 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 were successful.
During the fiscal years ended September 30, 2000, 1999 and 1998, we
spent amounts of $515,261, $195,466 and $60,225, respectively, on research and
development activities on the Rentech GTL Technology. During each of the same
fiscal years, we estimate that revenues received from third parties for research
and development activities on the technology were $751,166, $211,246, and $0,
respectively.
27
28
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 the 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 the 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 the Rentech GTL Technoloy can be cost effective so that
commercial-scale plants using the technology can be profitably operated depends
upon several factors. The principal conditions include adequate quantities of
low-cost feedstock, the availability and cost of construction financing, the
economic efficiency of the technology, and the market demand for the end
products at profitable prices. Those qualities, especially the economic
performance of the technology, have not yet been established. Poor economic
results at plants using the 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.
28
29
In addition to the funds Texaco is currently providing for our
technical services, we have expended and will continue to expend substantial
funds to research and develop our technologies and business, especially the
Rentech GTL Technology. If adequate funds are not available, our marketing and
licensing efforts would be materially hampered. We might have to delay or to
eliminate expenditures for certain of our capital projects or to license to
third parties the rights to commercialize aspects of technologies that we would
otherwise seek to exploit ourselves.
o OUR ABILITY TO CONTINUE TO BENEFIT FROM THE RENTECH GTL TECHNOLOGY
DEPENDS UPON THE EFFORTS OF LICENSEES OF THE TECHNOLOGY. WE DO NOT CONTROL THEIR
ACTIONS.
Except to the extent that we convert existing industrial gas plants, we
do not intend, and do not have adequate capital, to finance, construct and
operate our own commercial-scale plants. At this time, we do not have adequate
capital or financing to retrofit an existing industrial gas plant. Successful
use of the Rentech GTL Technology therefore depends upon our licensees. We will
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 THE RENTECH GTL TECHNOLOGY MAY NOT COMPETE FAVORABLY WITH OTHER GTL
TECHNOLOGIES. THAT WOULD LIMIT OUR ABILITY TO OBTAIN LICENSEES, AND WOULD
SEVERELY REDUCE OUR REVENUES FROM THE TECHNOLOGY.
Because of increasing worldwide demand for fuels in general, and for
the clean burning products of GTL technology in particular, as well as the large
quantities of carbon-bearing gas, liquid and solid materials available as
feedstock, there are economic incentives for businesses to develop and achieve
significant market penetration for successful Fischer-Tropsch technology.
Several major integrated oil companies, including ExxonMobil Corporation, Royal
Dutch/Shell and Sasol Ltd., as well as Syntroleum Corporation and several
smaller companies, have developed or are developing competing technologies. Most
of these
29
30
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.
o OUR ABILITY TO IMPLEMENT OUR BUSINESS STRATEGY DEPENDS UPON OUR
EXECUTIVE OFFICERS, AND THE CONTINUED IMPROVEMENT OF THE RENTECH GTL TECHNOLOGY
DEPENDS UPON OUR SCIENTIFIC PERSONNEL. LOSS OF ONE OR MORE OF OUR KEY EMPLOYEES
WOULD SUBSTANTIALLY HINDER OUR ABILITY TO EXPLOIT THE RENTECH GTL TECHNOLOGY.
Our success with our technology is substantially dependent upon the
contributions of our executive officers and key scientific and technical
employees. We believe that the management skills and industry relationships of
our executive officers are important to implement our business strategy. At this
stage of our development, economic success of the Rentech GTL Technology depends
upon continued improvements to the technology, marketing and proper design of
conversion plants and their startup in such a manner that achieves optimal plant
operations. These efforts require knowledge, skills, and relationships unique to
our key personnel. Moreover, to successfully compete through the Rentech GTL
Technology, we will be required to engage in continuous research and development
regarding processes, products, markets and costs. Loss of the services of our
executive officers, our scientists or other key employees could have a material
adverse effect on our business, financing, operating results and financial
condition.
o WE MUST CONTINUALLY DEVELOP IMPROVEMENTS TO OUR TECHNOLOGY AND MAKE
ADVANCES AS COMPETING TECHNOLOGIES ARE IMPROVED AND THE MARKET CHANGES.
The market for advanced technology products is characterized by rapidly
changing technology, new legislation and regulations, and evolving industry
standards. The introduction of products embodying new technology, the adoption
of new legislation or regulations, or the emergence of new environmental and
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
30
31
include rapid changes in political and economic climates; changes in foreign and
domestic taxation; lack of stable systems of law; susceptibility to loss of
protection of patent rights and other intellectual property rights; expatriation
laws adversely affecting removal of funds; fluctuations of currency exchange
rates; contract rights; labor disputes; the nationalization or appropriation of
property without fair compensation; civil disturbances; and war. International
operations and investments may also be negatively affected by laws and policies
of the United States affecting foreign trade, investment and taxation. Any of
these events could adversely impact our licensees and thereby adversely affect
our operating results and financial condition.
PROPRIETARY DESIGNS, INTELLECTUAL PROPERTY AND PATENTS
We own intellectual property rights consisting of proprietary designs
for our synthesis gas reactors and other key aspects of the Rentech GTL
Technology. We also own confidential information and trade secrets that are
essential to maintain our proprietary ownership of the technology. We seek to
protect our intellectual property rights through patents and trade secret
agreements, including confidentiality agreements with our licensees, employees
and consultants.
Use of the Rentech GTL Technology requires use of our patented
catalyst. The license arrangements with both Texaco and Donyi Polo
Petrochemicals Ltd. authorize them to manufacture our catalyst for their
respective conversion plants or to have the catalyst made for them by a
manufacturer of their choice. We have no present plans to manufacture our own
catalyst. We expect ultimately to grant a license, for which we would receive a
license fee and royalties, to an independent catalyst manufacturer for
manufacture and delivery of catalyst, or to grant a license to individual
licensees of the technology to manufacture catalyst for their own use.
We have been granted ten United States patents related to the Rentech
GTL Technology. These patents apply to our processes, applications of the
process, products produced, and materials used as part of the Rentech GTL
Technology. The patents include a method for cracking produced waxes; a method
of making and activating a promoted iron catalyst for use in slurry synthesis
reactors; production of a synthetic oxygenated diesel fuel; the overall
gas-to-liquids conversion process; and use of our oxygenated, sulphur and
aromatic-free diesel fuel as an additive to conventional diesel fuel.
Two of our patents include key elements of a process that enables our
iron-based catalyst to compete with cobalt-based catalysts used by other F-T
processes. These patents protect process steps that improve the carbon
conversion efficiency of the Rentech GTL Technology by over 30%. We believe
these procedures make our process cost-effective for converting gases to
liquids.
We have filed additional U.S. patent applications. One Australian
patent has been issued. Several foreign patent applications based on one or more
of the United States patents are pending.
Our first patent for the Rentech GTL Technology is based upon an
application filed in 1992. The patent was issued by the U.S. Patent and
Trademark Office in 1994. Patents have a term of 20 years from the date of
filing the application. Subsequent patents that we have been issued or may
obtain in the future for improvements and additions to the technology may have
the effect of extending our period of exclusive rights to use and license the
technology.
OKON's formulas for the manufacture of its stains, sealers and coatings
are proprietary. They are maintained as trade secrets, and OKON has no patents.
We rely upon confidentiality agreements with our
31
32
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.
OUR ABILITY TO EXPLOIT OUR VARIOUS TECHNOLOGIES DEPENDS UPON PROTECTING
AND ENFORCING OUR INTELLECTUAL PROPERTY RIGHTS. OUR ABILITY TO DO SO INVOLVES
COMPLEX LEGAL, SCIENTIFIC AND FACTUAL ISSUES AND UNCERTAINTIES.
The Rentech GTL Technology and our businesses conducted by OKON and
Petroleum Mud Logging are based upon patents and trade secrets. We rely upon a
combination of patent, trade secret, copyright and trademark law, nondisclosure
agreements and technical security measures to protect our intellectual property
rights in our several lines of business. Our success in technologies that are
based on intellectual property depends on our ability to establish, protect and
enforce intellectual property rights with respect to our technologies and to
successfully defend against any alleged infringement or related claims.
Protecting and enforcing our intellectual property position involves
complex legal, scientific and factual questions and uncertainties. This may be
especially true in foreign countries, which might become important users of the
Rentech GTL Technology, but which generally do not provide as much protection of
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.
32
33
Additional competitors in the field are those who are developing
Fischer-Tropsch technology, but who have not yet completed their research or
tested their technology in an operating pilot plant. Those other competitors
include several major oil and gas companies.
We believe that owners of competing GTL technologies which have
demonstrated use of their technology have spent many years and large sums of
money developing their technologies. We expect that others who may hope to
develop new, competing GTL technologies will face similar requirements of time
and money, to enter the field. We anticipate that these factors and the patents
that have been issued to us will make it difficult for others to enter the field
using an iron-based catalyst.
Several major oil companies are involved in large-scale synthetic fuel
development. These competitors include Royal Dutch/Shell, Exxon, and Sasol.
Syntroleum Corporation, a smaller public company, offers its Fischer-Tropsch
technology to licensees and joint ventures in which it has a part interest.
Exxon has operated a 200 barrel per day plant in Baton Rouge,
Louisiana, to demonstrate its process. While the plant was operated for several
years, it is not now being operated.
Shell operated a 12,500 barrel per day plant in Bintulu, Malaysia from
1993 through 1997 that produced diesel fuel and other products from natural gas.
The diesel fuel was sold to two refineries located in California and used for
blending stock with commercial diesel. This Fischer-Tropsch plant was shut down
in December 1997 because of an explosion in the air separation unit, which is
not a part of the Fischer-Tropsch reactor. Shell's plant came on-line again in
2000 with increased production capacity.
Sasol currently operates three Fischer-Tropsch plants that produce
about 160,000 barrels per day of liquid hydrocarbons. The feedstock is synthesis
gas produced from coal. Mossgas also uses Sasol's technology in South Africa to
produce in excess of 20,000 barrels per day of synthetic oil from natural gas.
In June 1999, Sasol and Chevron signed a memorandum of understanding for the
creation of a new global alliance to implement ventures based on Sasol's
gas-to-liquids technology.
In July 1999, Syntroleum announced the commencement of operations at
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.
33
34
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. See
"Proprietary Designs, Intellectual Property and Patents." 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.
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.
34
35
OPERATION OF GAS PLANTS THAT USE THE RENTECH GTL TECHNOLOGY INVOLVES
RISKS OF MECHANICAL FAILURES AND FIRES AND EXPLOSIONS. FREQUENT OR SEVERE
ACCIDENTS OF THIS TYPE AND THE RESULTING DAMAGES COULD MATERIALLY AND ADVERSELY
AFFECT OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION.
We expect that use of the Rentech GTL Technology in some conversion
plants will require oxygen producing systems to convert the feedstock into
synthesis gas. This is the first step of the Fischer-Tropsch process, and it
occurs before our GTL Technology is applied. The oxygen producing systems, if
required, will involve risk of accidents. Personal injuries to workers at the
plant and property damage to the plant may result. The frequency and seriousness
of accidents, injuries and damages will impact the marketability of the Rentech
GTL Technology, and our licensees' operating costs and insurability. Significant
frequency or severity of such accidents could have a material adverse effect on
our business, operating results and financial condition.
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 other than discount
retailers and mass merchandisers, industry users, and architects and building
contractors. The formulas used by OKON for manufacturing its products are
proprietary. 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.
OKON primarily manufactures and markets standard products, but it also
prepares special products for large orders. Sales are generally made pursuant to
purchase orders, which are occasionally revised to reflect changes in the
customer's requirements or to establish special orders. Product deliveries are
35
36
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 concentration of sales have occurred in the spring and summer
months. Production schedules are timed to reflect these seasonal variations.
OKON's sales of products to some customers may constitute a significant
portion of our revenues. For the year ended September 30, 2000, one customer of
OKON accounted for 16% of our total revenues. For the year ended September 30,
1999, two customers for OKON accounted for 29% and 12% of our total revenues.
For the year ended September 30, 1998, two customers of OKON accounted for 41%
and 24% 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 2,000 customers, and we expect that this broad customer base would help
soften the impact of the loss of any single customer.
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. Rentech believes that OKON products are competitive based on
the quality of its products and their unique properties, including the absence
of VOC ingredients due to the fact that 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.
Revenues from our stains, sealers and coatings business segment
represented approximately 41%, 68% and 100% of our revenues in the years ended
September 30, 2000, 1999 and 1998, respectively.
36
37
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.
PML owns 25 mobile well logging units that are moved from well to well.
Through state of the art instruments, the logging equipment measures traces of
gases and water throughout the depth of a well hole by analyzing the drilling
mud recovered from the well as drilling progresses. The results are transmitted
to customers immediately by either land lines or satellite uplink. The mineral
owners use this information to detect the presence of oil and gas deposits in
underground formations and to direct their exploration and development drilling.
The assets of PML also include a comprehensive library of well logs
accumulated over the past 36 years. The well logs are available for examination
by customers for a charge.
In the last several years, PML has provided its logging services for
fewer oil wells and more for gas wells. We expect this trend to continue as
exploration for natural gas intensifies due to increasing demand for that energy
source.
Revenues provided by our mud logging business segment represented
approximately 36% and 10% of our revenues during the fiscal years ended
September 30, 2000 and 1999. We acquired the mud logging assets in June 1999, so
there were no revenues from it in fiscal year 1998. PML's revenues from some
customers may constitute a significant portion of its revenues. For the year
ended September 30, 2000, one customer of PML accounted for 17% of our total
revenues. We have experienced a growing demand for our mud logging services. If
we lose a significant customer, we anticipate that demand from other customers
would use most of our capabilities.
Our competitors in mud logging services include approximately 100 other
companies. Many 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. The units automatically analyze that
information and rapidly communicate the results to the mineral owner. These
capabilities may have the advantage of enabling the mineral owner and its
geologists to exercise more precise control over the drilling without being at
the site.
o REN CORPORATION
On April 16, 1999, we entered into a letter of intent to purchase 51%
of the outstanding stock of Ren Corporation for approximately $1,200,000. Ren is
an Oklahoma corporation organized in 1980 and located in Stillwater, Oklahoma.
Ren is engaged in the manufacture of complex microprocessor controlled
industrial systems. Ren's primary market has been automated test equipment for
the fluid power industry. Ren
37
38
manufactures test instruments for various types of equipment such as automatic
hydraulic presses, transmissions, diesel fuel injection pumps and gearbox and
power supply systems. Ren's customer base currently consists of some of the
world's largest heavy-equipment manufacturers. These include Boeing,
Caterpillar, Inc., John Deere, Sauer-Sundstrand, Eaton and Vickers.
We believe this potential acquisition would complement our present
business organization. We expect that Ren would have a positive cash flow, would
retain its present management, and would be able to expand its business with
minimum capital expenditures.
Ren has a backlog of orders. In order to enable Ren to increase its
production rate, we have provided it with capital. We have advanced $573,899 in
cash and issued 200,000 shares of our common stock with a market value of
$400,000 as a deposit against the potential acquisition. As of September 30,
2000 and 1999, we have recorded a $973,899 and $300,000 deposit on our balance
sheets. Of the $973,899 deposit, as of September 30, 2000, $773,899 is in a form
of a note receivable due from Ren. On October 17, 2000, Ren issued its $200,000
note to us for the remaining deposit that existed at September 30, 2000. The
notes bear interest at 8% and are collateralized by the assets of Ren.
Upon closing of this transaction, the note receivable will be applied
to the purchase price. If the transaction does not close, then Ren is to repay
the note no later than six months from the date of our written notice that the
purchase will not be completed. Completion of the stock purchase is subject to
our final due diligence, funding of the purchase price, and approval by the
boards of directors of the two companies. No closing date to complete the
purchase has been scheduled.
ADVANCED TECHNOLOGIES
o ITN ENERGY SYSTEMS, INC. (ITN/ES)
In 1998 we acquired 10% of ITN/ES, a privately owned Colorado
corporation. ITN/ES was founded in 1995 by a team of scientists and engineers
from major aerospace corporations. Its goal is to bring aerospace know-how to
the marketplace.
ITN/ES's business strategy is to develop and commercialize emerging
technologies for the aerospace, military and commercial markets. Its approach is
to form sponsorships and partnerships with corporations for the study and
development of specific products. After intensive testing of prototypes and
evaluation of the market, the successful products are introduced to the market.
Using its core technologies, ITN/ES is developing several products to
be offered for commercial use. These technologies can be categorized in the
following groups:
o Thin-film technologies based on a process of depositing
ultra-thin layers of materials on thin sheets of plastics or
metals.
o Space systems technologies for space power, next generation
satellites, and shape memory mechanisms.
38
39
o Fuel cells using ceramic membranes to combine fuel and air in
an electrochemical process that increases efficiency and
eliminates polluting air emissions associated with
conventional fuel combustion.
o Intelligent processors and sensors that actively control
manufacturing processes and monitor the results.
Several of ITN/ES's core technologies are based upon its thin-film
technologies. This technology enables a user to deposit materials on a substrate
of thin plastic or metals in layers of atoms. Those innovative thin-film
materials have been used to develop products like photovoltaic solar collector
panels that produce electrical power, solid state thin-film lithium batteries,
and several space systems technologies.
In December 2000 we agreed in principal with ITN/ES to exchange our 10%
ownership interest in ITN/ES for an interest of approximately 3.5% in the
holding company which will own 100% of Global Solar Energy, Inc. and 100% of
Infinite Power Solutions, Inc., a company formed to exploit the thin-film
batteries. In addition, the same holding company will own 100% of two other key,
advanced technologies being developed by ITN/ES. These are ceramic membranes and
fuel cells.
o GLOBAL SOLAR ENERGY, INC.
Global Solar was the first commercial success of ITN/ES. Global Solar
uses the thin-film technology developed by ITN/ES to produce thin-film
photovoltaic materials to manufacture lightweight, solar collector panels. The
panels collect energy from the sun to produce electrical power. Conventional
solar panels are made by depositing silicon photovoltaic cells on thick glass
panels. Global Solar's photovoltaic film is thinner than a human hair. The film
is deposited onto thin plastics or metals to create large sheets of lightweight
solar panels. The photovolatic film converts sunlight directly into electricity.
Unlike traditional solar panels that are heavy, fragile and rigid,
Global Solar's solar modules are lightweight, durable and can be incorporated
into flexible products. Compared to internal combustion engines used to generate
power, Global Solar's solar power generation systems are silent, produce no
pollutants, and provide more cost-effective power than diesel fuel.
Global Solar is currently focusing on manufacturing unique, lightweight
and flexible solar energy modules. These products can be used for a wide variety
of applications by the aerospace, military and commercial sectors.
In early 2000, the U.S. Army ordered 10 solar powered generating
systems from Global Solar. The contract price is for nearly a half-million
dollars. The first of these solar systems was delivered to the U.S. Army in June
2000. The Army is using them in the field to produce electric power for
floodlights, computers, telephones, battery chargers, radios and other types of
troop equipment. The 10 solar systems consist of more than 50 solar collector
modules. Each module measures about 19 by 53 inches and weighs less than three
pounds. When connected to each other, the modules are designed to produce up to
2,800 watts of electrical power when exposed to sunlight.
The Air Force Research Laboratory selected ITN/ES in July 2000 to lead
an industry team, including Global Solar, that is developing "microsatellite"
spacecraft. This work is part of a three-year, $35 million demonstration
program.
39
40
In addition to ITN/ES, the other members of the microsatellite team are
Ball Aerospace and Technologies Corp., Lockheed Martin Astronautics Operations
and Global Solar Energy. The goal of the program is to develop clusters of
interdependent microsatellites that fly in close, bird-like formations circling
the earth. These small satellites, each weighing less than two pounds, are
expected to eventually replace many of the single, larger satellites of today.
The Air Force Research Laboratory anticipates that small satellites
will operate in clusters by communicating with each other and sharing data
processing, payload and missions. They are intended to be smaller, lighter and
mass produced, and thus considerably less expensive to launch into space than
current satellites.
Global Solar's function as part of the microsatellite program is to
provide its lightweight solar panels. The panels would provide all the
electrical power for these miniature satellites. ITN/ES has estimated that
Global Solar's solar panels could reduce costs from some $1 million per kilowatt
of electrical generation to about $100,000 per kilowatt. Typical satellite power
requirements range from one to 30 kilowatts.
Global Solar has said it believes the microsatellites have important
applications for both military and commercial uses. These include
communications, global positioning, and mapping of the earth's surface.
According to the Air Force Research Laboratory, the ability of these systems to
gather information is many times that of the present generation of space
satellites, and the cost is expected to be greatly less. The development team
has announced that it expects to launch three of the microsatellites later in
2003.
Global Solar has constructed a state-of-the-art manufacturing plant in
Tucson, Arizona. The Arizona plant is designed for the production of 1.5
megawatts of thin-film photovoltaic modules on an annual basis. The capacity of
this facility is currently being expanded to produce approximately 10 megawatts
annually. Global Solar is presently manufacturing its solar energy panels to
fulfill its government contracts, supply its photovoltaic materials to original
equipment manufacturers for incorporation into products such as roofing
materials, and providing lightweight modules for traditional and residential
applications of solar energy panels. Global Solar has said it hopes to capture
15% of the market for photovoltaic solar energy panels by 2005.
ITN/ES owned one-third of Global Solar before we acquired our shares of
Global Solar from ITN/ES. Two-thirds of Global Solar Energy Holdings is owned by
UniSource Energy Corporation. The affiliates of UniSource are Tucson Electric
Power Company, the second largest investor-owned utility in Arizona; Nations
Energy Corporation, an investor in independent power projects; ION
International, a newly-formed energy services consulting company; and Southwest
Energy Solutions, a regional services company.
o INFINITE POWER SOLUTIONS, INC.
Our arrangement with ITN/ES and Global Solar Power Holdings provides us
with 3.5% of the shares of Infinite Power. The purpose of this new company is to
commercialize the thin-film battery technology developed by ITN/ES.
The thin-film batteries that Infinite Power is to ready for the
commercial market are solid state rechargeable lithium batteries. The batteries
are thinner than a human hair, and can be smaller than a postage stamp.
According to UniSource Energy, the batteries provide several important features.
They tolerate a wide range of operating temperatures. They essentially never
need to be replaced because they can be
40
41
recharged thousands of times. These batteries can be fabricated into many shapes
and sizes to meet the specific requirements for various uses.
Infinite Power's batteries can be used as the power source for
microelectronics like implantable medical devices, and standby power sources for
microelectronics like memory devices. They can be used with radio frequency
identification tags and smart cards, that is, credit card-type devices that have
capabilities of processing and storing information.
According to UniSource Energy, the solid state construction and
flexibility characteristics of the battery, combined with its ability to survive
wide temperature ranges, allows it to be added directly into semi- conductors,
integrated circuit assemblies, and laminated components during the manufacturing
process. The battery can also be added to a product after its manufacture.
Global Solar has announced that, over the long term, it plans to
integrate these thin-film batteries into its photovoltaic solar energy modules.
That combination would provide self-contained power systems.
According to projections by Global Solar the initial production level
is expected to produce its batteries at the rate of 23 million a year by 2002.
RISKS RELATING TO GLOBAL SOLAR POWER AND INFINITE POWER SOLUTIONS
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.
There is no history of operations in these lines of advanced technologies upon
which to evaluate their prospects for future operating or financial success.
Success in these businesses is uncertain.
o THE VALUE OF OUR INTERESTS IN ADVANCED TECHNOLOGIES DEPENDS UPON THE
EFFORTS OF OTHERS. WE DO NOT CONTROL THEIR ACTIONS.
The advanced technologies in which we acquired an ownership interest
through ITN/ES are controlled by others. We own only 3.5% of the parent company
of Global Solar and Infinite Power. We have no influence over their actions and
are not involved in their operations. The success of Global Solar Energy, Inc.
in the fields of thin-film photovoltaic solar energy panels and of Infinite
Power Solutions' thin-film batteries depends upon their controlling
shareholders, officers and managers.
o THE ADVANCED TECHNOLOGIES OF GLOBAL SOLAR ENERGY AND INFINITE POWER
SOLUTIONS MAY NOT BE APPLIED TO ADDITIONAL PRODUCTS OR ACCEPTED BY THE TARGET
MARKETS.
41
42
Global Solar Energy and Infinite Power Solutions intend to make
improvements to their advanced technologies that enable them to be incorporated
into more products. These improvements 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 NEITHER GLOBAL SOLAR ENERGY NOR INFINITE POWER SOLUTIONS HAVE
ACHIEVED A BROAD CUSTOMER BASE. THEY MAY NOT OPERATE AT A PROFIT. IF THEY ARE
UNABLE TO DO SO, OUR ECONOMIC BENEFIT FROM OWNERSHIP OF SHARES OF THEIR COMMON
STOCK 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 GLOBAL SOLAR ENERGY AND INFINITE POWER SOLUTIONS HAVE NEVER
DISTRIBUTED DIVIDENDS TO SHAREHOLDERS. WE DO NOT EXPECT THEY WILL DO SO. WITHOUT
DIVIDENDS, WE MAY NOT REALIZE REVENUE FOR OUR INVESTMENT IN ADVANCED
TECHNOLOGIES.
Unless Global Solar Energy and Infinite Power Solutions 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. Transfer of the
shares is restricted. Our ability to realize value from the common shares will
be limited. We may be required to hold the common stock for an indefinite period
of time without any economic return.
o THERE IS NO MARKET FOR OUR STOCK IN GLOBAL SOLAR ENERGY AND INFINITE
POWER SOLUTIONS. OUR INTERESTS IN THESE COMPANIES IS NOT LIQUID.
Our shares in these companies have not been registered under federal or
state law. They may not be offered, sold or transferred except in compliance
with the registration requirements of the Securities Act of 1933 or under an
exemption from registration. These stocks are not listed on any stock exchange
or listed on any market at this time. These investments are illiquid and may
remain illiquid for an unknown time.
EMPLOYEES
At September 30, 2000, we had 65 employees. Among our wholly-owned
subsidiaries, Rentech Services Corporation had 12 employees who work at our
development and testing laboratory, OKON, Inc., had eight full-time employees,
and Petroleum Mud Logging, Inc. had 37 employees. Of the latter, three are
part-time employees.
42
43
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 7,000 square foot laboratory located within our 20,000
square foot industrial building. The remainder of the building is rented to
tenants and constitutes potential expansion space for the laboratory. We
renovated the building in fiscal 1999 to provide a state-of-the-art laboratory
and support facilities for Fischer-Tropsch technology. Our small scale reactor
is operated at the facility for continued development of Fischer-Tropsch
technology. Our lab equipment and the laboratory were upgraded in 1999 by
outlaying approximately $500,000 in capital expenditures. We believe that our
laboratory is one of the most comprehensive Fischer-Tropsch facilities in the
field today.
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 rent is $74,700 per year, and the lease extends to March 2005. 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
The offices of Petroleum Mud Logging Inc., a wholly owned subsidiary,
are located in Oklahoma City, Oklahoma. The office space consists of 1,930
square feet of rental property that is adequate to meet the current needs of the
subsidiary and accommodate future growth. The lease extends to May 31, 2001. If
the term is not extended, alternative space is available at similar rental
rates. The rent is $19,300 per year plus taxes, insurance and maintenance.
Petroleum Mud Logging, Inc. also owns a shop building in Oklahoma City,
Oklahoma and personal property. These include 25 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 building is adequate for maintenance of
the vehicles, and the well logging units are in good condition.
43
44
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or
its subsidiaries or properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Our annual meeting of shareholders was held on May 25, 2000. At the
meeting, John J. Ball and Erich W. Tiepel were elected to terms ending in 2003
as members of the board of directors. The terms of Ronald C. Butz, John P.
Diesel, Douglas L. Sheeran and Dennis L. Yakobson as directors continued after
the meeting.
The following tabulation shows the votes cast at the meeting on each
matter voted upon, including election of directors.
For Withheld/Against Not Voted
---------- ---------------- ---------
Election of Directors:
John J. Ball 42,253,563 44,664 0
Erich W. Tiepel 42,253,563 44,664 0
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since April 5, 2000, Rentech's common stock has traded on The American
Stock Exchange(R) under the AMEX symbol RTK. Between then and August 18, 1999,
the stock traded on the OTC Bulletin Board under the symbol RNTK. Prior to
August 18, 1999 the stock traded on the NASDAQ SmallCap Market under the same
symbol. The following table sets forth the range of high and low prices for the
Company's common stock, as reported by AMEX or NASDAQ, for the quarters
presented. The quotations reflect inter-dealer prices, without adjustment for
retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
Fiscal Year Ended September 30, 2000
- ------------------------------------
High Low
---- ---
1st Quarter, ended Dec. 31, 1999 $.765625 $ .4375
2nd Quarter, ended Mar. 31, 2000 $3.46875 $.609375
3rd Quarter, ended Jun. 30, 2000 $ 4.25 $ 1.75
4th Quarter, ended Sep. 30, 2000 $ 2.8125 $ 1.0625
Fiscal Year Ended September 30, 1999
- ------------------------------------
High Low
---- ---
1st Quarter, ended Dec. 31, 1998 $1.21875 $ .625
2nd Quarter, ended Mar. 31, 1999 $1.35714 $ .15625
3rd Quarter, ended Jun. 30, 1999 $ .84375 $ .375
4th Quarter, ended Sep. 30, 1999 $ .90625 $ .46875
44
45
The approximate number of shareholders of record of our common stock as
of November 30, 2000 was 513. We estimate the number of beneficial owners is not
less than 9,000.
We have declared no dividends with respect to the common stock during
the 12-month fiscal year ended September 30, 2000. We currently expect that we
will retain future earnings for use in the operation and expansion of our
business and do not anticipate paying any cash dividends in the foreseeable
future.
The following table shows information concerning all sales of our
unregistered securities made by us during the past three years and not
previously reported on Form 10-QSB.
Type of Total Exemptions
Date of Security Securities Offering Total Class of From
Sale Sold Sold Price Commissions Purchasers Registration
- --------- ---------- ---------- -------- ----------- ---------- ------------
Jul. 10, 1998 Common Stock 1,700,000 (1) 0 Accredited Rules 505, 506,
Investor Section 4(6)
Jul. 17, 1998 Series 1998-B 100,000 $1,000,000 $ 100,000 Accredited Rules 505, 506,
Convertible Investors Section 4(6)
Preferred
Stock(2)
Aug. 18, 1998 Series 1998-B 100,000 $1,000,000 $ 100,000 Accredited Rules 505, 506,
Convertible Investors Section 4(6)
Preferred
Stock(2)
Sep. 15, 1998 Series 1998-B 100,000 $1,000,000 $ 100,000 Accredited Rules 505, 506,
Convertible Investors Section 4(6)
Preferred
Stock(2)
Nov. 19, 1998 Common Stock 100,000 (3) 0 Accredited Rules 505, 506,
Section 4(6)
June 1, 1999 Common Stock 100,000 (4) 0 Accredited Rules 505, 506,
Investors Section 4(6)
Jul. 13, 1999 Common Stock 1,514 (5) 0 Accredited Rules 505, 506,
Investor Section 4(6)
Jul. 27, 1999 Common Stock 100,000 (6) 0 Accredited Rules 505, 506,
Investor Section 4(6)
Sep. 30, 1999 Common Stock 3,680,168 (7) 0 Accredited Rules 505, 506,
Investor Section 4(6)
Jun. 18, 2000 Common Stock 200,000(8) $ 400,000 0 Accredited Rules 505, 506,
Investors Sections
4(2), 4(6)
(1) The consideration received was 10% of the common stock of ITN Energy
Systems, Inc. plus an ownership interest in advanced technologies
developed by ITN Energy Systems, Inc.
45
46
(2) The preferred shares were convertible into common stock at 82.5% of the
average closing bid for the 5 trading days prior to conversion. All
preferred shares in this series have been converted into common stock.
(3) Shares issued for investment banking services.
(4) Shares issued as partial consideration for the purchase of our mud
logging assets.
(5) Shares issued in exchange for consulting services.
(6) 25,000 shares were issued to each of our outside directors, John J.
Ball, John P. Diesel, Douglas L. Sheeran and Dr. Erich W. Tiepel, in
lieu of directors' fees.
(7) The consideration received was 5% of the common stock of Dresser
Engineers & Constructors, Inc.
(8) Shares issued as an advance in partial consideration for the purchase
of 51% of the issued and outstanding stock of Ren Corporation.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
thereto appearing in them elsewhere in this Annual Report on Form 10-K. We
changed our fiscal year-end from December 31 to September 30 effective September
30, 1996.
9 Months
Ended
12 Months Ended Sept. 30
2000 1999 1998 1997 1996
----------- ------------- ------------- ------------- ------------
CONSOLIDATED
STATEMENT OF
OPERATIONS DATA
Revenues $ 5,066,607 $ 2,880,900 $ 1,987,586 $ 1,189,536 $ 295,176
Cost of Sales $ 3,134,396 $ 1,416,078 $ 944,068 $ 481,797 $ 29,463
Gross Profit $ 1,932,211 $ 1,464,822 $ 1,043,518 $ 707,739 $ 265,713
Loss from Operations $ (3,804,389) $ (3,442,392) $ (1,986,818) $ (1,077,783) $ (553,799)
Net Loss $ (4,099,395) $ (3,442,661) $ (2,180,855) $ (1,375,686) $ (392,478)
Loss Applicable to
Common Stock $ (4,189,006) $ (3,974,593) $ (3,345,847) $ (2,034,100) $ (392,478)
BASIC AND DILUTED
LOSS PER SHARE(1)
Loss Before Extraordinary
Item $ (.07) $ (.09) $ (.10) $ (.10) $ (.06)
Loss Per Common Share $ (.07) $ (.09) $ (.10) $ (.10) $ (.04)
CONSOLIDATED
BALANCE SHEET DATA
Working Capital (Deficit) $ 1,892,376 $ 115,457 $ 3,195,381 $ (675,630) $ 258,103
Total Assets $ 16,462,592 $ 13,209,981 $ 10,715,250 $ 4,857,204 $ 3,458,883
Total Long-Term
Liabilities $ 999,355 $ 1,246,917 $ -- $ 125,000 $ --
Total Liabilities $ 1,758,615 $ 2,149,183 $ 394,684 $ 1,502,867 $ 122,707
Accumulated Deficit $ (18,800,321) $ (14,700,926) $ (11,258,265) $ (10,394,238) $ (7,701,724)
46
47
- ----------
(1) The weighted average number of shares of common stock outstanding during the
12 months ended September 30, 2000, 1999, 1998, 1997 and the 9 months ended
September 30, 1996 were 57,532,816, 43,838,417, 33,289,164, 19,603,265 and
10,401,922, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are the developer and owner of a proprietary and patented
gas-to-liquids (GTL) process that converts carbon-bearing gases, liquids and
solids into valuable liquid hydrocarbon products. The products include clean
burning diesel fuel, naphthas and specialty products such as waxes,
petrochemical feedstocks, fuel cell feedstocks and synthetic lubricant base
stock. We believe that the Rentech GTL Technology represents a major enhancement
of the Fischer-Tropsch technology developed in Germany in the 1920s. We have
successfully used the Rentech GTL Technology for a short period in a
commercial-scale plant and for longer periods in several pilot plants. No
commercial plant is now using the technology, and economic operation of the
technology has not been demonstrated. We believe that the advancements we have
made in Fischer-Tropsch technology will enable use of our GTL technology on a
cost-effective basis in some situations.
We are distributing 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, 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 is conducting its own study of
the technology and has contracted for us to do research and development for
integrating Texaco's gasification technology (which produces synthesis gas from
feedstocks in liquid and solid forms) with Rentech's GTL Technology (which uses
synthesis gas). Texaco is working on proposals to use the combined technologies
for a U.S. Department of Energy project and other projects. We have granted
licenses to several other licensees.
We are receiving royalty income as a result of our October 1998 license
of the Rentech GTL Technology to Texaco and revenues from a technical services
contract with Texaco. We are not receiving royalties on production of liquid
hydrocarbons from use of the Rentech GTL Technology, or license fees except on a
irregular basis. Revenues from the Rentech GTL Technology and the revenues from
our other businesses conducted through OKON, Inc. and Petroleum Mud Logging,
Inc. and our real estate rentals are not sufficient to cover our ongoing losses
related to our efforts to commercialize the Rentech GTL Technology. We do not
expect to realize increases in operating revenues in the near term that would be
47
48
adequate to offset these losses. We thus expect to continue to operate at a loss
unless and until we are successful in commercializing the Rentech GTL
Technology.
OPERATING REVENUES
BACKGROUND
During the fiscal periods discussed in this report, we realized
revenues from the stains, sealers and coatings business conducted by our
wholly-owned subsidiary, OKON, Inc.; from the mud logging services provided by
Petroleum Mud Logging, Inc., a wholly-owned subsidiary; from rents from real
estate leases; and revenues associated with the Rentech GTL Technology. These
were royalties earned under our October 1998 license of the Rentech GTL
Technology to Texaco, and contract payments for technical engineering services
provided to Texaco. 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 payment 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 of 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 of 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.
48
49
We anticipate that we may receive increased contract payments for
design studies if interest by members of the energy industry in our technology
grows. We do not expect to realize significantly increased revenues from
exploitation of the Rentech GTL Technology until a commercial-scale plant using
the technology is in operation and has proved profitable. We are attempting to
obtain financing to retrofit one or more industrial gas plants to use the
technology in order to demonstrate economic use of Rentech GTL Technology in a
commercial-size plant. There are no assurances that adequate financing will be
available or that we will succeed in retrofitting and successfully operating a
converted plant at a profit. Our future operating revenues will depend primarily
upon economic success by us, followed by success by our licensees, in financing,
constructing and operating commercial-scale plants using the Rentech GTL
Technology. Other factors affecting our success include competition by other GTL
technologies, availability of low-cost feedstock, and market prices for
conventional fuels and hydrocarbon products with which synthetic liquid
hydrocarbons produced by use of our technology will compete. Our future
operating revenues would also be increased to the extent we are able to expand
revenues of our other businesses.
OPERATING EXPENSES
Our operating expenses have historically been grouped primarily into
several categories of major expenses. These are development of the Rentech GTL
Technology through pilot plants and the Synhytech commercial-scale plant in
Pueblo, Colorado; acquiring and funding our other business segments to bring
them to profitable operations; 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
in 1999 through enhancements of our development and testing laboratory and by
adding five more scientific or technical personnel to our laboratory staff in
1999. We have also significantly increased our general and administrative
expenses as our salary expenses have grown. We are incurring substantial costs
associated with our one-half ownership interest in Sand Creek Energy LLC which
owns the mothballed Sand Creek plant. These include the maintenance and holding
expenses for our one-half interest in the plant.
We expect to incur large costs to start the retrofitting of any
industrial gas plants in which we may acquire an equity interest. We estimate
that these expenses will remain at significant levels for approximately 12 to 18
months of construction work and several weeks after startup of a particular
plant. When production is achieved, we anticipate incurring new expenses to
market and sell the products. We do not expect to use the Sand Creek plant for
commercial production of liquid hydrocarbons. Instead, we may use it as a large
pilot plant for continuing work with the Rentech GTL Technology. Because of the
substantial capital investments we anticipate making in the Sand Creek plant and
other plants in which we may acquire an equity interest, we project we will
incur significant depreciation and amortization expenses in the future.
RESULTS OF OPERATIONS
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Revenues. We had revenues from product sales, service revenues, royalty
income, and rental income of $5,066,607 in fiscal 2000 and $2,880,900 in fiscal
1999.
49
50
Product Sales. Our product sales were realized from sales of
water-based stains, sealers and coatings by our subsidiary, OKON, Inc. through
which we conduct this paint business segment. These sales produced revenues of
$2,096,159 in fiscal 2000. This compares to revenues from this segment of
$1,960,764 for the 1999 fiscal year. The increase of 7% in revenues from this
segment was primarily due to new customers and the introduction of new products.
Service Revenues. Service revenues are provided by two of our business
segments. The segments are the mud logging subsidiary and the technical services
related to the Rentech GTL Technology. The technical services are provided
through the scientists and technicians who staff our development and testing
laboratory.
Service revenues in the amount of $1,831,389 were derived from
contracts for the mud logging services provided by our subsidiary, Petroleum Mud
Logging, Inc., in fiscal 2000. Our mud logging service revenues for fiscal year
2000 increased by $1,535,877 over the service revenues of $295,512 in fiscal
1999. Our mud logging services were provided throughout all twelve months of the
2000 fiscal year, and only for the last four months of the 1999 fiscal year that
followed our purchase of this business segment in June 1999. Another significant
portion of the increase in mud logging service revenues was due to increased
demand for our mud logging services, particularly for new wells drilled for
natural gas. In response. we outfitted several of our unused mud log vehicles
with new equipment and were thereby able to expand our services.
Service revenues also included payments received from Texaco Energy
Systems, Inc. for our technical services related to the Rentech GTL Technology.
On October 8, 1998, we licensed exclusive rights to Texaco to use our technology
with liquid and solid carbon-bearing materials. Effective in February 1999, we
entered into an additional agreement that produced these service revenues. Under
that agreement, we are providing our technical services to Texaco with the goal
of integrating Texaco's proprietary gasification technology, which produces
synthesis gas from liquids and solids, with our Rentech GTL Technology. Our
technology would use the synthesis gas to produce synthetic liquid hydrocarbons
like clean-burning diesel fuel, naphthas, waxes and specialty products. We
started billing Texaco for our technical services in April 1999. Our service
revenues for these technical services were $751,166 during the twelve months of
fiscal 2000 as compared to $211,246 during the six months in fiscal 1999.
Royalty Income. Royalty income consisted of royalties that we received
as the result of our October 1998 license of the Rentech GTL Technology to
Texaco. Under the license agreement, we earned $260,000 in royalties during
fiscal 2000 as compared to $340,000 in royalties for the prior year. Royalty
income for the 1999 fiscal year includes an initial payment of $100,000 that was
made upon signing the license. After Texaco is producing liquid hydrocarbons
through use of our technology, it is allowed by the license agreement to apply
the royalty payments made after the initial $100,000 payment against future
royalty payments made on account of production.
Rental Income. We leased part of our development and testing laboratory
in Denver to three tenants. These tenants provided rental income to us. We use
this lab to work on improvements to the Rentech GTL Technology. This work
includes providing technical services to Texaco to integrate its gasification
technology with our Rentech GTL Technology. We acquired the land and building
for the laboratory in February 1999. Our research department is housed there.
Rental income from this facility contributed $127,893 in revenue for the twelve
months of fiscal 2000 as compared to $73,378 for the eight months we owned it in
fiscal 1999.
50
51
Costs of Sales. Our costs of sales includes costs for our products as
well as for our mud logging services and technical services. During the fiscal
year ended September 30, 2000, the combined costs of sales increased by 121% to
$3,134,396 from $1,416,078 for the prior year. The increase of $1,718,318
relates almost entirely to costs associated with the addition of new revenues
from these three business segments.
Costs of sales for product sales are the cost of sales of our paint
business segment for sales of stains sealers and coatings. During fiscal 2000,
our cost of sales for the paint segment increased by $111,134 to $1,029,812, as
compared to fiscal 1999. This increase of 12% is almost entirely related to the
additional costs associated with the increased revenues from this business
segment.
Costs of sales for mud logging services were $1,353,418 for fiscal
2000, up from $244,404 for fiscal 1999. This increase of $1,109,014 is largely
due to operating this business for twelve months in the 2000 year, compared to
four months in the 1999 year. Some of the increase also relates to the addition
of more mud logging vehicles and field employees to operate them as we expanded
to meet the growth in demand for mud logging for new natural gas wells.
Costs of sales for technical services were $751,166 during fiscal 2000,
up from $252,996 for fiscal 1999. Of this $498,170 increase, approximately
one-half is due in part to providing these services for twelve months during the
2000 period, compared to six months during the 1999 period. We also expanded the
range and extent of our technical services for Texaco during fiscal 2000. We
added additional engineers and technicians to staff our development and testing
laboratory. Those additional salaries and the related overhead expenditures
amounted to approximately one-half of the total increase in costs for the
technical services segment.
Gross Profit. Our gross profit for the year ended September 30, 2000
was $1,932,211, as compared to $1,464,822 for the 1999 period. The increase of
$467,389 results from the combined contributions of additional revenues from
product sales by our paint segment (up 6.9%), and increased service revenues
from our mud logging and technical services segments (up 520%). These additions
to gross profit were offset by corresponding increases in costs of sales of 12%
for the paint segment and of 323% for our mud logging and technical services
segments. Costs of sales for the paint segment increased at a higher rate than
gross profit for the segment because of the expenses of moving the business to a
new location and increased fixed expenses associated with the new space. Gross
profit from the mud logging segment increased at a higher rate than the related
cost of sales because more mud logging units were readied for use and put under
contract in the last quarter of fiscal 2000.
Operating Expenses. Operating expenses consist of general and
administrative expense, depreciation and amortization, writeoff of deposits
related to acquisition, and research and development.
General and Administrative Expenses. General and administrative
expenses were $4,776,431 for fiscal 2000, up $665,280 from fiscal 1999 when
these expenses were $4,111,151. The increase is attributable to approximately
$329,000 associated with a full year of operations of Petroleum Mud Logging,
$119,811 in maintenance and holding expenses associated with maintaining our
one-half interest in the mothballed Sand Creek plant which were not incurred in
the prior year, approximately $239,000 in expense for the hiring of additional
laboratory technicians for our technical services segment and more office staff
as well as higher salaries during fiscal 2000.
51
52
Depreciation and Amortization. Depreciation and amortization expense
for fiscal 2000 was $611,987. Of this amount, $167,079 was included in cost of
sales. Depreciation and amortization expense for fiscal 1999 was $488,713, of
which $121,395 was included in cost of sales. The increase in depreciation and
amortization expense for fiscal 2000 are attributable to the additional
equipment acquired during fiscal 2000 for our mud logging segment and
development and testing laboratory, a full twelve months of depreciation and
amortization on the assets acquired with the acquisition of the mug logging
segment during June 1999 compared to four months in 1999, and depreciation on
the rental property for twelve months in 2000, as compared to eight months in
1999.
Write-Off of Deposits Related to Acquisition. We had no write-off of
deposits related to a potential acquisition in fiscal 2000. This amount for
fiscal 1999 consisted of expensing our $233,279 non-refundable deposit related
to a potential acquisition. We expensed this deposit as we decided not to
acquire the business.
Research and Development. Research and development expense was $515,261
for fiscal 2000, increased by $319,795 over 1999, when this expense was
$195,466. This increase is primarily due to new research and development work
that we undertook in fiscal 2000 to accelerate our improvements to the Rentech
GTL Technology and ready it for commercial use.
Total Operating Expenses. Total operating expenses for fiscal 2000 were
$5,736,600, as compared to $4,907,214 for fiscal 1999, an increase of $829,386.
The increase in total operating expenses is a result of the factors, previously
described, that relate to operating expenses.
Loss From Operations. Loss from operations for fiscal 2000 increased by
$361,997 to a loss of $3,804,389, as compared to a loss of $3,442,392 for fiscal
1999. The increased loss is primarily due to increases in operating expenses,
partially offset by an increase in gross profit contributed by our operating
segments.
Other Income (Expenses). Other income (expenses) include equity in loss
of investee, interest income, interest expense, and loss on disposal of fixed
assets.
Equity in Loss of Investee. In fiscal year 2000, we recognized $276,585
in equity in loss of investee. This represents our 50% share of the loss
incurred by our joint venture in Sand Creek Energy LLC. The LLC is holding and
maintaining the mothballed Sand Creek methanol plant. We are considering
rettofitting this plant to use it as a large pilot plant for continuing work
with the Rentech GTL Technology. There was no comparable loss in fiscal 1999
because we acquired our interest in the plant in fiscal 2000.
Interest Income. Interest income in fiscal 2000 was $135,443, increased
from $75,665 during fiscal 1999. The increased interest income was due to having
more funds invested in interest-bearing cash accounts in fiscal 2000, because of
the net proceeds from our private placement of our common stock in fiscal 2000,
as well as interest income of approximately $45,600 in notes receivable during
that period.
Interest Expense. Interest expense in fiscal 2000 was $136,833,
increased from $75,934 during fiscal 1999. The increase in interest expense is a
result of our indebtedness associated with purchase of the mud logging assets
and interest expense on the mortgage for purchase of our development and testing
laboratory. Both of these indebtednesses were outstanding for all twelve months
of fiscal 2000, but only for parts of fiscal 1999.
52
53
Loss on Disposal of Fixed Assets. Loss on disposal of fixed assets was
$17,031 during fiscal 2000. This loss represents write-off of capitalized
leasehold improvements in the former facility upon relocation of our paint
business segment to a larger facility. This loss was offset by a gain from
disposal of vehicle by the mud logging segment. There was no comparable amount
in 1999.
Total Other Expenses. Total other expense increased to $295,006 for
fiscal 2000, an increase of $294,737 over total other expenses of $269 for the
comparable year ended September 30, 1999. The increase in total other expenses
resulted from the combination of the factors previously described as other
income (expense).
Net Loss. For fiscal 2000, we experienced a net loss of $4,099,395
compared to a $3,442,661 net loss in fiscal 1999. The $656,734 increase in net
loss resulted from a combination of the factors previously described.
Dividend Requirements on Convertible Preferred Stock. Dividend
requirements on convertible preferred stock is the imputed amount calculated
when there is a discount from fair market value of our common stock compared to
the conversion rate, plus the 9% dividend that accrues on the convertible
preferred stock. The dividends are deducted from net loss in order to arrive at
loss applicable to common stock. In both fiscal 2000 and fiscal 1999, we issued
convertible preferred stock, and we were required to calculate a deemed dividend
in both years. In fiscal 2000, we recorded dividends of $89,611 compared to
$531,932 in fiscal 1999.
Loss Applicable to Common Stock. As a result of recording
dividends on convertible preferred stock as described above, the loss applicable
to common stock was $4,189,006 or $.07 per share in fiscal 2000 and $3,974,593
or $.09 per share in fiscal 1999.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Revenues. We received revenues from product sales, service revenues,
royalty income, and rental income of $2,880,900 in fiscal 1999 compared to
$1,987,586 in fiscal 1998.
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
$1,960,764 in fiscal 1999. This compares to revenues from this segment of
$1,987,586 for the 1998 fiscal year. The slight decrease in revenues from this
segment primarily reflects variations in orders for our products.
Service Revenues. Service revenues are provided by two of our business
segments. The segments are the mud logging subsidiary and the technical services
related to the Rentech GTL Technology. The technical services are provided
through the scientists and technicians who staff our development and testing
laboratory.
Service revenues in the amount of $295,512 were derived from contracts
for the mud logging services provided by our subsidiary, Petroleum Mud Logging,
Inc., in fiscal 1999. We had no service revenues for fiscal 1998 because the mud
logging assets were not acquired until June 1999.
53
54
Service revenues also included payments received from Texaco Energy
Systems, Inc. for our technical services related to the Rentech GTL Technology.
On October 8, 1998, we licensed exclusive rights to Texaco to use our technology
with liquid and solid carbon-bearing materials. Effective in February 1999, we
entered into an additional agreement that produced these service revenues. Under
that agreement, we are providing our technical services to Texaco with the goal
of integrating Texaco's proprietary gasification technology, which produces
synthesis gas from liquids and solids, with our Rentech GTL Technology. Our
technology would use the synthesis gas to produce synthetic liquid hydrocarbons
like clean-burning diesel fuel, naphthas, waxes and specialty products. We
started billing Texaco for our technical services in April 1999. Our service
revenues for these technical services were $211,246 during the six months in
fiscal 1999. There were no comparable revenues in fiscal 1998.
Royalty Income. Royalty income consisted of royalties that we received
as the result of our October 1998 license of the Rentech GTL Technology to
Texaco. Under the license agreement, we earned $340,000 in royalties during
fiscal 1999 and none during the prior year. Royalty income for the 1999 fiscal
year includes an initial payment of $100,000 that was made upon signing the
license. After Texaco is producing liquid hydrocarbons through use of our
technology, it is allowed by the license agreement to apply the royalty payments
made after the initial $100,000 payment against future royalty payments made on
account of production.
Rental Income. We leased part of our development and testing laboratory
in Denver to three tenants. These tenants provided rental income to us. We use
this lab to work on improvements to the Rentech GTL Technology. This work
includes providing technical services to Texaco to integrate its gasification
technology with our Rentech GTL Technology. We acquired the land and building
for the laboratory in February 1999. Our research department is housed there.
Rental income from this facility contributed $73,378 in revenue for the for the
eight months we owned it in fiscal 1999. There was no rental income in fiscal
1998.
Costs of Sales. Our costs of sales includes costs for our stains,
sealers and coatings products as well as for our mud logging services and
technical services. During the fiscal year ended September 30, 1999, the
combined costs of sales increased to $1,416,078 from $944,068 for the prior
year. The increase of $472,010 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 1999,
our cost of sales for the paint segment decreased by $25,390 to $918,678, as
compared to the 1998 fiscal year. This decrease is almost entirely related to
the reduced costs associated with the decreased revenues from this business
segment.
Costs of sales for mud logging services were $244,404 for fiscal year
1999. We started incurring these costs upon purchase of the mud logging assets
in June 1999. There were no comparable costs in fiscal 1998.
Costs of sales for technical services were $252,996 during fiscal year
1999. We started incurring these costs in fiscal 1999 when we agreed to provide
the technical services. There were no comparable costs in fiscal 1998.
Gross Profit. Our gross profit for the year ended September 30, 1999
was $1,464,822, as compared to $1,043,518 for the 1998 period. The increase of
$421,304 results from the combined contributions from
54
55
our mud logging and technical services segments, offset by a small decrease in
new revenues from product sales by our paint segment.
Operating Expenses. Operating expenses consist of general and
administrative expense, depreciation and amortization, write-off of deposits
related to acquisition, and research and development.
General and Administrative Expenses. General and administrative
expenses were $4,111,151 for fiscal 1999, up $1,532,690 from fiscal 1998 when
these expenses were $2,578,461. The increase is attributable to approximately
$125,000 associated with more employees of Petroleum Mud Logging, and
approximately $838,000 in expense for the hiring of additional sales, laboratory
and office staff as well as higher salaries during fiscal 1999.
Depreciation and Amortization. Depreciation and amortization expense
for the year ended September 30, 1999 was $488,713. Of this amount, $121,395 is
included in cost of sales. Depreciation and amortization expense for the year
ended September 30, 1998 was $391,650, none of which is included in cost of
sales. The increase in depreciation and amortization expenses for fiscal 1999 is
attributable to the additional equipment for the laboratory acquired during
fiscal 1998, the mud logging assets acquired in June 1999, and depreciation on
the rental property acquired in February 1999.
Write-Off of Deposits Related to Acquisition. We had a write-off of
deposits related to a potential acquisition in fiscal 1999. This amount
consisted of a $233,279 non-refundable deposit related to a potential
acquisition. We expensed this deposit as we decided not to acquire the business.
There were no comparable write-offs in fiscal 1998.
Research and Development. Research and development expense was $195,466
for fiscal 1999, increased by $135,241 over the prior year ended September 30,
1998, when this expense was $60,225. This increase is primarily due to new
research and development work that we undertook in fiscal year 1999 to
accelerate our improvements to the Rentech GTL Technology and ready it for
commercial use.
Total Operating Expenses. Total operating expenses for the year ended
September 30, 1999 were $4,907,214, as compared to $3,030,336 for the 1998 year,
an increase of $1,876,878. The increase in total operating expenses is a result
of the factors, previously described, that relate to operating expenses.
Loss From Operations. Loss from operations for the year ended September
30, 1999, increased by $1,455,574 to a loss of $3,442,392, as compared to a loss
of $1,986,818 for the year ended September 30, 1998. The increased loss is
primarily due to increases in general and administrative expenses. This increase
is partially offset by an increase in gross profit contributed by royalties
received for the license to Texaco for use of the Rentech GTL Technology for
liquids and solids, and a small operating profit from our real estate segment.
Other Income (Expenses). Other income (expenses) include write-down of
Synhytech plant held for sale, interest income and interest expense.
Write-Down of Synhytech Plant Held for Sale. We sold the Synhytech
plant located at Pueblo, Colorado in 1996. We reserved several administrative
buildings from the sale. During the fiscal year ended September 30, 1998, we
wrote-down the carrying value of the remaining improvements associated with the
Synhytech plant by $99,500.
55
56
Interest Income. Interest income in fiscal year 1999 was $75,665,
increased from $40,495 during fiscal year 1998. The increased interest income in
the 1999 period was due to the increase in the average amount of cash on hand in
fiscal 1999 compared to fiscal 1998.
Interest Expense. Interest expense in fiscal year 1999 was $75,934,
decreased from $135,032 during fiscal year 1998. The decrease in interest
expenses results from a lower average amount of debt outstanding during fiscal
1999 than during fiscal 1998.
Total Other Expenses. Total other expenses were $269 for the year ended
September 30, 1998, a decrease over total other expenses of $194,037 for the
comparable year ended September 30, 1998. The increase in total other expenses
resulted from the combination of the factors previously described as other
income (expenses).
Net Loss. For fiscal 1999, we experienced a net loss of $3,442,661
compared to a $2,180,855 net loss in fiscal 1998. The $1,261,806 increase in net
loss resulted from a combination of the factors previously described.
Dividend Requirements on Convertible Preferred Stock. Dividend
requirements on convertible preferred stock is the imputed amount calculated
when there is a discount from fair market value of our common stock compared to
the conversion rate, 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 1999 and fiscal 1998, we issued
convertible preferred stock, and we were required to calculate a deemed dividend
in both years. In fiscal 1999, we recorded dividends of $531,932 compared to
$1,164,992 in fiscal 1998.
Loss Applicable to Common Stock. As a result of recording dividends on
convertible preferred stock as described above, the loss applicable to common
stock was $3,974,593 or $.09 per share in fiscal 2000 and $3,345,847 or $.10 per
share in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had working capital of $1,892,376 as compared
to working capital of $115,457 at September 30, 1999. The increase in working
capital is primarily due to cash provided from the issuance of our common stock
and Series 1998-B convertible preferred stock. This increase was offset by the
use of cash for operations, investing activities, redemption of convertible
preferred stock and payments on long-term debt.
As of September 30, 2000, we had $2,651,636 in cash and other current
assets, including accounts receivable of $745,204. At that time, our current
liabilities were $759,260. We had long-term liabilities of $999,355. Most of our
long-term liabilities relate to our mortgage on our laboratory facility which we
purchased in February 1999. The rental income from the facility is adequate to
fund the monthly mortgage payments. The mortgage is due on March 1, 2029.
The primary source of our liquidity has been equity capital
contributions. We added an additional source of liquidity in March 1997 by the
purchase of OKON, Inc., which conducts our paint business segment. We have
received royalties from granting Texaco a license for use of the Rentech GTL
Technology in October 1998. We have also had service revenues from Texaco since
we started billing it for technical
56
57
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.
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 and mud logging business
segments, invest in the advanced technologies of ITN Energy Systems, acquire
interests in Dresser Engineers & Constructors, Inc. and provide deposits for the
potential acquisition of Ren Corporation.
We believe that our cash on hand and revenues from operations will be
sufficient to fund our operations at the present level through the end of fiscal
2001.
We anticipate needs for substantial amounts of new capital to acquire
and retrofit one or more methanol or other industrial gas plants to use the
Rentech GTL Technology, 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 the
projects involving the plants to be retrofitted, we expect to need significant
amounts of capital as our required share of the total investment in these
projects. We may attempt to fund some of these project costs through sales of
some part of our ownership, if we have any, in any industrial gas plant that we
may attempt to retrofit. At this time, we own a one-half interest in one plant,
which is the mothballed Sand Creek methanol plant. We are not targeting it for
use as a commercial scale plant to use our technology. Instead, we are
considering plans to retrofit it for our use as a large pilot plant for
continued improvement of the Rentech GTL Technology.
We are considering proposals to acquire ownership interests or
leasehold rights in one or more of methanol or other industrial gas plants that
are presently under-utilized. Under these proposals, we would have to contribute
capital, 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 operate any converted
plant on a commercial basis and realize a new source of revenues for the
production and sale of liquid hydrocarbons.
At this time, we do not have access to capital needed to acquire or
retrofit an existing plant. In an effort to raise capital that could enable us
to retrofit one or more industrial gas plants, we have signed a non-binding
letter of intent with an underwriter for a registered public offering of our
common stock. The underwriter has agreed to use its best efforts to sell $75
million to $100 million of our common stock. We anticipate that the offering
would occur early in the second half of fiscal year 2001. We believe that a
successful offering of this type would provide net proceeds sufficient for us to
acquire an ownership interest and management control of one or more of these
existing plants.
If this financing effort is completed 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.
57
58
IF OUR PROPOSED PUBLIC OFFERING OF COMMON STOCK IS NOT COMPLETED, 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 COMPLETE OUR PROPOSED PUBLIC OFFERING OF COMMON
STOCK AS PLANNED, OUR EFFORTS TO ACHIEVE COMMERCIAL USE OF THE RENTECH GTL
TECHNOLOGY BY OTHERS MAY BE DELAYED.
Without these funds, we could not acquire interests in the industrial
plants we have targeted or convert them to use our technology. We would lose
this opportunity to encourage others to use our technology on a commercial
business. We would have to depend upon their interest in building new plants
without the benefit of having at least one commercial-scale plant in operation.
WITHOUT THE PROCEEDS OF OUR PROPOSED PUBLIC OFFERING, 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 begun to increase
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 Coproduction 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 PROJECT FOR THE DOE COPRODUCTION PLANT AND NOT
UNDERTAKE OTHER POTENTIAL PROJECTS. 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 2000 and 19% in fiscal
1999. 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.
58
59
We had net deferred tax assets offset by a full valuation allowance at
September 30, 2000 and 1999. We are not able to determine if it is more likely
than not that the net deferred tax assets will be realized. See Note 8 to the
Consolidated Financial Statements.
ANALYSIS OF CASH FLOW
Operating Activities. Operating activities produced net losses of
$4,099,395, $3,442,661 and $2,180,855 for the fiscal years ended September 30,
2000, 1999 and 1998, respectively. The cash flows used in operations in fiscal
years 2000, 1999 and 1998 resulted from the following operating activities.
Depreciation. Depreciation is a non-cash expense. This expense
increased during fiscal 2000 by $112,234, compared to fiscal year 1999, and by
$95,917 during fiscal 1999, compared to fiscal 1998. The increases for these
periods are primarily due to additional equipment for our development and
testing laboratory, the assets acquired by the purchase of our mud logging
business segment in June 1999, and depreciation on the rental property which we
acquired in February 1999.
Loss on Disposal of Assets. Loss on disposal of assets is a non-cash
expense. Loss on disposal of assets decreased to $17,031 for fiscal year 2000
and increased to $233,279 for fiscal 1999. There was no comparable loss for
fiscal 1998. The loss for the 2000 period represents write-off of capitalized
leasehold improvements to the former building upon relocation of our paint
business segment to a larger facility. This loss was offset by a gain from
disposal of vehicles by the mud logging segment. During fiscal 1999, we wrote
off a $233,279 non-refundable deposit related to a potential acquisition as we
decided not to acquire the business.
Equity in Loss of Investee. We recognized equity in loss of investee in
the amount of $276,585 during fiscal year 2000. This represents our 50% share of
the loss incurred by our joint venture in Sand Creek Energy LLC. The LLC is
holding and maintaining the mothballed Sand Creek methanol plant. We are
considering retrofitting this plant to use the Rentech GTL Technology as a large
project plant for further improvements to the technology. We acquired our
investment in the plant during fiscal year 2000, and therefore there was no
comparable amount in fiscal years 1999 or 1998.
Common Stock Issued for Services. We issued common stock for services
in the amounts of $53,120, $62,500, and $94,908 for the fiscal 2000, 1999 and
1998. These services consisted of shareholder relations provided by independent
contractors and compensation to our directors.
Stock Options and Warrants Issued for Services. We issued stock options
and warrants for services in the amounts of $351,998, $7,152 and $52,933 for
fiscal 2000, 1999 and 1998. These options and warrants were issued in lieu of
cash to our non-employee directors and independent contractor financial
consultants for their services.
Changes in Operating Assets and Liabilities. The changes in operating
assets and liabilities, net of business combination, result from the following
factors.
Accounts Receivable. Accounts receivable increased by $372,921,
$149,950 and $73,822 for the years ending September 30, 2000, 1999 and 1998.
Accounts receivable increased in fiscal 2000, as compared to fiscal 1999, due to
the increased sales of our paint business segment and our mud logging business
segment. Accounts receivable increased in fiscal 1999 compared to fiscal 1998
primarily due to accounts
59
60
receivable acquired with our mud logging assets in June 1999 and accounts
receivable arising from the technical services provided to Texaco. We started
billing for these technical services in April 1999.
Accounts Payable. Accounts payable increased by $14,910, $29,580 and
$46,022 during the years ended September 30, 2000, 1999 and 1998. These
increases reflect our improved working capital position in fiscal 2000 as
compared to fiscal 1999. The lower accounts payable for fiscal 1999 as compared
to fiscal 1998 reflects more prompt payment of accounts payable by us.
Net Cash Used in Operating Activities. The total net cash used in
operations increased to $3,065,942, $2,651,686 and $1,430,770 during the years
ended September 30, 2000, 1999 and 1998. The increases reflect increased cash
costs for general and administrative expenses, including those of our Petroleum
Mud Logging subsidiary acquired in June 1999. The increase during fiscal 2000,
as compared to fiscal 1999, is partially offset by increases in rental income
from the real estate segment, and gross profit from the mud logging segment
during fiscal 2000. All of these segments had short operating periods during
fiscal 1999.
Investing Activities. Investing activities during the year ended
September 30, 2000 included purchases of $470,361, primarily in facilities for
our development and testing laboratory research and mud logging vehicles, which
were specially equipped for our mud logging business segment. Investing
activities during the year ended September 30, 1999 included purchases of
$1,054,646 in building and equipment, primarily in laboratory facilities. This
compares to purchases of $61,785 in equipment during the year ended September
30, 1998.
We received proceeds from disposal of vehicles in the fiscal years
ending September 30, 2000 and 1999. The proceeds were $24,068 in the 2000 year
and $13,791 in the 1999 year. There were no comparable proceeds in the 1998
period.
We used $597,812 in cash during the year ended September 30, 1999 to
acquire some assets related to the acquisition of the mud logging segment. There
was no comparable acquisition in fiscal 2000.
In the year ended September 30, 2000, we used $851,610 in cash to
purchase capitalized software to use as a generic model for conducting
feasibility studies and providing data for our engineering designs for plants.
There were no comparable amounts in fiscal 1999 and 1998.
We used $177,051 to acquire an additional 5% interest in Dresser
Engineering Company during the year ended September 30, 2000 as compared to
using $2,072 in cash, in addition to common stock, to acquire a 5% interest in
Dresser Engineering Company during the year ended September 30, 1999. We used
$287,169 to fund our 50% share of expenses of Sand Creek Energy, LLC during the
year ended September 30, 2000 as compared to no investment in that LLC during
fiscal 1999.
We invested $273,899 in a deposit for a future acquisition during the
year ended September 30, 2000, as compared to $477,615 in fiscal 1999 and
$55,664 in fiscal 1998.
Financing Activities. Financing activities during the year ended
September 30, 2000 provided $6,951,913 in cash from the issuance of common stock
compared to $312,319 during the year ended September 30, 1999 and $725,971
during the year ended September 30, 1998. During the year ended September 30,
2000, we received net proceeds of $150,000 from the issuance of convertible
preferred stock as compared to net proceeds of $1,834,844 during the year ended
September 30, 1999, and $4,399,185 during
60
61
the year ended September 30, 1998. We redeemed 23,832 shares of convertible
preferred stock for $285,000 in cash during the year ended September 30, 2000,
as compared to no cash redemption in fiscal years 1999 and 1998. We received
$60,000 from proceeds of a convertible note payable during the year ended
September 30, 1998, but no comparable proceeds during fiscal years 2000 and
1999. In the 1999 fiscal year, we entered into a mortgage to finance the
purchase of land and building in February 1999, and entered into two notes
payable and assumed long-term debt in connection with the acquisition during
June 1999 of the assets now held by our mud logging business segment. During the
year ended September 30, 2000, we acquired additional notes associated with the
purchase of vehicles for our mud logging segment. During the year ended
September 30, 2000, we repaid $448,037 on these debt obligations as compared to
$66,657 during the year ended September 30, 1999. During the year ended
September 30, 1998, we received $690,000 ($90,000 from a related party) as
proceeds from notes payable. These notes were repaid in full during fiscal 1998.
The net cash provided by financing activities during the year ended September
30, 2000 was $6,321,214, compared to $2,080,506 cash provided by financing
activities during the year ended September 30, 1999 and $4,495,156 during the
year ended September 30, 1998.
Cash increased during the year ended September 30, 2000 by $1,208,633
compared to an decrease of $2,748,197 during the year ended September 30, 1999
and an increase of $2,664,892 during the year ended September 30, 1998. These
changes increased the ending cash balance to $1,516,815 at September 30, 2000
from $308,182 at September 30, 1999. That was a decrease from the cash balance
of $3,056,379 at September 30, 1998.
WE HAVE A HISTORY OF OPERATING LOSSES, AND HAVE NEVER OPERATED AT A
PROFIT.
From our inception on December 18, 1981 through September 30, 2000, we
have incurred losses in the amount of $18,800,321. For the year ending September
30, 2000, our net loss was $4,099,395. If we do not operate at a profit in the
future, we may be unable to continue our operations at the present level.
Ultimately, our ability to maintain our present level of business will depend
upon earning a profit from operation of the Rentech GTL Technology. Our ability
to do so has not been demonstrated.
WE NEED ADDITIONAL CAPITAL OR FINANCING ARRANGEMENTS TO CARRY OUT OUR
PLANS. WITHOUT THESE SOURCES OF CAPITAL, WE WILL NOT BE ABLE TO ACQUIRE AND
CONVERT INDUSTRIAL GAS PLANTS TO USE THE RENTECH GTL TECHNOLOGY.
We intend to seek project financing, that is acquisition and
construction financing, to acquire and retrofit one or more industrial gas
plants. We also hope to obtain additional debt and equity financing in the
capital markets or through collaborative arrangements with potential co-owners
of these plants. Additional financing may not be available to us. If so, we
would have to defer or terminate our present expenditures, especially those
intended to achieve commercialization of the Rentech GTL Technology as soon as
possible. Our ability to implement our business plans and to achieve an
operating profit would be delayed or prevented. We might have to transfer some
aspects of our technology to others and allow them to develop markets for its
use. If so, our revenues from the technology would be substantially reduced. If
we raise additional capital by issuing equity securities, the ownership
interests of our shareholders could be diluted. We could also issue preferred
stock, without shareholder approval, to raise capital. The terms of our
preferred stock could include dividends, conversion voting rights and
liquidation preferences that are more favorable than those of the holders of our
common stock.
61
62
THE REVENUES THAT WE EXPECT FROM OPERATING USE OF THE RENTECH GTL
TECHNOLOGY MAY NOT BE REALIZED AS QUICKLY AS WE ANTICIPATE OR AT ALL. IF SO, THE
EQUITY SOURCES OF FINANCING THAT WE HAVE PRIMARILY RELIED UPON IN THE PAST MAY
NOT BE AVAILABLE.
We may experience long delays in realizing revenues from additional
license fees, royalties and engineering services related to the Rentech GTL
Technology. We may not receive substantial additional revenues from these
sources at all. If so, our dependency upon obtaining working capital from
financing activities will increase at times when our ability to do so will be
decreased.
OUR BUSINESS IN FOREIGN NATIONS WILL BE SUBJECT TO RISKS INVOLVING
CURRENCY EXCHANGE AND EXPROPRIATION OF FUNDS.
We expect that a substantial part of the use of our Rentech GTL
Technology will occur in foreign countries. This could result in payments to us
in foreign currencies. The exchange of foreign currencies into U.S. dollars will
subject us to the risk of unfavorable exchange rates that could reduce the value
of our foreign revenues by a significant amount. We plan to seek to be paid at
rates based on an exchange rate formula related to U.S. dollars. We may also
experience delays and costs in expropriating any foreign revenues that we may
earn to the United States. If we own property in foreign nations, we may have to
present our related assets and liabilities on our financial statements at the
current exchange rates.
WE HAVE NOT PAID DIVIDENDS ON OUR COMMON STOCK, AND WE DO NOT EXPECT TO
DO SO IN THE FUTURE.
We have paid no dividends on our common stock since inception in 1981.
We currently intend to retain any earnings for the future operation and
development of our business. We do not anticipate paying dividends in the
foreseeable future. Any future dividends may be restricted by the terms of
outstanding preferred stock and other financing arrangements then in effect.
WE EXPECT OUR QUARTERLY AND ANNUAL FINANCIAL OPERATING RESULTS TO
DIFFER FROM PERIOD TO PERIOD.
We have in the past, and expect in the future, to experience
significant fluctuations in quarterly and annual operating results caused by the
unpredictability of many factors. These variations may include differences in
actual results of operations from results expected by financial analysts and
investors, the demand for licenses of the Rentech GTL Technology, timing of
construction and completion of plants by licensees, their ability to operate
plants as intended, receipt of license fees and engineering fees and royalties,
improvements or enhancements of gas-to-liquids technology by us and our
competitors, economic use of our technology in commercial plants, changes in oil
and gas market prices, the impact of competition by other technologies and
energy sources, and general economic conditions. We believe that
period-to-period comparisons of our results of operations may not necessarily be
meaningful and should not be relied upon as indications of future performance.
Some or all of these factors may cause our operating results in future fiscal
quarters or years to be below the expectations of public market analysts and
investors. In such event, the price of our common stock is likely to be
materially adversely affected.
62
63
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement
on Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, amended by
SFAS No. 138, established standards for recognizing all derivative instruments
including those for hedging activities as either assets or liabilities in the
statement of financial position and measuring those instruments at fair value.
This Statement is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Management believes the adoption of this
statement will have no material impact on the Company's consolidated financial
statements.
In March 2000, the FASB issued Emerging Task Force Issue No. 00-2,
"Accounting for Web Site Development Costs" ("EITF 00-2"), which was effective
for all such costs incurred for fiscal quarters beginning after June 30, 2000.
This Issue establishes accounting and reporting standards for costs incurred to
develop a web site based on the nature of each cost. Currently, as the Company
has no web site development costs, the adoption of EITF 00-2 had no impact on
the Company's financial condition or results of operations. To the extent the
Company begins to enter into such transactions in the future, the Company will
adopt the Issue's disclosure requirements in the quarterly and annual financial
statements for the year ending September 30, 2001.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation" ("FIN 44"), which was
effective July 1, 2000, except that certain conclusions in this Interpretation
which cover specific events that occur after either December 15, 1998 or January
12, 2000 are recognized on a prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44 and
therefore, the adoption of FIN 44 had no material impact on the Company's
financial condition, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements" which provides additional guidance in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 is effective as of the fourth quarter of fiscal year ending September
30, 2001. Management believes the adoption of this bulletin will have no
material impact on the Company's financial statements.
63
64
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Results. The following table presents unaudited consolidated
operating results for each quarter within the two most recent fiscal years. We
believe that all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the following quarterly results when read in conjunction with our consolidated
financial statements included elsewhere in this report. Results of operations
for any particular quarter are not necessarily indicative of results of
operations for a full fiscal year.
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Fiscal 2000
Revenues $ 1,045,244 $ 994,062 $ 1,375,674 $ 1,651,627
Gross profit $ 463,636 $ 322,671 $ 571,873 $ 574,031
Loss before extraordinary item $ (641,799) $ (983,198) $(1,523,280) $ (656,112)
Net loss $ (674,905) $(1,056,214) $(1,731,160) $ (637,116)
Loss per common share $ (.02) $ (.02) $ (.03) $ (.01)
Fiscal 1999
Revenues $ 561,288 $ 483,698 $ 810,276 $ 1,025,638
Gross profit $ 387,151 $ 299,239 $ 389,246 $ 389,186
Loss before extraordinary item $ (616,698) $ (877,091) $ (780,804) $(1,167,799)
Net loss $ (584,495) $ (863,284) $ (796,278) $(1,198,604)
Loss per common share $ (.01) $ (.02) $ (.02) $ (.03)
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
We have not had a change of independent auditors during our three
recent fiscal years. We have not reported a disagreement with our auditors on
any matter of accounting principles or practices or financial statement
disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning our
directors and executive officers:
Term of
Service Term as
as an Officer Director
Name Positions Held or Director Expires
- ------------------ -------------- ----------- --------
John J. Ball(1) Director 1998 to date 2003
Charles B. Benham Vice President - Research and Development 1981 to date ---
Mark S. Bohn Vice President - Engineering 1998 to date ---
64
65
Ronald C. Butz(2) Vice President, Chief Operating Officer,
Secretary & Director 1984 to date 2001
Jack P. Diesel(1) Director 1998 to date 2002
Jimmie D. Fletcher General Manager, Petroleum Mud Logging, Inc. 1999 to date ---
Frank L. Livingston Vice President and General Manager,
OKON, Inc. 1997 to date ---
James P. Samuels Vice President - Finance, Chief Financial Officer 1996 to date ---
Douglas L. Sheeran(3) Director 1998 to date 2001
Erich W. Tiepel(1)(3) Director 1983 to date 2003
Dennis L. Yakobson(4) President, Chief Executive Officer, & Chairman
of the Board 1981 to date 2002
- ----------
(1) Member of audit committee.
(2) Director since 1984 and officer since 1989.
(3) Member of stock option committee.
(4) President since 1983.
John J. Ball, Director --
Mr. Ball, age 57, has served as a director of Rentech since 1998. He
formed the law firm, Broadhurst & Ball, Mississauga, Ontario, and was a partner
from 1975 to 1984. He subsequently formed Keyser Mason Ball, Mississauga, as a
senior partner from 1984 to present. Upon his admission to the Bar he joined the
firm of McMillan Binch, Toronto, as an associate from 1971 to 1975. He received
a Bachelor of Education and Arts Degree from Mount Allison University in 1966
and a Bachelor of Laws Degree from Dalhousie University in 1969. He was admitted
to the Nova Scotia Bar in 1970 and the Ontario Bar in 1971. He is presently a
director of The Mississauga Hospital, Chair of its Bio-Ethics Committee, and a
member of the Board Merger Committee in connection with the amalgamation of The
Mississauga Hospital and The Queensway Hospital. Mr. Ball is past member of the
Board and Executive Committees of Mount Allison University. He is a past Chair
of the Vanier Cup, which sponsors the Canadian National University Football
Championship.
Charles B. Benham, Vice President-Research and Development --
Dr. Benham, age 64, 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.
65
66
Mark S. Bohn, Vice President-Engineering --
Dr. Bohn, age 50, 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. 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 63, has served as a director of Rentech since 1984. In
October 1989, Mr. Butz was appointed vice president of Rentech, in June 1990 he
was appointed secretary, and in May 1998 he became chief operating officer. From
1984 to 1989, Mr. Butz was employed as president of Capital Growth, Inc., a
privately-held Colorado corporation providing investment services and venture
capital consulting. From 1982 to 1983, Mr. Butz was a shareholder, vice
president and chief operating officer of World Agricultural Systems, Ltd., a
privately-held Colorado corporation specializing in the international marketing
of commodity storage systems. From 1966 to 1982, Mr. Butz was a practicing
attorney in Denver, Colorado with the firm of Grant, McHendrie, Haines and
Crouse, P.C. He received a Bachelor of Science degree in Civil Engineering from
Cornell University in 1961 and a Juris Doctor degree from the University of
Denver in 1965.
John P. Diesel, Director --
Mr. Diesel, age 74, 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.
66
67
Jimmie D. Fletcher, General Manager, Petroleum Mud Logging, Inc. --
Mr. Jimmie D. Fletcher, age 55, 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 58, 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.
James P. Samuels, Vice President-Finance, Treasurer, and Chief
Financial Officer --
Mr. James P. Samuels, age 53, 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,
67
68
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 62, has served as a director of Rentech since 1998.
Mr. Sheeran is managing director of FCI, Inc., which he founded in 1986. FCI
Inc., is a human resource consulting firm located in Shrewsbury, New Jersey
which specializes in executive staffing, merger planning and organizational
effectiveness. FCI's client base includes Fortune 500 and start-up firms in
technology, pharmaceutical, automotive and consumer durable industries. From
1973 until 1986 Mr. Sheeran was employed by Purolator Automotive Group and
became Vice President, Human Resources, with responsibilities for multiple North
American business units. He held a number of human resource positions of
increasing scope and responsibility with Home Life Insurance Company, from 1960
to 1962, Kraft Foods from 1962 to 1965, Electronic Associates Inc. from 1965 to
1968, and Celanese Corporation from 1968 to 1973. These positions covered a
range of labor relations, organizational development, compensation and benefit
responsibilities at both operating sites and corporate staff. He received a
Bachelor of Arts degree in Industrial Psychology from Miami University, Oxford,
Ohio, in 1960.
Erich W. Tiepel, Director --
Dr. Tiepel, age 57, 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 64, 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
68
69
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 profit-sharing
and stock option plans. We provide a medical reimbursement plan and life
insurance coverage to officers and directors and may provide other benefits to
officers and employees in the future. We may also compensate non-employee
directors for attendance at board and committee meetings at a per diem rate to
be determined plus reimbursement of actual expenses incurred in attending such
meetings.
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 the following 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: James P.
Samuels did not file a Form 4 due by September 10, 1999 to report an exercise of
stock options. The transaction was reported on a Form 5 filed on December 22,
1999.
ITEM 11. EXECUTIVE COMPENSATION
CASH COMPENSATION
The following tables show the compensation paid by us or any of our
subsidiaries during the fiscal years indicated, to our chief executive officer
and our four most highly compensated executive officers other than the chief
executive officer.
69
70
Summary Compensation Table
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
-------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All Other
Name and Annual Restricted Compen-
Principal Compen- Stock Securities LTIP sation
Position Year Salary Bonus(1) sation Award(s) Underlying Options/SARs Payouts
- -------- ---- ------ -------- ------ ---------- ------------ ------------ ------
($) ($) ($) ($) (#) ($) ($)
Dennis L. Yakobson 2000 $191,356 $120,147 $ 1,465 -- -- -- --
Chief Executive 1999 $161,676 -- -- -- 35,000 -- --
Officer 1998 $132,090 -- -- -- 20,000 -- --
Ronald C. Butz 2000 $177,003 $ 88,147 $ 2,596 -- -- -- --
Chief Operating 1999 $150,972 -- -- -- 35,000 -- --
Officer 1998 $128,058 -- -- -- 20,000 -- --
Charles B. Benham 2000 $151,442 $ 43,046 $ 1,984 -- -- -- --
Vice President - 1999 $134,308 -- -- -- 30,000 -- --
Research & 1998 $128,058 -- -- -- 20,000 -- --
Development
Mark S. Bohn 2000 $151,442 $ 43,046 -- -- -- -- --
Vice President - 1999 $122,609 -- -- -- 30,000 -- --
Engineering 1998 -- -- -- -- 20,000 -- --
James P. Samuels 2000 $150,419 $ 52,884 $ 592 -- -- -- --
Chief Financial 1999 $133,144 -- -- -- 30,000 -- --
Officer 1998 $128,058 -- -- -- 20,000 -- --
- ----------
(1) After payment of personnel income tax obligations on these sums, the
recipients individually elected to invest all their net bonus amounts
in Rentech by exercising stock options.
OPTION/SAR EXERCISES AND HOLDINGS
The following table sets forth information with respect to the named
executives, concerning the exercise of options and/or limited SARs during the
last fiscal year and unexercised options and limited SARs held as of the end of
the last fiscal year.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values:
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End(#) at FY-End
Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable($)
- ------------------ -------------- ------------ ------------- -----------------
Dennis L. Yakobson 352,400 $241,554 185,000(1) $276,695
Ronald C. Butz 340,880 $234,815 125,000(1) 176,600
Charles B. Benham 340,880 $255,215 180,000(1) 270,385
Mark S. Bohn 192,092 $130,074 130,000(1) 191,035
James P. Samuels 234,000 $136,890 330,000(1) 527,060
- ----------
(1) Exercisable.
70
71
EMPLOYMENT CONTRACTS
Executive officers generally are elected at the annual director meeting
immediately following the annual stockholder meeting. Any officer or agent
elected or appointed by the Board of Directors may be removed by the Board
whenever in its judgment our best interests will be served thereby, without
prejudice to contractual rights, if any, of the person so removed.
There are no family relationships among the executive officers. There
are no arrangements or understandings between any officer and any other person
pursuant to which that officer was elected.
We employ Messrs. Yakobson, Benham, Bohn and Butz pursuant to
employment contracts that extend through March 31, 2002. Mr. Samuels is employed
pursuant to an employment contract that extends to January 1, 2002. Mr.
Livingston and Mr. Fletcher are employed according to contracts that extend to
December 31, 2001.
The contracts provide that the individuals will serve in their present
capacities as officers, together with such duties, responsibilities and powers
as the board of directors may reasonably specify. The contracts provide for
annual cost of living adjustments. If the Company terminates employment early
without cause, the contracts provide for continuation of salary for the
remainder of the term or one year, whichever is more, as severance pay. The
contracts impose obligations of confidentiality as well as covenants not to
compete with the Company for three years following termination of employment for
any reason whatsoever.
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.
PROFIT SHARING PLAN
We have adopted a profit-sharing plan for the benefit of all employees.
The plan is administered by a committee appointed by the board of directors.
Awards by the committee to its members will be subject to approval by the
disinterested members of the board of directors. Awards are discretionary and
shall not aggregate an amount in excess of five percent of audited pre-tax
earnings before depreciation, amortization and extraordinary income for the
preceding fiscal year. Bonuses are payable only if such pre-tax earnings exceed
$500,000 for the year.
We also 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 50% of the first 6% of the
participant's salary deferrals. All participants who have completed 1,000 hours
of service
71
72
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 $26,421,
$35,265 and $14,352 to the plan for the years ended September 30, 2000, 1999 and
1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 30,
2000 by (i) all persons who own of record or are known to the Company to
beneficially own more than 5% of the issued and outstanding shares of Common
Stock and (ii) by each director, each director nominee, each of the executive
officers named in the tables under "Executive Compensation" and by all executive
officers and directors as a group:
Amount and Nature of Percent
Name(1)(2) Beneficial Ownership(3) of Class
- ---- -------------------- --------
John J. Ball(4)(5) 117,000 *
Charles B. Benham 776,320 1.2%
Mark S. Bohn 765,523 1.2%
Ronald C. Butz(6) 730,031 1.2%
John P. Diesel 115,000 *
Frank L. Livingston 106,000 *
James P. Samuels 713,500 1.1%
Douglas L. Sheeran(4) 205,850 *
Erich W. Tiepel(4) 500,725 1.0%
Dennis L. Yakobson(7) 893,034 1.4%
All Directors and Executive 4,922,983 7.9%
Officers as a Group
(10 persons)
Forest Oil Corp.(8) 3,369,650 5.4%
- ----------
*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 - 40,000; Charles B. Benham - 180,000; Mark S. Bohn - 130,000;
Ronald C. Butz - 125,000; John P. Diesel - 40,000; Frank L. Livingston
- 81,000; James P. Samuels - 330,000; Douglas L. Sheeran - 40,000;
Erich W. Tiepel - 130,000; Dennis L. Yakobson - 185,000.
(3) Information with respect to beneficial ownership is based upon
information furnished by each stockholder or contained in filings with
the Securities and Exchange Commission.
(4) Includes 75,000 shares of common stock issued pursuant to a stock grant
dated July 27, 1999, of which 25,000 shares are subject to divestiture
until July 27, 2001.
72
73
(5) Includes 2,000 shares of common stock held by Mr. Ball's wife, as to
which Mr. Ball disclaims beneficial ownership.
(6) Does not include 237,432 shares of common stock held by Mr. Butz's
wife, as to which Mr. Butz disclaims beneficial ownership.
(7) Includes 8,000 shares of common stock held by Mr. Yakobson's wife, as
to which Mr. Yakobson disclaims beneficial ownership.
(8) Based on Amendment No. 1 to Schedule 13D filed by Forest Oil
Corporation on August 7, 2000. Includes options to purchase 2,894,650
shares of common stock that are immediately exercisable. Its address is
1600 Broadway, Suite 2200, Denver, CO 80202.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 7, 2000, we and Republic Financial Corporation through Sand
Creek Energy, LLC (SCE) purchased the Sand Creek methanol plant. The new 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 shall not exceed $4,000,000.
For the year ended September 30, 2000, we contributed $287,169 to SCE
and have recognized $276,585 related to our equity in SCE's loss. Also, as of
September 30, 2000, we have a receivable due from SCE in the amount of $64,246.
During fiscal 2000, we paid Dresser Engineering $851,610 for software
development. We have capitalized these amounts as of September 30, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements are filed as a part of this
report:
Financial Statements:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Summary of Accounting Policies
Notes to Consolidated Financial Statements
(b) The following report on Form 8-K has been filed during the last
quarter of the period covered by this report.
Form 8-K filed September 12, 2000 reporting an item under Item
5, Other Events.
73
74
Signatures
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RENTECH, INC.
/s/ Dennis L. Yakobson
--------------------------------------------
Date: December 22, 2000 Dennis L. Yakobson, President
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ Dennis L. Yakobson
--------------------------------------------
Date: December 22, 2000 Dennis L. Yakobson, President, Chief
Executive Officer and Director
/s/ Ronald C. Butz
--------------------------------------------
Date: December 22, 2000 Ronald C. Butz, Chief Operating Officer,
Vice President, Secretary and Director
/s/ James P. Samuels
--------------------------------------------
Date: December 22, 2000 James P. Samuels, Vice President - Finance,
Chief Financial Officer
Date: December 22, 2000 /s/ John J. Ball
--------------------------------------------
John J. Ball, Director
/s/ John P. Diesel
--------------------------------------------
Date: December 22, 2000 John P. Diesel, Director
/s/ Douglas L. Sheeran
--------------------------------------------
Date: December 22, 2000 Douglas L. Sheeran, Director
/s/ Erich W. Tiepel
--------------------------------------------
Date: December 22, 2000 Erich W. Tiepel, Director
74
75
RENTECH, INC. AND SUBSIDIARIES
CONTENTS
================================================================================
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6 - F-8
Consolidated Statements of Cash Flows F-9 - F-10
Summary of Accounting Policies F-11 - F-16
Notes to Consolidated Financial Statements F-17 - F-42
F-1
76
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
Rentech, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Rentech, Inc.
and Subsidiaries (the "Company") as of September 30, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 2000 and 1999 and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2000 in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
December 20, 2000
Denver, Colorado
F-2
77
RENTECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
September 30, 2000 1999
--------------- ---------------
ASSETS (Note 6)
CURRENT:
Cash $ 1,516,815 $ 308,182
Accounts receivable, net of $4,400 and $2,000 allowance for doubtful
accounts (Note 12) 745,204 374,683
Other receivables 101,025 59,378
Receivable from related party (Note 5) 64,246 --
Inventories 117,866 90,482
Prepaid expenses and other current assets 106,480 184,998
--------------- ---------------
Total current assets 2,651,636 1,017,723
--------------- ---------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization
of $566,512 and $329,238 (Note 2) 3,583,548 3,415,921
--------------- ---------------
OTHER:
Licensed technology, net of accumulated amortization of
$1,630,437 and $1,401,694 1,800,711 2,029,454
Capitalized software costs 851,610 --
Goodwill, net of accumulated amortization of $302,248 and $207,771
(Note 1) 1,104,905 1,169,382
Investment in ITN/ES (Note 3) 3,079,107 3,079,107
Investment in Dresser (Note 4) 2,017,135 1,840,084
Investment in Sand Creek (Note 5) 10,584 --
Technology rights, net of accumulated amortization of
$83,039 and $55,907 204,707 231,839
Deposit for acquisition (Note 8) 973,899 300,000
Deposits and other assets, net of $167,206 allowance for doubtful
accounts 184,750 126,471
--------------- ---------------
Total other assets 10,227,408 8,776,337
--------------- ---------------
$ 16,462,592 $ 13,209,981
=============== ===============
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-3
78
RENTECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
================================================================================
September 30, 2000 1999
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 358,885 $ 344,696
Accrued payroll 78,005 30,284
Accrued liabilities 78,817 83,260
Current portion of long-term debt (Note 6) 243,553 444,026
------------ ------------
Total current liabilities 759,260 902,266
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion (Note 6) 990,107 1,237,669
Lessee deposits 9,248 9,248
------------ ------------
Total long-term liabilities 999,355 1,246,917
------------ ------------
Total liabilities 1,758,615 2,149,183
------------ ------------
COMMITMENTS (Notes 5 and 8)
STOCKHOLDERS' EQUITY (Note 7)
Series A convertible preferred stock - $10 par value; 200,000 shares
authorized; no shares issued and outstanding; $10 per share
liquidation value -- --
Series B convertible preferred stock - $10 par value; 800,000 shares
authorized; 133,332 shares issued and outstanding as of September 30,
1999; $10 per share liquidation value (in the aggregate $1,370,742
including accrued dividends of $37,423) as of
September 30, 1999 -- 1,333,320
Series C participating preferred stock - $10 par value; 500,000
shares authorized; no shares issued and outstanding -- --
Common stock - $.01 par value; 100,000,000 shares authorized;
62,824,228 and 49,272,747 shares issued and outstanding 628,240 492,725
Additional paid-in capital 32,925,887 23,935,679
Unearned compensation (49,829) --
Accumulated deficit (18,800,321) (14,700,926)
------------ ------------
Total stockholders' equity 14,703,977 11,060,798
------------ ------------
$ 16,462,592 $ 13,209,981
============ ============
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-4
79
RENTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
Years Ended September 30, 2000 1999 1998
------------ ------------ ------------
REVENUES: (Notes 11 and 12)
Product sales $ 2,096,159 $ 1,960,764 $ 1,987,586
Service revenues 2,582,555 506,758 --
Royalty income 260,000 340,000 --
Rental income 127,893 73,378 --
------------ ------------ ------------
Total revenues 5,066,607 2,880,900 1,987,586
COST OF SALES:
Product costs 1,029,812 918,678 944,068
Service costs 2,104,584 497,400 --
------------ ------------ ------------
Total costs of sales 3,134,396 1,416,078 944,068
------------ ------------ ------------
GROSS PROFIT 1,932,211 1,464,822 1,043,518
OPERATING EXPENSES:
General and administrative expense 4,776,431 4,111,151 2,578,461
Depreciation and amortization 444,908 367,318 391,650
Write-off of deposits related to acquisition -- 233,279 --
Research and development 515,261 195,466 60,225
------------ ------------ ------------
Total operating expenses 5,736,600 4,907,214 3,030,336
------------ ------------ ------------
LOSS FROM OPERATIONS (3,804,389) (3,442,392) (1,986,818)
OTHER INCOME (EXPENSES):
Equity in loss of investee (Note 5) (276,585) -- --
Interest income 135,443 75,665 40,495
Interest expense (136,833) (75,934) (135,032)
Write-down of Synhytech plant held for sale -- -- (99,500)
Loss on disposal of fixed assets (17,031) -- --
------------ ------------ ------------
Total other expenses (295,006) (269) (194,037)
------------ ------------ ------------
NET LOSS (4,099,395) (3,442,661) (2,180,855)
Dividend requirements on convertible preferred stock (Note 7) 89,611 531,932 1,164,992
------------ ------------ ------------
LOSS APPLICABLE TO COMMON STOCK $ (4,189,006) $ (3,974,593) $ (3,345,847)
------------ ------------ ------------
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.07) $ (.09) $ (.10)
------------ ------------ ------------
BASIC AND DILUTED WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 57,532,816 43,838,417 33,289,164
============ ============ ============
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-5
80
RENTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
Years Ended September 30, 2000, 1999 and 1998
Convertible Preferred Stock
-----------------------------------------------------------
Series A Series B
Shares Amount Shares Amount
-------- ---------- -------- ----------
Balance, October 1, 1997 -- $ -- -- $ --
Common stock issued for cash on options and warrants
exercised (Note 7) -- -- -- --
Common stock issued for investment (Note 3) -- -- -- --
Common stock issued for technology rights (Note 7) -- -- -- --
Common stock issued for interest expense on
convertible notes payable -- -- -- --
Common stock issued for redemption of convertible
notes payable, net of $279,723 in offering costs -- -- -- --
Common stock issued for services and prepaid expenses
(Note 7) -- -- -- --
Preferred stock issued for cash, net of offering
costs of $696,572 200,000 2,000,000 300,000 3,000,000
Common stock issued for conversion of preferred stock
and $70,040 in dividends (150,000) (1,500,000) (192,500) (1,925,000)
Deemed dividends on convertible preferred stock of
$1,060,605 -- -- -- --
Stock warrants issued for
Investment -- -- -- --
Technology rights -- -- -- --
Offering costs -- -- -- --
Stock options issued for services -- -- -- --
Dividends on preferred stock -- -- -- --
Net loss -- -- -- --
-------- ---------- -------- ----------
Common Stock Additional
----------------------- Paid-In Unearned Accumulated
Shares Amount Capital Compensation Deficit
---------- ---------- ------------ ------------- ------------
Balance, October 1, 1997 29,539,548 $ 295,392 $ 12,136,355 $ -- $ (9,077,410)
Common stock issued for cash on options and warrants
exercised (Note 7) 2,824,442 28,245 697,726 -- --
Common stock issued for investment (Note 3) 1,700,000 17,000 2,711,125 -- --
Common stock issued for technology rights (Note 7) 200,000 2,000 160,500 -- --
Common stock issued for interest expense on
convertible notes payable 60,000 600 45,021 -- --
Common stock issued for redemption of convertible
notes payable, net of $279,723 in offering costs 1,880,301 18,803 321,974 -- --
Common stock issued for services and prepaid expenses
(Note 7) 166,000 1,660 221,373 -- --
Preferred stock issued for cash, net of offering
costs of $696,572 -- -- (696,572) -- --
Common stock issued for conversion of preferred stock
and $70,040 in dividends 3,705,001 37,050 3,387,950 -- --
Deemed dividends on convertible preferred stock of
$1,060,605 -- -- -- -- --
Stock warrants issued for
Investment -- -- 98,317 -- --
Technology rights -- -- 125,246 -- --
Offering costs -- -- 375,480 -- --
Stock options issued for services -- -- 52,933 -- --
Dividends on preferred stock -- -- (34,347) -- --
Net loss -- -- -- -- (2,180,855)
---------- ---------- ------------ ------------- ------------
See accompanying summary of accounting policies
and notes to consolidated financial statements
F-6
81
RENTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
================================================================================
Years Ended September 30, 2000, 1999 and 1998
Convertible Preferred Stock
------------------------------------------------- Common Stock
Series A Series B ------------------------
Shares Amount Shares Amount Shares Amount
------ ---------- ------- ------------ ---------- ---------
Balance September 30, 1998 50,000 $ 500,000 107,500 $ 1,075,000 40,075,292 $ 400,750
Common stock issued for cash (Note 7) -- -- -- -- 150,000 1,500
Common stock issued for cash on options and
warrants exercised (Note 7) -- -- -- -- 940,110 9,401
Common stock issued for acquisition (Note 1) -- -- -- -- 100,000 1,000
Common stock issued for investment (Note 4) -- -- -- -- 3,680,168 36,802
Common stock issued for services (Note 7) -- -- -- -- 100,000 1,000
Preferred stock issued for cash, net of offering
costs of $248,476 -- -- 208,332 2,083,320 -- --
Common stock issued for conversion of
preferred stock and $91,899 in dividends (50,000) (500,000) (182,500) (1,825,000) 4,227,177 42,272
Stock warrants granted for prepaid expenses -- -- -- -- -- --
Stock options granted for services -- -- -- -- -- --
Deemed dividends on convertible preferred stock of
$440,033 -- -- -- -- -- --
Net loss -- -- -- -- -- --
------ ---------- ------- ------------ ---------- ---------
Additional
Paid-In Unearned Accumulated
Capital Compensation Deficit
------------ ------------ ------------
Balance September 30, 1998 $ 19,603,081 $ -- $(11,258,265)
Common stock issued for cash (Note 7) 48,500 -- --
Common stock issued for cash on options and
warrants exercised (Note 7) 252,918 -- --
Common stock issued for acquisition (Note 1) 49,000 -- --
Common stock issued for investment (Note 4) 1,801,210 -- --
Common stock issued for services (Note 7) 61,500 -- --
Preferred stock issued for cash, net of offering
costs of $248,476 (248,476) -- --
Common stock issued for conversion of
preferred stock and $91,899 in dividends 2,279,651 -- --
Stock warrants granted for prepaid expenses 81,143 -- --
Stock options granted for services 7,152 -- --
Deemed dividends on convertible preferred stock of
$440,033 -- -- --
Net loss -- -- (3,442,661)
------------ ------------ ------------
See accompanying summary of accounting policies
and notes to consolidated financial statements
F-7
82
RENTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
================================================================================
Years Ended September 30, 2000, 1999 and 1998
Convertible Preferred Stock
------------------------------------------------ Common Stock
Series A Series B -----------------------
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 -- -- -- -- 8,428,334 84,283
Common stock issued for cash on options and
warrants exercised (Note 7) -- -- -- -- 2,324,527 23,245
Common stock issued for deposit on potential
business acquisition (Note 8) -- -- -- -- 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 1) -- -- -- -- 60,000 600
Preferred stock issued for cash, net of offering
costs of $16,660 (Note 7) -- -- 16,666 166,660 -- --
Preferred stock and $46,680 in dividends
redeemed for cash (Note 7) -- -- (23,832) (238,320) -- --
Common stock issued for conversion of preferred
stock and $22,731 in dividends (Note 7) -- -- (126,166) (1,261,660) 2,338,620 23,387
Stock options granted for services (Note 7) -- -- -- -- -- --
Stock options granted to employees for services -- -- -- -- -- --
Deemed dividends on preferred stock of $20,200 -- -- -- -- -- --
Net loss -- -- -- -- -- --
---- -------- -------- ------------ ---------- ----------
Balance September 30, 2000 -- $ -- -- $ -- 62,824,228 $ 628,240
==== ======== ======== ============ ========== ==========
Additional
Paid-In Unearned Accumulated
Capital Compensation Deficit
------------ ------------ ------------
Balance, September 30, 1999 $ 23,935,679 $ -- $(14,700,926)
Common stock and stock options issued for cash, net
of offering costs of $603,049 5,844,668 -- --
Common stock issued for cash on options and
warrants exercised (Note 7) 999,717 -- --
Common stock issued for deposit on potential
business acquisition (Note 8) 398,000 -- --
Common stock issued for services 52,120 -- --
Common stock issued for prepaid expenses 52,120 -- --
Common stock issued for commissions on
business acquisition (Note 1) 29,400 -- --
Preferred stock issued for cash, net of offering costs
of $16,660 (Note 7) (16,660) -- --
Preferred stock and $46,680 in dividends
redeemed for cash (Note 7) (46,680) -- --
Common stock issued for conversion of preferred
stock and $22,731 in dividends (Note 7) 1,275,696 -- --
Stock options granted for services (Note 7) 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)
------------ ------------ ------------
Balance September 30, 2000 $ 32,925,887 $ (49,829) $(18,800,321)
============ ============ ============
See accompanying summary of accounting policies
and notes to consolidated financial statements
F-8
83
RENTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH
Years Ended September 30, 2000 1999 1998
----------- ----------- -----------
OPERATING ACTIVITIES:
Net loss $(4,099,395) $(3,442,661) $(2,180,855)
Adjustments to reconcile net loss to net cash used
in operating activities:
Increase in allowance for doubtful accounts 2,400 200 167,006
Depreciation 261,635 149,401 53,484
Amortization 350,352 339,312 338,166
Interest expense -- -- 45,621
Write-down of Synhytech plant held for sale -- -- 99,500
Loss on disposal of assets 17,031 233,279 --
Equity in loss of investee 276,585 -- --
Common stock issued for services 53,120 62,500 94,908
Stock options and warrants issued for services 351,998 7,152 52,933
Changes in operating assets and liabilities, net of
business combination:
Accounts receivable (372,921) (149,950) (73,822)
Other receivables and receivable from related
party (105,893) (59,378) --
Inventories (27,384) 9,092 7,577
Prepaid expenses and other current assets 131,638 129,638 (28,366)
Accounts payable 14,190 29,580 46,022
Accrued liabilities 80,702 30,901 (52,944)
Lessee deposits -- 9,248 --
----------- ----------- -----------
Net cash used in operating activities (3,065,942) (2,651,686) (1,430,770)
----------- ----------- -----------
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-9
84
RENTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
================================================================================
INCREASE (DECREASE) IN CASH
Years Ended September 30, 2000 1999 1998
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment $ (470,361) $(1,054,646) $ (61,785)
Proceeds from disposal of vehicles 24,068 13,791 --
Cash used in purchase of business -- (597,812) --
Purchase of capitalized software (851,610) -- --
Cash used in purchase of investments (464,220) (2,072) (252,665)
Increase in deposits for acquisitions (273,899) (477,615) (55,664)
Increase in deposits and other assets (10,617) (58,663) (29,380)
----------- ----------- -----------
Net cash used in investing activities (2,046,639) (2,177,017) (399,494)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of
offering costs 6,951,913 312,319 725,971
Proceeds from issuance of convertible preferred
stock, net of offering costs 150,000 1,834,844 4,399,185
Proceeds from convertible note payable -- -- 60,000
Deferred offering costs (47,662) -- --
Redemption of convertible preferred stock (285,000) -- --
Payments on long-term debt and notes payable (448,037) (66,657) (690,000)
----------- ----------- -----------
Net cash provided by financing activities 6,321,214 2,080,506 4,495,156
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 1,208,633 (2,748,197) 2,664,892
CASH, beginning of year 308,182 3,056,379 391,487
----------- ----------- -----------
CASH, end of year $ 1,516,815 $ 308,182 $ 3,056,379
=========== =========== ===========
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-10
85
RENTECH, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
================================================================================
BASIS OF Rentech, Inc. (the "Company" or "Rentech") was
PRESENTATION incorporated on December 18, 1981 in the state of
Colorado to develop and market processes for
conversion of low-value, carbon-bearing solids or
gases into valuable liquid hydrocarbons, including
high-grade diesel fuel, naphthas and waxes
("Rentech GTL Technology"). The Company's
activities prior to 1994 were primarily directed
toward obtaining financing, licensing its
technology to third parties and completing
full-scale plant processing to demonstrate the
Company's technology to prospective licensees.
During 1994, the Company entered into contracts to
provide basic engineering design relating to the
construction of plants using the Company's gas
conversion technology. In March 1997 with the
acquisition of 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 Petroleum Mud
Logging, Inc. and Petroleum Well Logging, Inc.
("PML"), the Company entered into the business of
logging the progress of drilling operations for
the oil and gas industry.
PRINCIPLES OF The accompanying consolidated financial statements
CONSOLIDATION include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in
consolidation.
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, which consist of water protection
sealant, chemicals and packaging supplies, are
recorded at the lower of cost (first-in,
first-out) or market.
CAPITALIZED SOFTWARE Capitalized software costs represent fees paid to
Dresser Engineering Company for software
development, completed during the fourth quarter
of fiscal 2000, and will be amortized over a three
year period using the straight-line method. The
Company has a 10% interest in Dresser Engineering
and Constructors, Inc. which is the parent company
of Dresser Engineering Company (see Note 4).
LICENSED Licensed technology represent costs incurred by
TECHNOLOGY the Company primarily for the purpose of
demonstrating the Company's proprietary technology
to prospective licensees, which it licenses to
third parties under various fee arrangements.
These capitalized costs are carried at the lower
of amortized cost or net realizable value and are
being amortized over 15 years.
F-11
86
RENTECH, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
================================================================================
GOODWILL Goodwill, which relates to the acquisition of Okon
in 1997 and the acquisition of PML in 1999, is
being amortized over a 15-year period using the
straight-line method.
PROPERTY, Property and equipment is stated at cost.
EQUIPMENT, Depreciation and amortization expense, are
DEPRECIATION AND computed using the straight-line method over the
AMORTIZATION 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 asset and accumulated
depreciation or amortization are removed from the
accounts and the resulting profit or loss is
reflected in operations.
INVESTMENT IN The Company has a 10% investment in ITN Energy
ITN/ES Systems, Inc. The investment is stated at cost.
The investment is evaluated periodically and is
carried at the lower of cost or estimated net
realizable value.
INVESTMENT IN The Company has a 10% investment in Dresser
DRESSER Engineers & Constructors, Inc. The investment is
stated at cost. The investment is evaluated
periodically and is carried at the lower of cost
or estimated net realizable value.
INVESTMENT IN The Company has a 50% investment in Sand Creek,
SAND CREEK 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 Technology rights are recorded at cost and are
RIGHTS being amortized on a straight-line method over a
10 year estimated life.
LONG-LIVED Long-lived assets, identifiable intangibles, and
ASSETS associated goodwill are reviewed for impairment
whenever events or changes in circumstances
indicate that the carrying amount may not be
recoverable. If the expected future cash flow from
the use of the asset and its eventual disposition
is less than the carrying amount of the asset, an
impairment loss is recognized and measured using
the asset's fair value.
F-12
87
RENTECH, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
================================================================================
REVENUE Sales of water-based stains sealers and coatings
RECOGNITION are recognized when the goods are shipped to the
customers.
Revenues from mud logging services are billed at
the completion of the service.
Rental income from tenant leases is recognized in
the period earned.
Laboratory research revenues are recognized upon
completion of a project.
Royalty fees are recognized when the revenue
earning activities that are to be provided by the
Company has been performed and no future
obligation to perform services exist.
INCOME 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.
NET LOSS Statement of Financial Accounting Standards No.
PER COMMON 128, "Earnings Per Share" ("SFAS No. 128")
SHARE 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, 2000, 1999 and
1998, total stock options of 7,735,000, 3,265,700
and 3,106,200 and total stock warrants of
4,452,671, 1,163,347 and 2,336,007 were not
included in the computation of diluted loss per
share because their effect was anti-dilutive.
F-13
88
RENTECH, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
================================================================================
CONCENTRATIONS The Company's financial instruments that are
OF CREDIT RISK 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 The preparation of financial statements in
ESTIMATES conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of
the financial statements, and the reported amounts
of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
FAIR VALUE OF The following methods and assumptions were used to
FINANCIAL estimate the fair value of each class of financial
INSTRUMENTS instruments for which it is practicable to
estimate that value:
Accounts Receivable, Accounts Payable and Accrued
Liabilities
Fair values of accounts receivables, accounts
payable, and accrued liabilities are assumed to
approximate carrying values for these financial
instruments since they are short term in nature
and their carrying amounts approximate fair value
or they are receivable or payable on demand.
Mortgages and Notes Payable
Substantially all of these mortgages and notes
bear interest at rates of interest, which
approximate current lending rates. These interest
rates are between 5.90% and 9.75%.
F-14
89
RENTECH, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
================================================================================
STOCK OPTION The Company applies APB Opinion 25, "Accounting
PLAN 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 income (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.
COMPREHENSIVE Comprehensive income is comprised of net loss and
INCOME 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, 2000, 1999, and
1998, the Company had no items of comprehensive
income other than net loss; therefore, a separate
statement of comprehensive income has not been
presented for these periods.
RECENT The Financial Accounting Standards Board has
ACCOUNTING recently issued Statement on Financial Accounting
PRONOUNCEMENTS Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133, amended by SFAS No. 138,
established standards for recognizing all
derivative instruments including those for hedging
activities as either assets or liabilities in the
statement of financial position and measuring
those instruments at fair value. This Statement is
effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. Management
believes the adoption of this statement will have
no material impact on the Company's consolidated
financial statements.
F-15
90
RENTECH, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
================================================================================
In March 2000, the FASB issued Emerging Issues
Task Force Issue No. 00-2, "Accounting for Web
Site Development Costs" ("EITF 00-2"), which was
effective for all such costs incurred for fiscal
quarters beginning after June 30, 2000. This Issue
establishes accounting and reporting standards for
costs incurred to develop a web site based on the
nature of each cost. Currently, as the Company has
no web site development costs, the adoption of
EITF 00-2 had no impact on the Company's financial
condition or results of operations. To the extent
the Company, begins to enter into such
transactions in the future, the Company will adopt
the Issue's disclosure requirements in the
quarterly and annual financial statements for the
year ending September 30, 2001.
In March 2000, the FASB issued FASB Interpretation
No. 44, "Accounting for Certain Transactions
Involving Stock Compensation" ("FIN 44"), which
was effective July 1, 2000, except that certain
conclusions in this Interpretation which cover
specific events that occur after either December
15, 1998 or January 12, 2000 are recognized on a
prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB
Opinion 25 for certain issues related to stock
issued to employees. The Company believes its
existing stock based compensation policies and
procedures are in compliance with FIN 44 and
therefore, the adoption of FIN 44 had no material
impact on the Company's financial condition,
results of operations or cash flows.
In December 1999, the Securities and Exchange
Commission (the "SEC") issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements" which provides additional
guidance in applying generally accepted accounting
principles to revenue recognition in financial
statements. SAB 101 is effective as of the fourth
quarter of fiscal year ending September 30, 2001.
Management believes the adoption of this bulletin
will have no material impact on the Company's
financial statements.
F-16
91
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. BUSINESS On June 1, 1999, the Company acquired the assets
ACQUISITION of Petroleum Mud Logging, Inc. and Petroleum Well
Logging, Inc. ("PML") for $550,000 in cash,
$50,000 in the Company's common stock, assumption
of debt in the amount of $154,250, a one year note
in the amount of $205,000, a two year note in the
amount of $400,000 and acquisition costs of
$47,812. 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 this
acquisition have been included in the accompanying
consolidated financial statements from the date of
acquisition. During fiscal 2000, the Company
issued 60,000 shares of its common stock valued at
$30,000 as additional purchase price
consideration. The allocation of the purchase
price was as follows:
Prepaid shop supplies $ 24,314
Property and equipment 1,215,310
Goodwill 197,438
----------
Total purchase price $1,437,062
----------
The following unaudited pro forma information
presents the consolidated results of operations of
the Company as if the acquisition of PML occurred
at the beginning of fiscal year 1998. The
unaudited pro forma financial data does not
purport to be indicative of the results which
actually would have been obtained had the purchase
been effected on the dates indicated or of the
results which may be obtained in the future.
Years Ended September 30, 1999 1998
----------- -----------
Revenues $ 3,471,080 $ 3,168,894
Operating expenses 6,968,210 5,156,283
Other expense 4,554 194,037
----------- -----------
Net loss (3,501,684) (2,181,426)
Dividend requirements on preferred
stock 531,932 1,164,992
----------- -----------
Loss applicable to common stock $(4,033,616) $(3,346,418)
----------- -----------
Basic and diluted loss per common
share from operations $ (0.09) $ (0.10)
=========== ===========
F-17
92
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. PROPERTY AND Property and equipment consists of the following:
EQUIPMENT
September 30, 2000 1999
---------- ----------
Land and buildings $1,507,513 $1,507,513
Machinery and equipment 1,423,215 1,332,252
Office furniture and equipment 441,783 371,607
Construction-in-progress 369,291 129,907
Vehicles 94,009 95,172
Leasehold improvements 314,249 308,708
---------- ----------
4,150,060 3,745,159
Less accumulated
depreciation and amortization 566,512 329,238
---------- ----------
$3,583,548 $3,415,921
========== ==========
- ----------
3. INVESTMENT On May 6, 1998, the Company and ITN Energy
IN ITN/ES Systems, Inc. ("ITN") 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 ITN.
On May 29, 1998, the Company acquired a 10%
ownership in ITN. The Company's 10% ownership in
ITN includes a 10% ownership interest in the 33%
ownership interest of ITN in Global Solar Energy
LLC. The other 67% owner of Global Solar Energy
LLC is Advanced Energy Technologies, Inc., and a
wholly-owned subsidiary of Tucson Electric Power
Corporation ("TEPC"). TEPC is a wholly-owned
subsidiary of UniSource Energy Corporation. Global
Solar Energy LLC was established to manufacture
and market flexible photovoltaic (PV) modules. The
additional consideration paid to ITN was 500,000
shares of the Company's common stock for the
derivative interest in Global Solar Energy LLC.
The Company's earlier investment with ITN enabled
the Company to acquire interests in other
technology ventures with ITN.
F-18
93
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The total consideration paid to ITN in exchange
for 10% of ITN's issued and outstanding shares was
as follows:
o A $200,000 cash deposit plus $52,665 in
acquisition costs,
o Issuance of 1,700,000 common shares having
a market value of $2,728,125 at the date
of issuance, and
o Issuance of warrants to purchase up to
150,000 additional shares of the Company.
The value of the warrants under the
Black-Scholes option-pricing model was
$98,317.
On May 29, 1998, the Company advanced ITN 200,000
shares prior to the closing. On July 1, 1998 the
Company finalized the purchase of 10% of ITN and
issued the additional 500,000 shares and released
1,000,000 shares from escrow.
4. INVESTMENT On September 28, 1999, the Company issued
IN DRESSER 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
increased its ownership percentage to 10% with a
payment of $175,000 to Dresser and payment of
$2,051 in additional acquisition costs. Dresser
will have exclusive rights to provide engineering
services and to design and construct the synthesis
reactor modules for natural gas-to-liquids plants
that use the Rentech GTL Technology.
5. INVESTMENT On January 7, 2000, the Company and Republic
IN SAND CREEK Financial Corporation ("Republic") through Sand
Creek Energy, LLC (SCE) purchased the "Sand Creek"
methanol facility and all the supporting
infrastructure, buildings, and the underlying
17-acre site. The Company and Republic are
developing a plan to convert the facility to a
gas-to-liquids (GTL) plant making Fischer-Tropsch
diesel, naphtha, petroleum waxes and other
products.
The new owner of the facility is SCE, which is 50
percent owned by Rentech Development Corp., a
wholly owned subsidiary of the Company, and 50
percent owned by RFC-Sand Creek Development, LLC,
a wholly-owned subsidiary of Republic Financial
Corporation. In connection with the
F-19
94
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
acquisition of the facility, SCE assumed certain
commitments with third parties. The Company and
Republic jointly and severally guarantee the full
and punctual performance and payment by SCE of all
SCE's obligations with respect to this facility.
The aggregate liability of the Company under this
guaranty shall not exceed $4,000,000.
For the year ended September 30, 2000, the Company
has contributed $287,169 to SCE and has recognized
$276,585 related to its equity in SCE's loss. As
of September 30, 2000, the Company had a $64,246
receivable due from SCE.
On April 15, 2000 as amended, the Company granted
Texaco Energy Systems, Inc. the exclusive right to
negotiate for Texaco's participation in the
project to retrofit the Sand Creek plant for the
planned purpose. Texaco has the right to evaluate
and acquire up to one-half of the Company's 50%
interest in Sand Creek Energy, LLC. This agreement
is in force until renewed or cancelled by mutual
agreement.
F-20
95
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
6. LONG-TERM DEBT Long-term debt consists of the following:
September 30, 2000 1999
------------- ---------- ----------
Promissory notes dated June 1, 1999; monthly
principal and interest payments of $18,590
with interest of 9.75%, unpaid principal and
accrued interest due July 1, 2001;
collateralized by assets of PML and
guaranteed by the Company(1). $ 162,108 $ 361,580
Promissory note dated June 1, 1999; unpaid
principal and accrued interest was paid in
full during fiscal 2000. -- 206,464
Mortgage dated February 8, 1999; monthly
principal and interest payments of $7,517 with
interest of 8.25% unpaid principal and accrued
interest due March 1, 2029; collateralized
by land and building. 977,014 992,105
Mortgages dated August 1, 1997; monthly
principal and interest payments of $988 with
interest of 9.00%, unpaid principal and accrued
interest due August 1, 2001; collateralized
by land and building(1). 62,999 69,353
Promissory note dated November 27, 1998; monthly
principal and interest payments of $2,000 with
interest of 10.00%, unpaid principal and accrued
interest was paid in full during fiscal 2000. -- 11,846
Various promissory notes 31,539 40,347
---------- ----------
Total long-term debt 1,233,660 1,681,695
Less current maturities 243,553 444,026
---------- ----------
Long-term debt, less current maturities $ 990,107 $1,237,669
========== ==========
F-21
96
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(1) During June 1999, the Company acquired the
assets of PML and assumed certain long-term debt
(see Note 1).
Future maturities of long-term debt as of
September 30, 2000 are as follows:
Years Ending September 30, 2000
-------------------------- ----------
2001 $ 243,553
2002 17,597
2003 16,594
2004 16,048
2005 13,873
Thereafter 925,995
----------
$1,233,660
==========
7. STOCKHOLDERS' Preferred Stock
EQUITY
During fiscal 1998, the Company amended its
articles of incorporation authorizing the issuance
of 200,000 shares of convertible Series A
Preferred Stock and 800,000 shares of convertible
Series B 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 1998, the Company issued 200,000
shares of convertible Series A Preferred Stock at
$10.00 per share together with warrants to
purchase 200,000 shares of Series B Preferred
stock and, at the option of the Company, up to an
additional 600,000 shares of Series B Preferred
Stock at $10.00 per share. The warrants issued to
the Series A Preferred stockholders were deemed to
be nominal in value. The Company received
$2,000,000 in cash
F-22
97
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
before offering costs of $336,083. The Series A
Preferred Stock pays a dividend of 9% per year and
is convertible over 18 months into common stock at
the lesser of the average closing bid price of the
common stock for the five trading days preceding
the purchase of the preferred shares; average
closing bid price of the common stock for the five
days preceding the date of the final sale of the
preferred shares by the Company; or at 82.5% of
the average closing bid for the five trading days
preceding the conversion of the Series A Preferred
Stock into common stock. The Company recorded a
deemed dividend of $424,242 when it issued the
Series A Preferred Stock. During fiscal 1998,
certain holders of the Series A Preferred Stock
converted 150,000 of their shares plus $57,716 in
accrued dividends into 1,540,014 common shares of
the Company. During fiscal 1999, certain holders
of the Series A Preferred Stock converted their
remaining 50,000 shares plus $55,761 in accrued
dividends into 782,617 common shares of the
Company.
The warrants provide for the purchasers of the
Series A Preferred Stock, during the 18 months
after purchase of the Series A Preferred Stock, to
purchase 200,000 shares of the Series B Preferred
Stock at $10 per share and provide the Company
during the same period the option to sell to the
purchasers an additional 600,000 shares of the
Series B Preferred Stock at $10.00 per share. The
Company has no obligation to sell any of the
600,000 shares of the Series B Preferred Stock to
the purchasers. The Company does not have to sell
any of the 800,000 shares of the Series B
Preferred Stock to the purchasers if certain
conditions occur, primarily related to volume and
the price of the common stock in the market. The
Company has no obligation to sell any of the
800,000 shares of the Series B Preferred Stock if
the average daily share price for the common stock
for the 10 trading days prior to the sale is less
than $1.00 per share. The Series B Preferred Stock
pays a dividend of 9% per year and is convertible
into common stock at 82.5% of the average closing
bid for the five trading days preceding the date
of conversion.
During fiscal 1998, the Company issued 300,000
shares of Series B Preferred Stock for $3,000,000
in cash before offering costs of $360,489. The
Company recorded a deemed dividend of $636,363
when it issued the Series B Preferred Stock.
During fiscal 1998, certain holders of the Series
B Preferred Stock converted 192,500 of their
shares plus $12,324 in accrued dividends into
2,164,987 common shares of the Company.
During fiscal 1999, the Company issued 208,332
shares of Series B Preferred Stock for $2,083,320
in cash before offering costs of $248,476. The
F-23
98
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Company recorded a deemed dividend of $440,033
when it issued the Series B Preferred Stock.
During fiscal 1999, certain holders of the Series
B Preferred Stock converted 182,500 of their
shares plus $33,063 in accrued dividends into
3,444,560 common shares of the Company.
During fiscal 2000, the Company issued 16,666
shares of its Series B Preferred Stock for
$166,660 in cash before offering costs of $16,660.
The Company recorded a deemed dividend of $20,200
when it issued the Series B Preferred Stock.
During fiscal 2000, certain holders of the Series
B Preferred Stock converted 126,166 of their
shares plus $60,154 in dividends of which $37,423
were accrued as of September 30, 1999 into
2,338,620 common shares of the Company.
The Series B Preferred Stock are 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 A and 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
During fiscal 1998, the Company issued 2,824,442
shares of its common stock upon exercise of
722,500 in stock options and 2,101,942 in stock
warrants for cash proceeds of $725,971.
During fiscal 1998, the Company issued 200,000
shares of its common stock with a market value of
$162,500 as partial consideration to reacquire all
rights that RIG86 held to market, develop, license
or sublicense the Rentech process technology in
the countries comprising the Association of South
East Asian Nations.
During fiscal 1998, the Company issued 166,000
shares of its common stock with a market value of
$223,033 in payment for services, of which
$128,125 is for future services.
During fiscal 1999, the Company issued 940,110
shares of its common stock upon exercise of
120,500 in stock options and 819,610 in stock
warrants for cash proceeds of $262,319.
F-24
99
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
During fiscal 1999, the Company issued 100,000
shares of its common stock with a market value of
$50,000 as partial consideration to acquire the
net assets of PML (See Note 1).
During fiscal 1999, the Company recorded the
issuance of 150,000 of its common stock for cash
proceeds of $50,000 in recognition of settlement
of a legal action in favor of the Company
pertaining to a misrepresentation of services
during 1996, in which a consultant did not perform
the agreed upon services.
During fiscal 1999, the Company issued 100,000
shares of its common stock with a market value of
$62,500 in payment for director's fees.
On October 12, 1999, the Company began offering
for sale its common stock in a private placement
memorandum for the purpose of raising $7,500,000.
First Union Securities was the placement agent for
this offering. The Company offered for sale Units
consisting of four shares of its $.01 par value
common stock and one redeemable stock purchase
warrant for the purchase of one share of common
stock. The purchase price was $2.40 per Unit. The
warrants entitle investors to purchase one share
of the Company's common stock at an exercise price
of $1.20 for a period of five years from the date
of this memorandum. The warrants may be redeemed
for $.05 per warrant by the Company at any time
prior to their expiration date upon written notice
30 days in advance to the holders of the warrants
if the market price of the common stock exceeds
120% of the exercise price of the warrants for a
period of 20 consecutive trading days prior to a
call for redemption by the Company, and if the
holders do not exercise their warrant during the
30-day period. The holders of shares of common
stock, the additional shares of common stock to be
issued upon exercise of the warrants and any
over-allotment shares were entitled to piggyback
registration rights and the provisions of the
Company's shareholder 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
F-25
100
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 89,300 in
additional options pursuant to an anti-dilution
clause included in the option agreement.
The Company and Forest Oil also signed a
memorandum of understanding that entitles Forest
Oil to obtain one or more licenses to use the
Company's GTL technology. The Company and Forest
Oil are evaluating several potential opportunities
for use of the technology at sites of Forest Oil's
natural gas reserves as well as at existing
industrial gas plants.
On March 29, 2000, the Company sold 2,291,667
shares of its common stock to Azure Energy Fund
with warrants to purchase 2,291,667 more shares of
common stock. The sales price was $2,750,000
before offering costs of $275,000. The warrants
are exercisable at a price of $2.64 per share
until March 29, 2003.
For the year ended September 30, 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 will be used
to acquire a majority interest in REN Corporation
(See Note 8).
During the year ended September 30, 2000, the
Company issued 200,000 shares of its common stock
with a market value of $106,240 in payment for
director's fees for the fiscal years of 2000 and
2001. At September 30, 2000, the Company has
charged $53,120 to expense and recorded the
balance in prepaid expenses.
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 (See Note 1).
F-26
101
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Stock Options and Stock Warrants
At September 30, 2000, the Company has four stock
option plans, which are described below.
The Company's board of directors adopted the 1990
Stock Option Plan which allows for the issuance of
incentive stock options, within the meaning of the
Internal Revenue Code, and other options issued
pursuant to the plan that constitute nonstatutory
options. Options granted under the 1990 Stock
Option Plan are for shares of the Company's $0.01
par value common stock. The Company has reserved
742,280 shares for the 1990 Stock Option Plan and
the 1988 Stock Option Plan, which has been rolled
into the 1990 plan. At September 30, 2000, 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 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, 2000,
180,000 stock options were outstanding under this
plan.
During 1996, the Company's board of directors
adopted the 1996 Stock Option Plan which allows
the issuance of incentive stock options, within
the meaning of the Internal Revenue Code, and
other options pursuant to the plan that constitute
nonstatutory options. The Company has reserved
500,000 shares of the Company's $0.01 par value
common stock for issuance under the plan. At
September 30, 2000, 340,000 stock options were
outstanding under this plan.
During 1998, the Company's board of directors
adopted the 1998 Stock Option Plan which allows
the issuance of incentive stock options, within
the meaning of the Internal Revenue Code, and
other options pursuant to the plan that constitute
nonstatutory options. The Company has reserved
500,000 shares of the Company's $0.01 par value
common stock for issuance under the plan. At
September 30, 2000, 348,000 stock options were
outstanding under this plan.
In October 1997, warrants to purchase 200,000
shares were issued as partial consideration to
reacquire all rights that RIG 86 held to market,
develop, license or sublicense the Rentech process
technology in the countries
F-27
102
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
comprising the Association of South East Asian
Nations. The warrants were exercisable at $.25 per
share and expired on March 3, 2000. The Company
recorded the $125,246 fair value of the warrants
to technology rights.
In October 1997, warrants to purchase 233,959
shares were issued as part of the consideration
for the 1997 private placement of convertible
notes payable. These warrants can be exercised at
$.33 per share through October 14, 2002. The
Company recorded $279,723 in offering costs
associated with this private placement.
In February 1998, warrants to purchase 200,000
shares were issued as part of the consideration
for the 1998 private placement of convertible
preferred shares. These warrants were exercisable
at $1.00 per share through February 8, 2000. The
Company recorded $95,757 in offering costs
associated with this private placement.
In June 1998, warrants to purchase 150,000 shares
were issued in connection with the Company's
investment in ITN/ES. The warrants can be
exercised at $1.59 per share and expire at July 1,
2003. The Company recorded the $98,317 fair value
of the warrants to its investment in ITN/ES (See
Note 3).
In March 1999, warrants to purchase 750,000 shares
were issued as partial consideration for public
relations services to be provided to the Company.
The warrants can be exercised at $1.00 per share
through March 20, 2002. The Company recorded the
$81,143 fair value of the warrants to public
relations expense.
In July 1999, the Company issued options to
purchase 25,000 of the Company's $.01 par value
common shares in connection with consulting
services. These options may be exercised at $.625
per share through July 11, 2004. The Company
recorded the $7,152 fair value of the options to
consulting expense.
During February 2000, the Company entered into a
consulting agreement with DSN Enterprises Ltd.
("DSN"). The Company granted the following stock
options to DSN.
o 100,000 stock options exercisable at an
exercise price of $.575 per share. These
stock options are immediately exercisable and
expire during 2001.
o 180,000 stock options exercisable at an
exercise price of $1.25 per share.
F-28
103
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
These stock options are immediately
exercisable and expire during 2001.
o 100,000 stock options exercisable at an
exercise price of $.80 per share. These stock
options are exercisable beginning on May 10,
2000 and expire during 2001.
o 100,000 stock options exercisable at an
exercise price of $.90 per share. These stock
options are exercisable beginning on October
10, 2000 and expire during 2001.
The Company recorded $351,998 in consulting
expense. The options exercisable on October 10,
2000 have not been included as outstanding as of
September 30, 2000. These options are considered
grants during fiscal 2001.
The following tables summarizes information on
stock option and warrant activity:
Options Warrants
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- -------- --------- --------
Outstanding, October 1, 1997 3,616,188 $ .25 3,423,456 $ .29
Granted 308,500 .79 983,959 .64
Exercised (722,500) .17 (2,071,408) .29
Cancelled (95,988) 1.88 -- --
--------- -------- --------- --------
Outstanding, September 30, 1998 3,106,200 .27 2,336,007 .43
Granted 280,000 .63 750,000 1.00
Exercised (120,500) .23 (819,610) .28
Cancelled -- -- (1,103,050) .29
--------- -------- --------- --------
Outstanding, September 30, 1999 3,265,700 .31 1,163,347 1.04
Granted 6,711,300 2.36 3,572,200 2.07
Exercised (2,252,700) .45 (71,827) .26
Cancelled -- -- (211,049) .96
--------- -------- --------- --------
Outstanding, September 30, 2000 7,724,300 $ 2.05 4,452,671 $ 1.90
========= ======== ========= ========
Exercisable, September 30, 2000 7,652,300 $ 2.03 4,452,671 $ 1.90
Exercisable, September 30, 1999 3,265,700 $ .31 1,163,347 $ 1.04
Exercisable, September 30, 1998 3,106,200 $ .27 2,336,007 $ .43
F-29
104
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Options Warrants
--------- --------
Weighted average fair value of
options and warrants granted
during 2000 $ 1.68 $ 1.49
Weighted average fair value of
options and warrants granted
during 1999 $ .52 $ .11
Weighted average fair value of
options and warrants granted
during 1998 $ .40 $ .62
====== ======
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 2000, 1999 and
1998, respectively; dividend yield of 0 percent
for all years; expected volatility of 90 to 99
percent in 2000, 39 to 43 percent in 1999 and 25
to 43 percent in 1998; risk-free interest rates of
5.62 to 6.71 percent in 2000, 5.16 to 5.62 percent
in 1999 and 5.14 to 6.22 percent in 1998; and
expected lives of 1.79 to 5 years in 2000, 3 to 5
years in 1999 and 2 to 5 years in 1998 for the
Plans and stock awards.
F-30
105
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Under the accounting provisions for SFAS No. 123,
the Company's net loss and net loss per share
would have been increased by the pro forma amounts
indicated below:
Years Ended September 30, 2000 1999 1998
------------------------- ------------- ------------- -------------
Loss applicable to common stock:
As reported $ (4,189,006) $ (3,974,593) $ (3,345,847)
Pro forma $ (4,275,273) $ (4,112,355) $ (3,415,072)
Loss per common share:
As reported $ (.07) $ (.09) $ (.10)
Pro forma $ (.07) $ (.09) $ (.10)
============= ============= =============
The following information summarizes stock options
outstanding and exercisable at September 30, 2000:
Outstanding Exercisable
------------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life in Exercise Number Exercise
Exercise Prices Outstanding Years Price Exercisable Price
---------------- ----------- ----------- -------- ----------- --------
$.1875-$.25 602,000 1.38 $ 0.21 602,000 $ 0.21
$.30 466,000 1.97 0.30 466,000 0.30
$.575-$.82 795,000 2.86 0.70 795,000 0.70
$1.25-$1.78 3,789,534 1.25 1.26 3,759,534 1.25
$1.93 42,000 4.65 1.93 -- --
$5.00 2,029,766 2.25 5.00 2,029,766 5.00
------------ --------- ---- ------ ---------- ------
$.1875-$5.00 7,724,300 1.75 $ 2.05 7,652,300 $ 2.03
============ ========= ==== ====== ========== ======
F-31
106
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following information summarizes stock warrants
outstanding and exercisable at September 30, 2000:
Outstanding Exercisable
------------------------------------------ ---------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life in Exercise Number Exercise
Exercise Prices Outstanding Years Price Exercisable Price
--------------- ----------- ----------- -------- ----------- -----------
$ .30 155,471 1.43 $ 0.30 155,471 $ 0.30
$ .66 71,366 4.29 0.66 71,366 0.66
$1.00-$1.25 1,784,167 .67 1.17 1,784,167 1.17
$1.641-$2.64 2,441,667 2.51 2.58 2,441,667 2.58
------------ --------- ---- -------- ----------- -----------
$.30-$2.64 4,452,671 1.76 $ 1.90 4,452,671 $ 1.90
============ ========= ==== ======== =========== ===========
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 record on November 10, 1999.
F-32
107
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. COMMITMENTS Employment Agreements
The Company has entered into various employment
agreements with six of its officers that extend
through March 31, 2002. The employment agreements
set forth annual compensation to the six officers
of between $130,000 and $190,000 each.
Compensation is adjusted annually based on the
cost of living index.
Retirement Plans
During 1990, the Company adopted a non-qualified
profit sharing plan for the benefit of all
employees. The profit sharing plan is administered
by a committee appointed by the Company's board of
directors. The profit sharing plan allows for
current year bonuses of up to five percent of
audited pre-tax earnings before depreciation,
amortization and extraordinary income, if adjusted
earnings for the preceding year exceeds $500,000.
No distributions have been granted since the
inception of the plan.
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 50% 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 $26,421, $35,265
and $14,352 to the plan for the years ended
September 30, 2000, 1999 and 1998.
Operating Leases
The Company leases office space under a
noncancellable operating lease, which expires
October 31, 2003, with a renewal option for an
additional five years. The Company also leases
office and warehouse space for its Okon operation,
under a lease, which expires during March 2005.
The Company also has
F-33
108
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
various operating leases, which expire through
August 2004.
Future minimum lease payments as of September 30,
2000 are as follows:
Years Ending September 30,
--------------------------
2001 $221,000
2002 208,000
2003 211,000
2004 101,000
2005 40,000
--------
Total $781,000
========
Total lease expense for the years ended September
30, 2000, 1999 and 1998 was approximately
$259,000, $156,000 and $63,000.
The Company leases a majority of its building
located in Denver, Colorado, to third parties. The
Company accounts for these leases as operating
leases. The leases expire from December 31, 2000
to April 30, 2003. Future minimum lease payment
receivables under non-cancelable leasing
arrangements as of September 30, 2000 are as
follows:
Years Ending September 30, Amount
-------------------------- ----------
2001 $ 88,000
2002 86,000
2003 51,000
----------
Total $ 225,000
==========
Letter of Intent
On April 16, 1999, the Company entered into a
letter of intent, to acquire 51% of the stock of
REN Corporation ("REN") for approximately
$1,200,000. The Company advanced $573,899 in cash
and issued 200,000 shares of its common stock with
a market value of $400,000 as a deposit on the
potential acquisition.
F-34
109
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
As of September 30, 2000 and 1999, the Company has
recorded a $973,899 and $300,000 deposit on its
balance sheets. Of the $973,899 deposit as of
September 30, 2000, $773,899 is in a form of a
note receivable due from REN. On October 17, 2000,
the Company and REN entered into a $200,000 note
for the remaining deposit that existed at
September 30, 2000. Both notes receivable bear
interest at 8% and are collateralized by the
assets of REN. Upon closing of this transaction,
the note receivables will be applied to the
purchase price. If the transaction does not close,
then REN is to repay the notes no later than six
months from the Company's written notice that the
purchase will not be completed.
The final agreement is subject to the completion
of the Company's due diligence, the funding of the
purchase and approval by the management of each
company.
9. INCOME There was no provision for income taxes required
TAXES for the years ended September 30, 2000, 1999 and
1998 due to operating losses in those years. At
September 30, 2000, the Company had available net
operating loss carry forwards and capital loss
carry forwards of approximately $15,795,000 for
tax reporting purposes. The operating loss carry
forwards expire through 2020, and the capital loss
carry forwards expire in 2001. These carry
forwards are subject to various limitations
imposed by the rules and regulations of the
Internal Revenue Service.
There were no tax credits established in the
statements of operations since the Company has a
100 percent valuation allowance for the tax
benefit of net deductible temporary differences
and operating loss 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, 2000
and 1999. The tax effect on the components is as
follows:
F-35
110
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
September 30, 2000 1999
------------- ----------- -----------
Net operating loss carry forwards $ 5,866,000 $ 4,343,000
Capital loss carry forwards 57,000 89,000
Compensation expense for
common stock options and
common stock not allowed for
income tax purposes -- 79,000
Accruals for financial statement
purposes not allowed for
income taxes - cash basis 11,000 3,000
Basis difference relating to
licensed technology 396,000 343,000
Basis difference in property and
equipment (115,000) (19,000)
Basis difference in other assets (28,000) (30,000)
Basis difference in goodwill 18,000 (14,000)
Basis difference in technology rights 11,000 8,000
Basis difference relating to
Synhytech plant held for sale 75,000 75,000
Basis difference in other accruals 9,000 --
Basis difference in investment in
Sand Creek 31,000 --
----------- -----------
6,331,000 4,877,000
Valuation allowance (6,331,000) (4,877,000)
----------- -----------
$ -- $ --
=========== ===========
F-36
111
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A reconciliation of the income taxes at the
federal statutory rate to the effective tax rate
is as follows:
September 30, 2000 1999 1998
----------- ----------- -----------
Federal income tax benefit computed
at the Federal statutory rate $(1,394,000) $(1,171,000) $ (741,000)
State income tax benefit net of
Federal benefit (143,000) (59,000) (39,400)
Other - permanent differences 83,000 10,000 22,500
Change in valuation allowance 1,454,000 1,220,000 757,900
----------- ----------- -----------
Income tax benefit $ -- $ -- $ --
----------- ----------- -----------
10. SUPPLEMENTAL Years Ended September 30, 2000 1999 1998
DATA TO ----------- ----------- -----------
STATEMENTS OF
CASH FLOWS Cash payments for interest $ 136,833 $ 75,934 $ 89,411
=========== =========== ===========
F-37
112
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Excluded from the statements of cash flows for
the years ended September 30, 2000, 1999 and
1998 were the effects of certain noncash
investing and financing activities as follows:
September 30, 2000 1999 1998
------------------------------ ---------- ---------- ----------
Issuance of common stock from
conversion of preferred
stock and dividends $1,261,660 $2,359,345 $4,555,645
Issuance of common stock for
deposit on potential
business acquisition $ 400,000 $ -- $ --
Issuance of common stock for
interest expense on
convertible notes payable $ -- $ -- $ 45,621
Issuance of common stock for
redemption of convertible
notes payable $ -- $ -- $ 620,500
Issuance of common stock for
unearned compensation $ 49,829 $ -- $ --
Issuance of common stock for
prepaid expense and services $ 53,120 $ 62,500 $ 94,908
Issuance of common stock for
Investment in Dresser $ -- $1,838,012 $ --
Issuance of common stock for
investment in ITN/ES $ -- $ -- $2,728,125
Issuance of common stock for
acquisition of business $ 30,000 $ 50,000 $ --
Issuance of common stock for
prepaid expenses $ -- $ -- $ 128,125
Issuance of common stock for
technology rights $ -- $ -- $ 162,500
F-38
113
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
September 30, 2000 1999 1998
------------------------------ -------- -------- --------
Issuance of stock warrants for
investment in ITN/ES $ -- $ -- $ 93,317
Issuance of stock warrants for
technology rights $ -- $ -- $125,246
Issuance of stock warrants for
offering costs $ -- $ -- $375,480
Issuance of stock warrants for
prepaid expenses $ -- $ 81,143 $ --
Issuance of stock options for
services $351,998 $ 7,152 $ 52,933
Property and equipment
financed with accounts
payable $ -- $ -- $138,893
Increase in accrued dividends $ -- $ 3,075 $ 34,347
Purchase of land and building
financed with mortgage
payable $ -- $989,100 $ --
Long-term debt issued in
connection with the
business acquisition $ -- $605,000 $ --
Long-term debt assumed in
connection with the
business acquisition $ -- $154,250 $ --
Accounts receivable offset with
accrued liability $ -- $ -- $ 24,000
======== ======== ========
F-39
114
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
11. SEGMENT The Company has adopted Statement of Financial
INFORMATION Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 established revised
standards for public companies relating to the
reporting of financial and descriptive information
about their operating segments in financial
statements. The Company operates in four business
segments as follows:
o Paint - The Company manufactures and
distributes water-based stains, sealers and
coatings.
o Alternative Fuels - The Company develops and
markets processes for conversion of
low-value, carbon-bearing solids or gases
into valuable liquid hydrocarbons.
o Mud Logging Services - The Company is in the
business of logging the progress of drilling
operations for the oil and gas industry.
o Real Estate - The Company leases office and
warehouse space to third parties.
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.
September 30, 2000 1999 1998
-------------------------- ---------- ---------- ----------
Revenues:
Paint $2,096,159 $1,960,764 $1,987,586
Alternative Fuels 1,011,166 551,246 --
Mud Logging Services 1,831,389 295,512 --
Real Estate 127,893 73,378 --
---------- ---------- ----------
$5,066,607 $2,880,900 $1,987,586
========== ========== ==========
F-40
115
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
September 30, 2000 1999 1998
------------- ----------- ----------- -----------
Operating Income (Loss):
Paint $ 232,685 $ 195,018 $ 337,270
Alternative Fuels (4,104,442) (3,598,275) (2,324,088)
Mud Logging Services 10,221 (80,502) --
Real Estate 57,147 41,367 --
----------- ----------- -----------
$(3,804,389) $(3,442,392) $(1,986,818)
=========== =========== ===========
Depreciation and amortization:
Paint $ 108,151 $ 105,594 $ 102,798
Alternative Fuels 340,448 320,433 288,852
Mud Logging Services 113,009 35,117 --
Real Estate 50,379 27,569 --
----------- ----------- -----------
$ 611,987 $ 488,713 $ 391,650
=========== =========== ===========
Equity in net loss of investees-
Alternative Fuels $ 276,585 $ -- $ --
=========== =========== ===========
Expenditures for additions and long-lived assets:
Paint $ 46,603 $ 9,481 $ 25,194
Alternative Fuels 1,158,997 602,115 463,230
Mud Logging Services 146,371 1,385,185 --
Real Estate -- 1,429,713 --
----------- ----------- -----------
$ 1,351,971 $ 3,426,494 $ 488,424
=========== =========== ===========
Investment in equity method investees-
Alternative Fuels $ 10,584 $ -- $ --
=========== =========== ===========
F-41
116
RENTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
September 30, 2000 1999 1998
----------- ----------- -----------
Total Assets:
Paint $ 1,474,744 $ 1,489,599 $ 1,610,200
Alternative Fuels 11,670,883 8,804,273 9,105,050
Mud Logging Services 1,659,201 1,487,951 --
Real Estate 1,657,764 1,428,158 --
----------- ----------- -----------
$16,462,592 $13,209,981 $10,715,250
=========== =========== ===========
12. SIGNIFICANT As of September 30, 2000, two customers accounted
CUSTOMERS for 31% and 15% of total accounts receivable and
for the year ended September 30, 2000, three
customers accounted for 20%, 17% and 16% of total
revenues. As of September 30, 1999, two customers
accounted for 26% and 12% of accounts receivable
and for the year ended September 30, 1999, three
customers accounted for 29%, 19% and 17% of total
revenues. For the year ended September 30, 1998,
two customers accounted for 41% and 24% of total
revenues.
13. VALUATION AND Balance at Deductions Balance at
QUALIFYING Beginning of Charged to and Write- End of
ACCOUNTS Period Expense Offs Period
------------ ---------- ---------- --------
Year Ended September 30, 2000
Allowance for doubtful accounts $169,206 2,400 -- $171,606
Year Ended September 30, 1999
Allowance for doubtful accounts $169,006 3,016 (2,816) $169,206
Year Ended September 30, 1998
Allowance for doubtful accounts $ 2,000 167,206 (200) $169,006
======== ======= ====== ========
14. SUBSEQUENT During October 2000, the Company issued 467,500
EVENTS shares of its common stock upon exercise of stock
options for cash proceeds of $521,000.
F-42
117
EXHIBIT INDEX
The following exhibits are filed with this Form 10-K or incorporated herein by
the following references:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated and Amended Articles of Incorporation, dated January 4, 1991 (incorporated herein by
reference from the exhibits to Amendment No. 2 to Registrant's Form S-18 Registration Statement
No. 33-37150-D filed with the Securities and Exchange Commission on or about January 18, 1991).
3.2 Articles of Amendment dated April 5, 1991 to the Restated and Amended Articles of Incorporation
(incorporated herein by reference from the exhibits to Registrant's Current Report on Form 8-K
dated August 10, 1993 filed with the Securities and Exchange Commission).
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 herein by reference from Exhibit No. 3.(I).2 to Registrant's Form 10-KSB filed with
the SEC 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 its Shareholder Rights Plan (incorporated herein by reference from Exhibit No.
3.(I).4 to Registrant's Form 10-KSB filed with the Securities and Exchange Commission on January
13, 1999).
3.5 Bylaws dated January 19, 1999 (incorporated herein by reference from Exhibit No. 3.(ii) to
Registrant's Form 10-KSB filed with the Securities and Exchange Commission on January 13, 1999).
4.1 Shareholder Rights Plan dated November 10, 1998 (incorporated herein by reference from the
exhibits to 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
herein by reference from Exhibit No. 4.2 to Registrant's Form 10-KSB filed with the Securities
and Exchange Commission on January 13, 1999).
4.3 Form of Option to Purchase Shares of Common Stock issued to Anschutz Investment Company and
Forest Oil Corporation.
4.4 Form of Warrant issued to Azure Energy Fund, Inc.
10.1 Profit Sharing Plan (incorporated herein by reference from the exhibits to Registrant's Form S-18
Registration Statement No. 33-37150-D filed with the Securities and Exchange Commission on or
about October 30, 1990).
118
10.2 1990 Stock Option Plan (incorporated herein by reference from the exhibits to the Company's
Registration Statement No. 33-37150-D filed with the Securities and Exchange Commission on Form
S-18 dated April 12, 1992).
10.3 1994 Stock Option Plan (incorporated herein by reference from the exhibits to Post-Effective
Amendment No. 5 to Registrant's Form S-18 on Form SB-2 Registration Statement No. 33-37150-D
filed with the Securities and Exchange Commission on or about September 19, 1994).
10.4 1996 Stock Option Plan (incorporated herein by reference from the exhibits to Registrant's
Current Report on Form 8-K dated December 18, 1996 filed with the Securities and Exchange
Commission).
10.5 1998 Stock Option Plan (incorporated herein by reference from Exhibit 10.5 to Registrant's Form
10-KSB filed with the Securities and Exchange Commission on January 13, 1999).
10.6 Form of employment contract with Charles B. Benham, Dennis L. Yakobson, Ronald C. Butz, James P.
Samuels and Mark Bohn (incorporated herein by reference from Exhibit 10.6 to Registrant's Form
10-KSB filed with the Securities and Exchange Commission on January 13, 1999).
10.7 License Agreement to Esquire Gujarat Petrochemicals Ltd. dated Jun. 25, 1994 (incorporated by
reference from Exhibit No. 10-7 to Registrant's Form 10-KSB/A Amendment No. One filed with the
Securities and Exchange Commission on October 31, 1997).
10.8 License Agreement between Rentech, Inc. and Texaco Natural Gas, Inc. dated October 8, 1998
(incorporated herein by reference from Exhibit 10.10 to Registrant's Form 10-KSB filed with the
Securities and Exchange Commission on January 13, 1999). *Portions of the exhibit were omitted
pursuant to a Request for Confidential Treatment.
10.9 Form of Registration Rights Agreement issued to investors in the 1999 private placement of
securities (incorporated herein by reference from Exhibit No. 4.5 to Registrant's Form 10-KSB
filed with the Securities and Exchange Commission on January 13, 1999).
10.10 Form of Registration Rights Agreement with Anschutz Investment Company and Forest Oil
Corporation.
10.11 Form of Registration Rights Agreement with Azure Energy Fund, Inc.
21 Subsidiaries of Rentech.
23.1 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule.